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Registration Nos.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. / / / /
Post-Effective Amendment No. / /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Amendment No. / /
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
___________________________________________________
(Exact name of Registrant as Specified in Charter)
100 East Pratt Street, Baltimore, Maryland 21202
______________________________________________________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 410-547-2000
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
________________________________________
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering June 30, 1994
It is proposed that this filing will become effective (check appropriate box):
/___/ immediately upon filing pursuant to paragraph (b)
/___/ on (date) pursuant to paragraph (b)
/___/ 60 days after filing pursuant to paragraph (a)
/___/ on (date) pursuant to paragraph (a) of Rule 485
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+
_________________________________________________________________________
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate
Title of Securities Being Price Offering Amount of
Being Registered Registered Per Unit Price Registration Fee
__________________________________________________________________________
Capital Stock - $.0001 Indefinite Varying prices calculated $500
par value per share Number as set forth in prospectus
__________________________________________________________________________
The purpose of this Registration Statement is to register the Registrant under
the Investment Company Act of 1940, to register the shares of the Registrant
under the Securities Act of 1933 and to declare pursuant to Section 24(f) of
the Investment Company Act of 1940 and Rule 24f-2 thereunder that an
indefinite number of its securities is being registered by this Registration
Statement.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a) may
determine.
SUBJECT TO COMPLETION
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
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PERSONAL STRATEGY FUNDS
CROSS REFERENCE SHEET
N-1A Item No. Location
_____________ ________
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Transaction Costs
and Expenses
Item 3. Condensed Financial Information +
Item 4. General Description of Registrant About the Funds; Fund
and Market
Characteristics: What to
Expect; Understanding Fund
Performance; Investment
Programs and Practices
Item 5. Management of the Fund Transaction Costs and
Expenses; The Funds'
Organization and
Management
Item 6. Capital Stock and Other Securities Useful Information on
Distributions and Taxes;
The Funds' Organization
and Management
Item 7. Purchase of Securities Being Pricing Shares and Receiving
Offered Sale Proceeds; Transaction
Procedures and Special
Requirements; Meeting
Requirements for New
Accounts; Shareholder
Services
Item 8. Redemption or Repurchase Pricing Shares and Receiving
Sale Proceeds; Transaction
Procedures and Special
Requirements; Shareholder
Services
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
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Item 12. General Information and History +
Item 13. Investment Objectives and Policies Investment Objectives and
Policies; Investment
Program; Investment
Restrictions; Yield
Information; Investment
Performance
Item 14. Management of the Registrant Management of the Funds
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
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Item 16. Investment Advisory and Other Investment Management
Services Services;
Custodian; Independent
Accountants; Legal Counsel
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities Dividends;
Organization of the Funds
Item 19. Purchase, Redemption and Pricing Pricing of Securities;
of Securities Being Offered Net Asset Value Per Share;
Redemptions in Kind;
Federal and State
Registration of Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for the Funds
Item 22. Calculation of Yield Quotations of
Money Market Funds +
Item 23. Financial Statements +
PART C
Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C to this Registration Statement
___________________________________
+Not applicable or negative answer<PAGE>
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Facts At A Glance T. Rowe Price
Personal Strategy Funds, Inc.
Investment Goals July 1, 1994
Each of the three funds seeks
the highest total return over CONTENTS
time consistent with its ____________________________
particular investment strategy 1 About the Personal Strategy
and level of potential risk. Funds
There is no assurance the Transaction Costs and fund
funds will achieve their Expenses.......
objective. Fund and Market
Characteristics.......
Strategies and Risk/Reward ____________________________
Potential 2 About Your Account
Each fund will invest in a Pricing Shares; Receiving
diversified portfolio of Sale Proceeds..........
stocks, bonds, and money Distributions and
market securities. The Taxes.....................
investment mix will be shifted Transaction Procedures and
gradually within specified Special Requirements.....
ranges for each fund according ____________________________
to the manager's outlook for 3 More About the Funds
the economy and the financial Organization and
markets. Management...............
Generally, the higher the Understanding Fund
fund's stock component, the Performance..............
greater the potential risk Investment Program and
(share-price volatility) and Practices...............
reward (total return ____________________________
performance). 4 Investing with T. Rowe Price
Meeting Requirements for New
o Income Fund. For greater Accounts...............
stability, 50% to 70% of Opening a New Account...
assets invested in bonds and Purchasing Additional
money market securities with Shares................
the balance in stocks. Exchanging and
Risk/Reward Potential: Lower Redeeming..............
risk and return than the other Shareholder Services...
two funds.
This prospectus contains
o Balanced Fund. For both information you should know
appreciation and income, 50% before investing. Please keep
to 70% of assets invested in it for future reference. A
stocks with the remainder in Statement of Additional
bonds and money market Information about the Funds,
securities. dated July 1, 1994, has been
Risk/Reward Potential: Higher filed with the Securities and
risk and return than the Exchange Commission and is
Income Fund but less than the incorporated by reference in
Growth Fund. this prospectus. To obtain a
free copy, call 1-800-638-
o Growth Fund. For greater 5660.
appreciation, 70% to 90% of
assets invested in stocks,
with the balance in bonds and
money market securities.
Risk/Reward Potential:
Highest expected risk and
return of the three funds.
Investor Profile
Individuals who seek to match
their investment goals and
risk tolerance with a single
investment that diversifies
across several asset
categories. Appropriate for
both regular and tax-deferred
accounts, such as IRAs.
Fees and Charges
100% no-load. No fees or
charges to buy or sell shares
or to reinvest dividends; no
12b-1 marketing fees; free
telephone exchange.
Investment Manager
Founded in 1937 by the late
Thomas Rowe Price, Jr., T.
Rowe Price Associates, Inc.
("T.Rowe Price") and its
affiliates currently manage
over $53 billion for
approximately two and a half
million individual and
institutional investors.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE
COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE
COMMISSION, OR ANY STATE
SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
About the Personal
Strategy Funds
Transaction Costs and Fund Expenses
These tables should help you understand the
kinds of expenses you will bear directly or
indirectly as a fund shareholder.
The first part of the table, "Shareholder
Transaction Costs" shows that you pay no
sales charges. All the money you invest in
a fund goes to work for you, subject to the
fees explained below.
___________________________________________
Fund Expenses
Shareholder Transaction Costs
___________________________________________
Sales load "charge" on
purchases None
___________________________________________
Sales load "charge" on
reinvested dividends None
___________________________________________
Redemption fees None
___________________________________________
Exchange fees None
___________________________________________
Percentage of Fiscal
Annual Mutual Fund 1995 Average Net
Expenses Assets
Balanced Growth Income
___________________________________________
Management fee 0.__%** 0.__%** 0.__%**
(after reduction)
___________________________________________
Total other (Shareholder
servicing, custodial
auditing, etc.) 0.__% 0.__% 0.__%
___________________________________________
Distribution fees
(12b-1) None None None
___________________________________________
Total fund
expenses 0.__%** 0.__%** 0.__%**
___________________________________________
*The funds charge a $5 fee for wire
redemptions which can be changed without
notice.
**To limit each fund's expenses during its
initial period of operations, T. Rowe Price
has agreed to bear any expenses through May
31, 1996, which would cause the Balanced,
Growth or Income Funds' ratio of expenses
to average net assets to exceed __%, __%
and __%, respectively. Expenses paid or
assumed under this agreement are subject to
reimbursement to T. Rowe Price by each fund
whenever the fund's expense ratio is below
the previously stated ratio; however, no
reimbursement will be made after May 31,
1998, or if it would result in the expense
ratio exceeding the ratio as previously
stated. Without this expense limitation,
it is estimated each fund's management fee
and total expense ratio for the first
period of operation would be __%, __% and
__% and __%, __% and __% for the Balanced,
Growth and Income Funds, respectively.
Organizational expenses will be charged to
the funds over a period not to exceed 60
months.
___________________________________________
Table 1
The second half of Table 1, "Annual Mutual
Fund Expenses," provides an estimate of how
much it will cost to operate each fund for
a year, based on 1995 fiscal year expenses
(and any expense limitations described
above). These are costs you pay indirectly,
because they are deducted from the fund's
total assets before the daily share price
is calculated and before dividends and
other distributions are made. In other
words, you will not see these expenses on
your account statement.
The main types of expenses, which all
mutual funds may charge against fund
assets, are:
o A management fee: the percent of fund
assets paid to the fund's investment
manager. Each fund's fee comprises a
group fee, discussed later, and an
individual fund fee, as follows: Balanced
.__%, Growth .__% and Income .__%.
o "Other" administrative expenses:
primarily the servicing of shareholder
accounts, such as providing statements,
reports, disbursing dividends, as well as
custodial services. For the period ended
May 31, 1995, the funds are expected to
pay the fees shown in Table 2 to T. Rowe
Price Services, Inc. for transfer and
dividend disbursing functions and
shareholder services; T. Rowe Price
Retirement Plan Services, Inc. for
recordkeeping services for certain
retirement plans; and T. Rowe Price for
fund accounting services.
Service Fees Paid
Transfer Subaccounting Accounting
Agent Services
___________________________________________
Balanced
___________________________________________
Growth
___________________________________________
Income
___________________________________________
Table 2
o Marketing or distribution fees: an annual
charge ("12b-1") to existing shareholders
to defray the cost of selling shares to
new shareholders. T. Rowe Price funds do
not levy 12b-1 fees. For further details
on fund expenses, please see "The Funds'
Organization and Management."
Hypothetical example: Assume you invest at
least $1,000, the Fund returns 5% annually,
expense ratios remain as previously listed,
and you close your account at the end of
the time periods shown. Your expenses per
$1,000 invested would be:
____________________ __________________________________________
The table at right is Fund 1 3 5 10
just an example, and Year Years Years Years
actual expenses can be __________________________________________
higher or lower than Balanced
those shown. __________________________________________
Growth
__________________________________________
Income
__________________________________________
Table 3
_________________________ FUND AND MARKET CHARACTERISTICS
Generally, the greater This section takes a closer look at each
the portion of total fund's investment program as well as some
return derived from fundamentals of stock, bond, and money
stocks, the higher the market investing.
fund's potential return
over time and the greater What are the objectives of each portfolio?
the risk of interim price o Income Fund: The objective is to provide
declines. the highest total return consistent with
a primary emphasis on income and a
secondary emphasis on capital
appreciation. The fund pursues this
objective by investing in a diversified
portfolio typically consisting of 40%
stocks, 40% bonds, and 20% money market
securities. Allocations can vary by 10%
above or below these ranges based on the
fund manager's outlook for the economy
and the financial markets.
o Balanced Fund: The objective is to
provide the highest total return
consistent with an emphasis on both
capital appreciation and income. The fund
pursues this objective by investing in a
diversified portfolio typically
consisting of 60% stocks, 30% bonds, and
10% money market securities. Allocations
can vary by 10% above or below these
ranges based on the fund manager's
outlook for the economy and the financial
markets.
o Growth Fund: The objective is to provide
the highest total return consistent with
a primary emphasis on capital
appreciation; income is expected to play
a secondary role. The fund pursues this
objective by investing in a diversified
portfolio typically consisting of
approximately 80% stocks and 20% bonds.
Based on the fund manager's outlook for
the economy and the financial markets,
the allocation for stocks and bonds,
respectively, can vary by 10% above or
below these ranges and, for money market
securities, can rise to 20%.
Why have three Personal Strategy Funds?
Generally, the potential for higher
investment returns over time is accompanied
by higher investment risk -- the risk of
periodic declines in the value of your
principal. Investors respond differently to
this risk/reward trade-off; some are
comfortable with higher risk levels, while
others are not. And, for example, investors
who seek a more aggressive approach at a
particular stage of their lives may prefer
a more balanced or conservative approach at
another stage as their circumstances or
investment objectives change.
To accommodate a wider range of investor
preferences and time horizons than would be
possible with a single fund, these funds
offer three different combinations of the
appreciation potential of common stocks and
the greater income and stability of bonds
and money market securities. These
allocation mixes represent three distinct
levels of potential returns and investment
risk.
SEE APPENDIX A
What are the advantages of diversifying
across stocks, bonds, and money market
securities?
Diversification is the investment
_________________________ equivalent of not putting all your eggs in
None of these funds one basket. By spreading investments across
should be relied upon for several types of assets, a fund's overall
short-term financil needs volatility should be reduced. Since prices
nor be used to play of stocks and bonds may respond differently
short-term swings in the to changes in economic conditions and
stock or bond markets. interest rate levels, a rise in bond
prices, for example, could help offset a
fall in stock prices. Money market
securities have a stabilizing influence,
since their price fluctuations are very
small. In addition, the steady income
provided by bonds and money market
securities contributes positively to a
portfolio's total return, cushioning the
impact of any price declines or enhancing
price increases.
This asset allocation strategy reduces the
risks associated with investing in a single
asset category; however, there is no
guarantee the strategy will always result
in lower overall volatility for the funds.
What are the general characteristics and
risk factors of these major asset classes?
0 Stocks represent ownership in a
corporation. Common stock prices
fluctuate with changes in a company's
current earnings and future prospects and
with overall stock market conditions.
Common stocks have provided higher
returns over time than bonds or money
market securities. In addition, stock
investments historically have provided
the greatest protection against the
erosion of value caused by inflation.
However, the potential for higher returns
is accompanied by higher risk, and stocks
are generally more volatile than other
asset classes.
_________________________ Stocks of many well-established
The fund manager corporations offer the potential for
regularly reviews the appreciation and rising dividends. While
asset allocation and may smaller companies usually reinvest
make gradual changes, earnings in their own growth and,
within the defined therefore, pay minimal or no dividends,
ranges, based on the they offer the possibility of even
outlook for the economy, greater appreciation if their businesses
interest rates, and the prosper and grow. However, their higher
financial markets. The return potential is accompanied by
funds will not attempt to greater risk that their stock prices will
time short-term market decline.
moves.
0 Bonds are debt securities, meaning the
issuer has a contractual obligation to
pay interest at a fixed rate on specified
dates and to repay principal (the bond's
face value) upon maturity. There are two
main sources of risk. Credit risk refers
to the possibility that a bond's price
may fall due to a credit downgrade or
"default," i.e., the issuer fails to make
an interest or principal payment.
Interest rate risk refers to a bond's
price movement in response to changes in
interest rates. When rates rise, bond
prices fall, and vice versa. Generally,
the longer a bond's maturity, the greater
its potential price fluctuation.
_________________________ The funds expect to invest primarily in
Please see "High bonds with investment-grade credit
Yield/High Risk ratings. Investment-grade securities
Investing" for further include a range of securities from the
information on these highest rated (AAA) to medium quality
investments. (BBB). Securities in the BBB category
may be more susceptible to adverse
economic conditions or changing
circumstances and the securities at the
lower end of the BBB category have
certain speculative characteristics.
Prices of below-investment-grade (or
"junk") bonds are usually more affected
by adverse economic conditions or a
deterioration in the issuer's financial
circumstances than by overall changes in
interest rates. To compensate investors
for higher credit risk exposure, such
bonds usually provide higher income.
Please see "High Yield/High Risk
Investing" for further information on
these investments.
_________________________ 0 Money market securities are debtPlease
For a detailed discussion see "High Yield/High Risk Investing" for
of security further information on these investments.
characteristics and risk obligations issued primarily by the U.S.
factors, please see Government, Government agencies, and
"Investment Program and corporations. The high credit ratings,
Pratices." short maturities, and high liquidity of
money market securities minimize their
credit and market risk. Their low risk is
usually accompanied by low potential
returns relative to other investments.
Why include foreign securities?
_______________________ Foreign stocks and bonds offer two
For a discussion of the advantages to a portfolio: extra
effect of currency diversification and the potential for
exchange rate enhanced returns. Since foreign stock and
fluctuations and other bond markets may move independently from
special risks of foreign their U.S. counterparts, such investments
investing, please see could reduce a portfolio's short-term price
"Investment Program and fluctuations while offering a way to
Practices." participate in markets that may generate
superior returns.
How does the portfolio manager try to
reduce risk and increase returns?
Consistent with each fund's objective, the
managers of the Personal Strategy Funds
seek to reduce risk and increase total
return. Risk management tools include:
0 broad asset diversification, as discussed
previously, to reduce the impact of a
single holding or asset class on the
fund's share price;
0 gradual allocation changes among and
within asset classes (stocks, bonds,
etc.) to take advantage of market
opportunities and changing economic
conditions;
0 thorough research of stocks, bonds, and
other securities by our analysts to find
the most favorable investment
opportunities.
_________________________ How can I decide which fund is most
The fund or funds you appropriate for me?
select should reflect Review your own financial objectives,
your individual investment time horizon, and risk
investment goals, but tolerance. Use the table below, which
should not be relied upon summarizes the funds' main characteristics,
for short-term financial to choose a fund (or funds) suitable for
needs or represent your your particular needs.
complete investment
program. 0 The Income Fund is designed for more
conservative investors who value the
relative stability provided by substantial
investments in income-producing securities
but also seek some capital growth.
0 The Balanced Fund is intended for those
seeking a middle-of-the road approach that
emphasizes stocks for their higher capital
appreciation potential but retains a
significant income component to temper
volatility.
0 The Growth Fund, with the greatest
exposure to stocks, is designed for more
aggressive investors who can ride out the
market's inevitable setbacks to participate
in its potential long-term rewards.
To review some investing ground rules or to
gain a more accurate picture of your own
investment objectives, we suggest you use
the Investment Guide you may have received
with this prospectus, or call 1-800-638-
5660 to request the Guide.
Differences among funds
Fund Benchmark Asset Allocation Range Risk/Reward
____ _______ ______________________ ___________
Income 40% 30 - 50% stocks Lowest
40 30 - 50 bonds
20 10 - 30 money markets
Balanced 60 50 - 70% stocks
30 20 - 40 bonds Moderate
10 0 - 20 money markets
Growth 80 70 - 90% stocks Highest
20 10 - 30 bonds
0 0 - 20 money markets
Is there other information I need to review
before making a decision?
Be sure to review "Investment Program and
Practices" in Section 3, which reviews the
following topics: the types of securities
in which the funds invest including--bonds,
common and preferred stocks, convertible
securities and warrants, foreign
securities, asset-backed securities,
mortgage-backed securities, hybrid
instruments, zero coupon and pay-in-kind
bonds and private placements--and the types
of management practices with regard to--
cash position, borrowing money and
transferring assets, futures and options,
interest rate swaps, managing foreign
currency risk, lending of portfolio
securities, when-issued securities and
forward commitment contracts, portfolio
transactions, highyield/high risk investing
and credit quality considerations.
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know
when investing in a fund.
________________________ How and when shares are priced
The various ways you can The share price (also called "net asset
buy, sell, and exchange value" or NAV per share) for each fund is
shares are explained at calculated at 4 p.m. ET each day the New
the end of this York Stock Exchange is open for business.
prospectus and on the New To calculate the NAV, a fund's assets are
Account Form. priced and totaled, liabilities are
subtracted, and the balance, called net
assets, is divided by the number of shares
outstanding.
How your purchase, sale, or exchange price
is determined
If we receive your request in correct form
before 4 p.m. ET, your transaction will be
priced at that day's NAV. If we receive it
after 4 p.m., it will be priced at the next
business day's NAV.
We cannot accept orders that request a
particular day or price for your
transaction or any other special
conditions.
________________________ Note: The time at which transactions are
When filling out the New priced may be changed in case of an
Account Form, you may emergency or if the New York Stock Exchange
wish to give yourself the closes at a time other than 4 p.m. ET.
widest range of options
for receiving proceeds How you can receive the proceeds from a
from a sale. sale
If your request is received by 4 p.m. ET in
correct form, proceeds are usually sent on
the next business day. Proceeds can be
sent to you by mail, or to your bank
account by ACH transfer or bank wire.
________________________ Proceeds sent by bank wire should be
If for some reason we credited to your bank account the next
cannot accept your business day, and proceeds sent by ACH
request to sell shares, transfer should be credited the second day
we will contact you. after the sale.
Exception:
o Under certain circumstances and when
deemed to be in the fund's best
interests, your proceeds may not be sent
for up to five business days after
receiving your sale or exchange request.
If you were exchanging into a bond or
money fund, your new investment would not
begin to earn dividends until the sixth
business day.
Useful Information on Distributions and
Taxes
________________________ Dividends and other distributions
The funds distribute all Dividend and capital gain distributions are
net investment income and reinvested in additional fund shares in
realized capital gains to your account unless you select another
shareholders. option on your New Account Form. The
advantage of reinvesting distributions
arises from compounding; that is, you
receive interest and capital gain
distributions on a rising number of shares.
Dividends not reinvested are paid by check
or transmitted to your bank account via
ACH. If the Post Office cannot deliver
your check, or if your check remains
uncashed for six months, a fund reserves
the right to reinvest your distribution
check in your account at the then current
NAV and to reinvest all subsequent
distributions in shares of the fund.
Income dividends
o The Balanced and Income Funds declare and
pay dividends (if any) quarterly.
o The Growth Fund declares and pays
dividends (if any) annually.
o All or part of a fund's dividends will be
eligible for the 70% deduction for
dividends received by corporations.
Capital gains
o A capital gain or loss is the difference
between the purchase and sale price of a
security.
o If the fund has net capital gains for the
year (after subtracting any capital
losses), they are usually declared and
paid in December to shareholders of
record on a specified date that month.
________________________ Tax information
The funds send timely You need to be aware of the possible tax
information for your tax consequences when
filing needs.
o the fund makes a distribution to your
account, or
o you sell fund shares, including an
exchange from one fund to another.
________________________ Taxes on fund redemptions.
The funds furnish average When you sell shares in any fund, you may
cost and capital gain realize a gain or loss. An exchange from
(loss) information on one fund to another is still a sale for tax
most share redemptions. purposes.
In January, the funds will send you and the
IRS Form 1099-B, indicating the date and
amount of each sale you made in the fund
during the prior year. We will also tell
you the average cost of the shares you sold
during the year. Average cost information
is not reported to the IRS, and you do not
have to use it. You may calculate the cost
basis using other methods acceptable to the
IRS, such as "specific identification."
To help you maintain accurate records, we
send you a confirmation immediately
following each transaction you make and a
year-end statement detailing all your
transactions in each fund account during
the year.
______________________
Distributions are taxable Taxes on fund distributions.
whether reinvested in The following summary does not apply to
additional shares or retirement accounts, such as IRAs, in the
received in cash. funds, which are tax-deferred until you
withdraw money from them.
In January, the funds will send you and the
IRS Form 1099-DIV indicating the tax status
of any dividend and capital gain
PAGE 12
distribution made to you. All
distributions made by these funds are
taxable to you for the year in which they
were paid. The only exception is that
distributions declared during the last
three months of the year and paid in
January are taxed as though they were paid
by December 31. Dividends and
distributions are taxable to you regardless
of whether they are taken in cash or
reinvested. The funds will send you any
additional information you need to
determine your taxes on fund distributions,
such as the portion of your dividend, if
any, that may be exempt from state income
taxes.
Short-term capital gains are taxable as
ordinary income and long-term gains are
taxable at the applicable long-term gain
rate. The gain is long or short term
depending on how long the fund held the
securities, not how long you held shares in
the fund.
Distributions resulting from the sale of
certain foreign currencies and debt
securities, to the extent of foreign
exchange gains, are taxed as ordinary
income or loss. If the fund pays
nonrefundable taxes to foreign governments
during the year, the taxes will reduce the
fund's dividends.
Tax effect of buying shares before a
capital gain distribution. If you buy
shares near or on the "record date"--the
date that establishes you as the person to
receive the upcoming distribution--you will
receive in the form of a taxable
distribution a portion of the money you
just invested. Therefore, you may wish to
find out a fund's record date(s) before
investing. Of course, the fund's share
price may reflect undistributed capital
gains or unrealized appreciation at any
time.
Transaction Procedures and Special
Requirements
Purchase Conditions
________________________ Nonpayment. If your payment is not received
Following these or you pay with a check or ACH transfer
procedures helps assure that does not clear, your purchase will be
timely and accurate cancelled. You will be responsible for any
transactions. losses or expenses incurred by the fund or
transfer agent, and the fund can redeem
shares you own in this or another
identically registered T. Rowe Price fund
as reimbursement. The fund and its agents
have the right to reject or cancel any
purchase, exchange, or redemption due to
nonpayment.
U.S. dollars. All purchases must be paid
for in U.S. dollars; checks must be drawn
on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you
just purchased and paid for by check or ACH
transfer, the fund will redeem your shares
at the price on the day the request is
received, but will generally delay sending
you the proceeds for up to 10 calendar days
to allow the check or transfer to clear. If
you requested a redemption by mail or
mailgram, the proceeds will be mailed no
later than the seventh day following
receipt unless the check or ACH transfer
has not cleared. (The 10-day hold does not
apply to purchases paid for by: bank wire;
cashier's, certified, or treasurer's
checks; or automatic purchases through your
paycheck.)
Telephone Transactions. Telephone exchange
and redemption are established
automatically when you sign the New Account
Form unless you check the box which states
that you do not want these services. The
fund uses reasonable procedures (including
shareholder identity verification) to
confirm that instructions given by
telephone are genuine. If these procedures
are not followed, it is the opinion of
certain regulatory agencies that a fund may
be liable for any losses that may result
from acting on the instructions given. All
conversations are recorded, and a
confirmation is sent within five business
days after the telephone transaction.
Redemptions over $250,000. Large sales can
adversely affect a portfolio manager's
ability to implement a fund's investment
strategy by causing the premature sale of
securities that would otherwise be held.
If in any 90-day period, you redeem (sell)
more than $250,000, or your sale amounts to
more than 1% of the fund's net assets, the
fund has the right to delay sending your
proceeds for up to five business days after
receiving your request, or to pay the
difference between the redemption amount
and the lesser of the two previously
mentioned figures with securities from the
fund.
Excessive Trading
________________________ Frequent trades involving either
T. Rowe Price may bar substantial fund assets or a substantial
excessive traders from portion of your account or accounts
purchasing shares. controlled by you, can disrupt management
of the fund and raise its expenses. We
define "excessive trading" as exceeding one
purchase and sale involving the same fund
within any 120-day period.
For example, you are in fund A. You can
move substantial assets from A to fund B,
and, within the next 120 days, sell your
shares in fund B to return to fund A or
move to fund C.
If you exceed the number of trades
described above, you may be barred
indefinitely from further purchases of T.
Rowe Price funds.
Three types of transactions are exempt from
excessive trading guidelines: 1) trades
solely between money market funds, 2)
redemptions that are not part of exchanges,
and 3) systematic purchases or redemptions
(see "Shareholder Services").
Keeping Your Account Open
Due to the relatively high cost of
maintaining small accounts, we ask you to
maintain an account balance of at least
$1,000. If your balance is below $1,000 for
three months or longer, the fund has the
right to close your account after giving
you 60 days in which to increase your
balance.
________________________ Signature Guarantees
A signature guarantee is You may need to have your signature
designed to protect you guaranteed in certain situations, such as:
and the fund from fraud
by verifying your o Written requests to 1) redeem over
signature. $50,000 or 2) wire redemption proceeds.
o Remitting redemption proceeds to any
person, address, or bank account not on
record.
o Transferring redemption proceeds to a T.
Rowe Price fund account with a different
registration from yours.
o Establishing certain services after the
account is opened.
You can obtain a signature guarantee from
most banks, savings institutions,
broker/dealers and other guarantors
acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or
organizations that do not provide
reimbursement in the case of fraud.
3 More About the Funds
The Funds' Organization and Management
______________________ How are the funds organized?
Shareholders benefit from The T. Rowe Price Personal Strategy Funds
T. Rowe Price's 56 years Corporation is a diversified, open-end
of investment management investment company incorporated in Maryland
experience. in 1994. The Corporation currently
consists of three series, each representing
a separate class of shares. The
Corportaion's charter provides that the
Board of Directors may issue additional
series of shares and/or addtional classes
of shares for each series.
What is meant by "shares"?
As with all mutual funds, investors
purchase "shares" when they invest in a
fund. These shares are part of a fund's
authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles
the shareholder to:
o receive a proportional interest in a
fund's and capital gain distributions;
o cast one vote per share on certain fund
matters, including the election of fund
directors, changes in fundamental policies,
or approval of changes in a fund's
management contract.
PAGE 21
Does each fund have an annual shareholder
meeting?
The funds are not required to hold meetings
but will do so when certain matters, such
as a change in a fund's fundamental
policies, are to be decided. In addition,
shareholders representing at least 10% of
all eligible votes may call a special
meeting if they wish for the purpose of
voting on the removal of any fund
director(s). If a meeting is held and you
cannot attend, you can vote by proxy. Well
before the meeting, the fund will send you
proxy materials that explain the issues to
be decided and include a voting card for
you to mail back.
_________________________ Who runs the funds?
All decisions regarding General Oversight. The funds are governed
the purchase and sale of by a Board of Directors that meets
fund investments are made regularly to review the fund's investments,
by T. Rowe Price performance, expenses, and other business
Associates-specifically affairs. The Board elects the funds'
by the funds' portfolio officers.
managers.
Portfolio Management. Each fund has an
Investment Advisory Committee, whose
members are listed below. Each Committee
Chairman has day-to-day responsibility for
managing the portfolio and works with the
Committee in developing and executing the
fund's investment program. The funds'
Board of Directors has authorized T. Rowe
Price to use certain brokers indirectly
related to T. Rowe Price in connection with
the execution of each fund's portfolio
transactions.
Balanced Fund.
Growth Fund.
Income Fund.
Marketing. T. Rowe Price Investment
Services, Inc., a wholy-owned subsidiary of
T. Rowe Price, distributes (sells) shares
of these and all other T. Rowe Price funds.
Shareholder Services. T. Rowe Price
Services, Inc., another wholly-owned
subsidiary, acts as the funds' transfer and
dividend disbursing agent and provides
shareholder and administrative services.
Services for certain types of retirement
plans are provided by T. Rowe Price
Retirement Plan Services, Inc., also a
wholly-owned subsidiary. The address for
each is 100 East Pratt St., Baltimore, MD
21202.
How are fund expenses determined?
The management agreement spells out the
expenses to be paid by the fund. In
addition to the management fee, the fund
pays for the following: shareholder service
expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing
prospectuses and reports sent to
shareholders; registration fees and
expenses; proxy and annual meeting expenses
(if any); and director/trustee fees and
expenses.
The Management Fee. This fee has two parts
-- an "individual fund fee" (discussed on
page 2) which reflects the fund's
particular investment management costs, and
a "group fee." The group fee, which
reflects the benefits each fund derives
from sharing the resources of the T. Rowe
Price investment management complex, is
calculated monthly based on the net
combined assets of all T. Rowe Price funds
(except Equity Index and both Spectrum
funds). The fee schedule (shown below) is
graduated, declining as the asset total
rises, so shareholders benefit from the
overall growth in mutual fund assets.
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
Based on combined Price funds' assets of
approximately $34.9 billion at March 31,
1994, the Group Fee was 0.34%.
Understanding Performance Information
This section should help you understand the
terms used to describe the funds'
performance. You will come across them in
shareholder reports you receive from us
four times a year, in our newsletters,
"Insights" reports, in T. Rowe Price
advertisements, and in the media.
_________________________ Total Return
Total return is the most This tells you how much an investment in a
widely used performance fund has changed in value over a given time
measure. Detailed period. It reflects any net increase or
performance information decrease in the share price and assumes
is included in the funds' that all dividends and capital gains (if
annual reports and any) paid during the period were reinvested
quarterly shareholder in additional shares. Reinvesting
reports. distributions means that total return
numbers include the effect of compounding,
i.e., you receive income and capital gain
distributions on a rising number of shares.
Advertisements for the fund may include
cumulative or compound average annual total
return figures, which may be compared with
various indices, other performance
measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an
investment for a specified period. A
cumulative return does not indicate how
much the value of the investment may have
fluctuated between the beginning and the
end of the period specified.
Average Annual Total Return
This is always hypothetical. Working
backward from the actual cumulative return,
it tells you what constant year-by-year
return would have produced the actual,
cumulative return. By smoothing out all the
variations in annual performance, it gives
you an idea of the investment's annual
contribution to your portfolio provided you
held it for the entire period in question.
Investment Program and Practices
This section takes a detailed look at some
of the securities the funds may hold in
their portfolios and the various kinds of
investment practices that may be used in
day-to-day portfolio management. The funds'
investment programs are subject to further
restrictions and risks described in the
Statement of Additional Information.
Shareholder approval is required to
substantively change a fund's objective and
certain investment restrictions noted in
the following section as "fundamental
policies." The managers also follow
certain "operating policies" which can be
changed without shareholder approval.
However, significant changes are discussed
with shareholders in fund reports.
Types of Portfolio Securities
_________________________ In seeking to meet its investment
Fund managers have objective, the funds may invest in any type
considerable leeway in of security whose investment
choosing investment characteristics are consistent with the
strategies and selecting fund's investment program. These and some
securities they believe of the other investment techniques the
will help the funds funds may use are described in the
achieve their objectives. following pages.
Fundamental Policy. A fund will not
purchase a security if, as a result, with
respect to 75% of the fund's total assets,
more than 5% of its total assets would be
invested in securities of the issuer or
more than 10% of the voting securities of
the issuer would be held by the fund.
Bonds. A bond is an interest-bearing
security - an IOU - issued by companies or
governmental units. The issuer has a
contractual obligation to pay interest at a
stated rate on specific dates and to repay
principal (the bond's face value) on a
specified date. An issuer may have the
right to redeem or "call" a bond before
maturity, and the investor may have to
reinvest the proceeds at lower market
rates.
A bond's annual interest income, set by its
coupon rate, is usually fixed for the life
of the bond. Its yield (income as a percent
of current price) will fluctuate to reflect
changes in interest rate levels. A bond's
price rises when interest rates fall, and
vice versa so its yield stays current.
Bonds may be secured (backed by specified
collateral) or unsecured (backed by the
issuer's general creditworthiness).
Certain bonds have interest rates that are
adjusted periodically in order to minimize
fluctuations of their principal value. The
maturity of those securities may be
shortened under certain specified
conditions.
Bonds may be designated as senior, junior,
or subordinated obligations. Senior
obligations have a prior claim on a
corporation's earnings and assets and, in
the event of liquidation, are prepaid
before junior or other debt.
Operating Policy. Balanced Fund: At least
25% of the fund's total assets must be
senior fixed income securities.
Common and Preferred Stocks. Stocks
represent shares of ownership in a company.
Generally, preferred stock has a specified
dividend and ranks after bonds and before
common stocks in its claim on income for
dividend payments and on assets should the
company be liquidated. After other claims
are satisfied, common stockholders
participate in company profits on a pro
rata basis; profits may be paid out in
dividends or reinvested in the company to
help it grow. Increases and decreases in
earnings are usually reflected in a
company's stock price, so common stocks
generally have the greatest appreciation
and depreciation potential of all corporate
securities. While most preferred stocks
pay a dividend, the fund may purchase
preferred stock where the issuer has
omitted, or is in danger of omitting,
payment of its dividend. Such investments
would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The
funds may invest in debt or preferred
equity securities convertible into or
exchangeable for equity securities.
Traditionally, convertible securities have
paid dividends or interest at rates higher
than common stocks but lower than non-
convertible securities. They generally
participate in the appreciation or
depreciation of the underlying stock into
which they are convertible, but to a lesser
degree. In recent years, convertibles have
been developed which combine higher or
lower current income with options and other
features. Warrants are options to buy a
stated number of shares of common stock at
a specified price any time during the life
of the warrants (generally, two or more
years).
Foreign Securities. The funds may invest in
foreign securities. These include non-
dollar denominated securities traded
outside of the U.S. and dollar denominated
securities traded in the U.S. (such as
ADRs). Such investments increase a
portfolio's diversification and may enhance
return, but they also involve some special
risks such as exposure to potentially
adverse local political and economic
developments; nationalization and exchange
controls; potentially lower liquidity and
higher volatility; possible problems
arising from accounting, disclosure,
settlement, and regulatory practices that
differ from U.S. standards; and the chance
that fluctuations in foreign exchange rates
will decrease the investment's value
(favorable changes can increase its value).
Operating Policy. Each fund may invest up
to 35% of its total assets in foreign
securities.
Asset-backed Securities. An underlying pool
of assets, such as credit card or
automobile trade receivables or corporate
loans or bonds, backs these bonds and
provides the interest and principal
payments to investors. Credit quality
depends primarily on the quality of the
underlying assets and the level of credit
support, if any, provided by the issuer.
The underlying assets (i.e., loans) are
subject to prepayments which can shorten
the securities' weighted average life and
may lower their return. The value of these
securities also may change because of
actual or perceived changes in the
creditworthiness of the originator,
servicing agent, or of the financial
institution providing the credit support.
Mortgage-backed Securities. The funds may
invest in a variety of mortgage securities.
Mortgage lenders pool individual home
mortgages with similar characteristics to
back a certificate or bond, which is sold
to investors such as the funds. Interest
and principal payments generated by the
underlying mortgages are passed through to
the investors. The "big three" issuers are
Government National Mortgage Association
(GNMA), the Federal National Mortgage
Association (Fannie Mae), and the Federal
Home Loan Mortgage Corporation (Freddie
Mac). GNMA certificates are backed by the
full faith and credit of the U.S.
Government, while others, such as Fannie
Mae and Freddie Mac certificates, are only
supported by the ability to borrow from the
U.S. Treasury or supported only by the
credit of the agency. Private mortgage
bankers also issue mortgage-backed
securities.
Mortgage securities are subject to regular
principal prepayments as homeowners pay
down or pay off their mortgages. When
interest rates fall, the pace of mortgage
refinancings picks up. Refinanced mortgages
are paid off at face value (par), causing a
loss for any investor who may have
purchased the security at a price above
par. In such an environment, this risk
limits the potential price appreciation of
these securities and can negatively affect
a fund's net asset value. When rates rise,
however, mortgage-backed securities have
historically experienced smaller price
declines than comparable quality bonds.
Additional mortgage-related securities in
which the funds may invest include:
0 Collateralized Mortgage Obligations
(CMOs). CMOs are debt securities that are
fully collateralized by a portfolio of
mortgages or mortgage-backed securities.
All interest and principal payments from
the underlying mortgages are passed
through to the CMOs in such a way as to
create more definite maturities than is
the case with the underlying bonds. CMOs
may pay fixed or variable rates of
interest, and certain CMOs have priority
over others with respect to the receipt
of prepayments.
0 Stripped Mortgage Securities. Stripped
mortgage securities are created by
separating the interest and principal
payments generated by a pool of
mortgage-backed bonds to create two
classes of securities. Generally, one
class receives only interest payments
(IOs) and one principal payments (POs).
IOs and POs are acutely sensitive to
interest rate changes and to the rate of
principal prepayments. They are very
volatile in price and may have lower
liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit
these qualities, especially those which
pay variable rates of interest which
adjust inversely with and more rapidly
than short-term interest rates. There is
no guarantee a fund's investment in CMOs,
IOs or POs will be successful, and a
fund's total return could be adversely
affected as a result.
Operating Policy. Each fund may invest up
to 10% of its total assets in stripped
mortgage securities.
Hybrid Instruments. These instruments can
combine the characteristics of securities,
futures and options. For example, the
principal amount, redemption or conversion
terms of a security could be related to the
market price of some commodity, currency or
securities index. Such securities may bear
interest or pay dividends at below market
(or even relatively nominal) rates. Under
certain conditions, the redemption value of
such an investment could be zero. Hybrids
can have volatile prices and limited
liquidity and their use by a fund may not
be successful.
Operating Policy. Each fund may invest up
to 10% of its total assets in hybrid
instruments.
Zero Coupon Bonds and Pay-in-Kind Bonds. A
zero coupon bond does not make cash
interest payments during the life of the
bond. Instead, it is sold at a deep
discount to face value, and the interest
consists of the gradual appreciation in
price as the bond approaches maturity.
"Zeros" can be an attractive financing
method for issuers with near-term cash-flow
problems. Pay-in-kind (PIK) bonds pay
interest in cash or additional securities,
at the issuer's option, for a specified
period. Like zeros, they may help a
corporation economize on cash. PIK prices
reflect the market value of the underlying
debt plus any accrued interest. Zeros and
PIKS can be higher- or lower-quality debt,
and both are more volatile than coupon
bonds.
Each fund is required to distribute to
shareholders income imputed to any zero or
PIK investments. Such distributions could
reduce a fund's reserve position.
Each fund may invest up to 10% of its total
assets in zero coupon and pay-in-kind.
Private Placements (Restricted Securities).
These securities are sold directly to a
small number of investors, usually
institutions. Unlike public offerings, such
securities are not registered with the SEC.
Although certain of these securities may be
readily sold, for example under Rule 144A,
the sale of others may involve substantial
delays and additional costs.
Operating Policy. Each fund will not invest
more than 15% of its net assets in illiquid
securities.
Types of Management Practices
Cash Position. Each fund will hold a
certain portion of their assets in money
market securities, including repurchase
agreements, in the two highest rating
categories, maturing in one year or less.
For temporary, defensive purposes, a fund
may invest without limitation in such
securities. This reserve position provides
flexibility in meeting redemptions,
expenses, and the timing of new
investments, and serves as a short-term
defense during periods of unusual market
volatility.
Borrowing Money and Transferring Assets.
The funds can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the fund's
investment objectives and program. Such
borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental Policy. Borrowings may not
exceed 33 1/3% of a fund's total assets.
Operating Policies. Each fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of a fund's total
assets. A fund may not purchase additional
securities when borrowings exceed 5% of
total assets.
Futures and Options. Futures are often
used to manage risk, because they enable
the investor to buy or sell an asset in the
future at an agreed upon price. Options
give the investor the right, but not the
obligation, to buy or sell an asset at a
predetermined price in the future. The
funds may buy and sell futures contracts
(and options on such contracts) to manage
their exposure to changes in interest
rates, stock and bond prices, and foreign
currencies; as an efficient means of
adjusting their overall exposure to certain
markets; and also to adjust the portfolio's
duration. The funds may purchase, sell, or
write call and put options on securities,
financial indices, and foreign currencies.
Futures contracts and options may not
always be successful hedges; their prices
can be highly volatile; using them could
lower the fund's total return and the
potential loss from the use of futures can
exceed the fund's initial investment in
such contracts.
Operating Policies. Futures: Initial
margin deposits and premiums on options
used for non-hedging purposes will not
equal more than 5% of a fund's net asset
value. Options on securities: The total
market value of securities against which a
fund has written call or put options may
not exceed 25% of its total assets. A fund
will not commit more than 5% of its total
assets to premiums when purchasing call or
put options.
Interest Rate Swaps. The funds may enter
into various interest rate transactions
such as interest rate swaps and the
purchase or sale of interest rate caps and
floors, to preserve a return or spread on a
particular investment or portion of its
portfolio, to create synthetic securities,
or to structure transactions designed for
other non-speculative purposes.
Operating Policy. Each fund will not invest
more than 10% of its total assets in
interest rate swaps.
Managing Foreign Currency Risk. Investors
in foreign securities may "hedge" their
exposure to potentially unfavorable
currency changes by purchasing a contract
to exchange one currency for another on
some future date at a specified exchange
rate. In certain circumstances, a "proxy
currency" may be substituted for the
currency in which the investment is
denominated, a strategy known as "proxy
hedging." Although foreign currency
transactions will be used primarily to
protect a fund's foreign securities from
adverse currency movements relative to the
dollar, they involve the risk that
anticipated currency movements will not
occur and a fund's total return could be
reduced.
Lending of Portfolio Securities. Like other
mutual funds, the funds may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
insolvency of the broker-dealer or other
borrower. In this event, the funds could
experience delays in recovering their
securities and possibly capital losses.
Fundamental Policy. The value of loaned
securities may not exceed 33 1/3% of a
fund's total assets.
When-Issued Securities and Forward
Commitment Contracts. The funds may
purchase securities on a when-issued or
delayed delivery basis or may purchase or
sell securities on a forward commitment
basis. The price of these securities is
fixed at the time of the commitment to buy,
but delivery and payment can take place a
month or more later. During the interim
period, the market value of the securities
can fluctuate, and no interest accrues to
the purchaser. At the time of delivery, the
value of the securities may be more or less
than the purchase or sale price. Depending
on the fund's other investments, purchase
of these securities could increase the
level of fluctuations in the fund's net
asset value.
Portfolio Transactions. The funds will not
generally trade in securities (either
common stocks or bonds) for short-term
profits, but, when circumstances warrant,
securities may be purchased and sold
without regard to the length of time held.
The portfolio turnover rate of the
Balanced, Growth and Income Funds is not
expected to exceed ____%, ____% and ____%,
respectively.
High Yield/High Risk Investing. The total
return and yield of lower quality (high
yield/high risk) bonds, commonly referred
to as "junk bonds," can be expected to
fluctuate more than the total return and
yield of higher quality, shorter-term
bonds. Junk bonds are regarded as
predominantly speculative with respect to
the issuer's continuing ability to meet
principal and interest payments. Successful
investment in low and lower-medium quality
bonds involves greater investment risk and
is highly dependent on T. Rowe Price's
credit analysis. A real or perceived
economic downturn or higher interest rates
could cause a decline in high yield bond
prices, because such events could lessen
the ability of issuers to make principal
and interest payments. These bonds are
thinly-traded and can be more difficult to
sell and value accurately than high-quality
bonds. Because objective pricing data may
be less available, judgment may play a
greater role in the valuation process.
Operating Policy. The Balanced, Growth and
Income Funds may each invest up to 25%, 20%
and 15%, respectively, of their total
assets in below investment grade or junk
bonds.
Credit Quality Considerations. The credit
quality of most bond issues is evaluated by
rating agencies such as Moody's and
Standard & Poor's. Credit quality refers to
the issuer's ability to meet all required
interest and principal payments. The
highest ratings are assigned to issuers
perceived to be the best credit risks. T.
Rowe Price research analysts also evaluate
all portfolio holdings of the funds,
including those rated by outside agencies.
The lower the rating on a bond, the higher
the yield, other things being equal.
Table 4 shows the rating scale used by the
major rating agencies. T. Rowe Price
considers publicly available ratings, but
emphasizes its own credit analysis when
selecting investments.
___________________________________________
Ratings of Corporate Debt Securities
Moody's Standard Fitch Definition
Investors & Poor'sInvestors
Service, Corpora-Service,
Inc. tion Inc.
___________________________________________
Long-Term Aaa AAA AAA Highest
quality
_________________________________
Aa AA AA High
quality
_________________________________
A A A Upper
medium
grade
_________________________________
Baa BBB BBB Medium
grade
_________________________________
Ba BB BB Low
grade
_________________________________
B B B Specula-
tive
_________________________________
Moody's S&P Fitch
___________________________________________
Commer- P-1 Superior A-1+ F-1+
cial quality Extremely Exception-
Paper strong ally strong
quality quality
A-1 StrongF-1 Very
quality strong
quality
___________________________________
P-2 Strong A-2 F-2 Good
quality Satisfac- credit
tory quality
quality
___________________________________
P-3 A-3 F-3 Fair
Acceptable Adequate credit
quality quality quality
___________________________________
B Specu- F-S Weak
lative credit
quality quality
___________________________________
Table 4
4 Investing with T. Rowe Price
Meeting Requirements for New Accounts
Tax Identification Number
________________________ We must have your correct social security
Always verify your or corporate tax identification number and
transactions by carefully a signed New Account Form or W-9 Form.
reviewing the Otherwise, federal law requires the fund to
confirmation we send withhold a percentage (currently 31%) of
you. Please report any your dividends, capital gain distributions,
discrepancies to and redemptions, and may subject you to an
Shareholder Services. IRS fine. You will also be prohibited from
opening another account by exchange. If
this information is not received within 60
days after your account is established,
your account may be redeemed, priced at the
NAV on the date of redemption.
Unless you request otherwise, one
shareholder report will be mailed to
multiple account owners with the same tax
identification number and same zip code and
to those shareholders who have requested
that their account be combined with someone
else's for financial reporting.
Opening a New Account: $2,500 minimum
initial investment; $1,000 for retirement
or gifts or transfers to minors (UGMA/UTMA)
accounts
Account Registration
If you own other T. Rowe Price funds, be
sure to register any new account just like
your existing accounts so you can exchange
among them easily. (The name and account
type would have to be identical.)
________________________ By Mail
Regular Mail Please make your check payable to T. Rowe
T. Rowe Price Price funds (otherwise it may be returned)
Account Services and send it together with the New Account
P.O. Box 17300 Form to the address at left.
Baltimore, MD
21298-9353 By Wire
o Call Investor Services for an account
Mailgram, Express, number and use the wire address below.
Registered, or Certified
Mail o Complete a New Account Form and mail it
T. Rowe Price to one of the appropriate addresses
Account Services listed at left. Note: Retirement plans
10090 Red Run Blvd. cannot be opened by wire.
Owings Mills, MD 21117
o Give the following wire address to your
bank: Morgan Guaranty Trust Co. of New
York, ABA# 021000238, T. Rowe Price [fund
name], AC-00153938. Provide fund name,
account name(s), and account number.
By Exchange
Call Shareholder Services. The new account
will have the same registration as the
account from which you are exchanging.
Services for the new account may be carried
over by telephone request if preauthorized
on the existing account. (See explanation
of "Excessive Trading " under "Transaction
Procedures.")
In Person
Drop off your New Account Form at any of
the locations listed on the next page and
obtain a receipt.
Drop-off locations:
101 East Lombard St. T. Rowe Price
Baltimore, MD Financial Center
10090 Red Run
Boulevard
Owings Mills, MD
Farragut Square ARCO Tower
900 17th Street, NW 31st Floor
Washington, D.C. 515 S. Flower St.
Los Angeles, CA
Note: The fund and its agents have the
right to waive or lower investment
minimums, to accept initial purchases by
telephone or mailgram, to cancel or reject
any purchase or exchange if the written
confirmation has not been received by the
shareholder to otherwise modify the
conditions of purchase or any services at
any time or to act on any instructions
believed to be genuine.
Purchasing Additional Shares: $100 minimum
purchase; $50 minimum for retirement plans
and Automatic Asset Builder; $5,000 minimum
for telephone purchases
By ACH Transfer
Use Tele*AccessR, PC*AccessR or call
Investor Services if you have established
electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire
address in "Opening a New Account."
________________________ By Mail
Regular Mail o Provide your account number and the fund
T. Rowe Price Funds name on your check.
Account Services
P.O. Box 89000 o Mail the check to us at the address shown
Baltimore, MD at left either with a reinvestment slip
21289-1500 or a note indicating the fund and account
number in which you wish to purchase
shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder
section on the New Account or Shareholder
Services Form ($50 minimum).
By Phone
Call Shareholder Services to lock in that
day's closing price; payment is due within
five days ($5,000 minimum).
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our
phones busy during unusually volatile
markets, please consider placing your order
by Tele*Access or PC*Access (if you have
previously authorized telephone services),
or by express mail or mailgram. For
exchange policies, please see "Transaction
Procedures and Special Requirements -
Excessive Trading."
Redemption proceeds can be mailed to your
account address, sent by ACH transfer, or
wired to your bank. For charges, see
"Electronic Transfers - By Wire" on the
next page.
___________________ By Mail
Mailgram, Express, Provide account name(s) and numbers, fund
Registered, or name(s), and exchange or redemption amount.
Certified Mail For exchanges, mail to the appropriate
(See page 20.) address below or at left, indicate the fund
you are exchanging from and the fund(s) you
are exchanging into. T. Rowe Price requires
the signatures of all owners exactly as
registered, and possibly a signature
guarantee (see "Transaction Procedures and
Special Requirements--Signature
Guarantees").
Regular Mail
For Non-Retirement For Employer-Sponsored
and IRA Accounts: Retirement Accounts:
T. Rowe Price T. Rowe Price Trust
Account Services Company
P.O. Box 89000 P.O. Box 89000
Baltimore, MD Baltimore, MD
21289-0220 21289-0300
Note: Redemptions from retirement accounts,
including IRAs, must be in writing. Please
call Shareholder Services to obtain an IRA
Distribution Request Form. For
employer-sponsored retirement accounts,
call Investor Services or your plan
administrator for instructions.
________________________ Shareholder Services
Investor Services Many services are available to you as a T.
1-800-638-5660 Rowe Price shareholder; some you receive
1-410-547-2308 automatically and others you must authorize
on the New Account Form. By signing up for
services on the New Account Form rather
than later on, you avoid having to complete
a separate form and obtain a signature
guarantee. This section reviews some of the
principal services currently offered. Our
Services Guide contains detailed
descriptions of these and other services.
If you are a new T. Rowe Price investor,
you will receive a Services Guide with our
Welcome Kit.
Retirement Plans
We offer a wide range of plans for
individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs,
Keoghs (profit sharing, money purchase
pension), 401(k), and 403(b)(7). For
information on IRAs, call Investor
Services. For information on all other
retirement plans, please call our Trust
Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an
existing identically registered account, or
open a new identically registered account.
Remember, exchanges are purchases and sales
for tax purposes. (Exchanges into a state
tax-free fund are limited to investors
living in states where the funds are
registered.) Some of the T. Rowe Price
funds may impose a redemption fee of
.50%-2%, payable to such funds, on shares
held for less than one year, or in some
Funds, six months.
Automated Services
Telephone Services
Tele*Access. 24-hour services via toll-free
number provides information such as yields,
prices, dividends, account balances, and
your latest transaction as well as the
ability to request prospectuses and account
forms and initiate purchase, redemption and
exchange orders in your accounts (see
"Electronic Transfers" below).
PC*Access. 24-hour service via dial-up
modem provides the same information as
Tele*Access, but on a personal computer.
Please call Investor Services for an
information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling
one of our service representatives or by
visiting one of our four investor center
locations.
Electronic Transfers
By ACH. With no charges to pay, you can
initiate a purchase or redemption for as
little as $100 or as much as $100,000
between your bank account and fund account
using the ACH network. Enter instructions
via Tele*Access, PC*Access or call
Shareholder Services.
By Wire. Electronic transfers can also be
conducted via bank wire. There is currently
a $5 fee for wire redemptions under $5,000,
and your bank may charge for wire transfers
regardless of size.
Automatic Investing ($50 minimum)
You can invest automatically in several
different ways, including:
o Automatic Asset Builder. You instruct us
to move $50 or more once a month or less
often from your bank account, or you can
instruct your employer to send all or a
portion of your paycheck to the fund or
funds you designate.
o Automatic Exchange. Enables you to set up
systematic investments from one fund
account into another, such as from a
money fund into a stock fund.
Discount Brokerage
You can trade stocks, bonds, options,
precious metals and other securities at a
substantial savings over regular commission
rates. Call Investor Services for
information.
Note: If you buy or sell T. Rowe Price
Funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you
may be charged transaction or service fees
by those institutions. No such fees are
charged by T. Rowe Price Investment
Services or the Fund for transactions
conducted directly with the Fund.
Prospectus
To Open an Account
Investor Services Personal
1-800-638-5660 Strategy Funds
1-410-547-2308
For Existing Accounts
Shareholder Services T. Rowe Price
1-800-225-5132 Personal
1-410-625-6500 Strategy Funds,
Inc.
July 1, 1994
For Yields & Prices
Tele*Access(registered
trademark)
1-800-638-2587
1-410-625-7676
24 hours, 7 days
Investor Centers
101 East Lombard St.
First Floor
Baltimore, MD
Farragut Square
900 17th Street, N.W.
First Floor
Washington, D.C.
T. Rowe Price
Financial Center
First Floor
10090 Red Run Blvd.
Owings Mills, MD T. Rowe Price
Invest With
ARCO Tower Confidence
31st Floor (registered
515 S. Flower St. trademark)
Los Angeles, CA
To help you achieve
your financial goals,
T. Rowe Price offers a
wide range of stock,
bond, and money market
investments, as well
as convenient services
and timely,
informative reports.
______________
A family of
funds diversified across stocks, bonds, and money market
securities to offer three levels of potential risk and reward.
APPENDIX A
(Three pie charts appear here as an illustration of the funds'
investment programs and risk profiles.)
Personal Personal Personal
Strategy: Income Strategy: Balanced Strategy: Growth
Benchmark mix Benchmark mix Benchmark mix
Stocks 40% Stocks 60% Stocks 80%
(can range 30-50%) (can range 50-70%) (can range 70-90%)
Bonds 40% Bonds 30% Bonds 20%
(can range 30-50%) (can range 20-40%) (can range 10-30%)
Money markets 20% Money markets 10% Money markets 0%
(can range 10-30%) (can range 0-20%) (can range 0-20%)
Potential Risk/ Potential Risk/ Potential Risk/
Reward Reward Reward
lowest moderate highest
<PAGE>
PAGE 8
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE GNMA FUND
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
(collectively the "Funds" and individually the "Fund")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the appropriate
Fund's prospectus dated July 1, 1994, which may be obtained from
T. Rowe Price Investment Services, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you are
not a shareholder, please call 1-800-638-5660. A prospectus with
more complete information, including management fees and expenses
will be sent to you. Please read it carefully.
The date of this Statement of Additional Information is
July 1, 1994.
<PAGE>
PAGE 9
TABLE OF CONTENTS
Page Page
Asset-Backed Securities. . . . . . Lending of Portfolio
Capital Stock. . . . . . . . . . . Securities. . . . . . . . . . . .
Custodian. . . . . . . . . . . . . Management of Fund . . . . . . . .
Description of the Fund. . . . . . Mortgage-Related
Distributor for Fund . . . . . . . Securities. . . . . . . . . . . .
Dividends and Distributions. . . . Net Asset Value Per Share. . . . .
Federal and State Options. . . . . . . . . . . . . .
Registration of Shares. . . . . . Organization of the Fund . . . . .
Foreign Currency Portfolio Transactions . . . . . .
Transactions. . . . . . . . . . . Pricing of Securities. . . . . . .
Foreign Futures and Options. . . . Principal Holders of
Futures Contracts. . . . . . . . . Securities. . . . . . . . . . . .
Hybrid Instruments . . . . . . . . Ratings of Commercial Paper. . . .
Independent Accountants. . . . . . Ratings of Corporate
Illiquid or Restricted Debt Securities . . . . . . . . .
Securities. . . . . . . . . . . . Repurchase Agreements. . . . . . .
Investment Management Risk Factors . . . . . . . . . . .
Services. . . . . . . . . . . . . Tax Status . . . . . . . . . . . .
Investment Objectives Taxation of Foreign
and Polices . . . . . . . . . . . Shareholders. . . . . . . . . . .
Investment Performance . . . . . . Warrants . . . . . . . . . . . . .
Investment Program . . . . . . . . When-Issued Securities and Forward
Investment Restrictions. . . . . . Commitment Contracts. . . . . . .
Legal Counsel. . . . . . . . . . . Yield Information. . . . . . . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objectives and policies discussed in each
Fund's prospectus. The Funds will not make a material change in
their investment objectives without obtaining shareholder
approval. Unless otherwise specified, the investment programs
and restrictions of the Funds are not fundamental policies. Each
Fund's operating policies are subject to change by each Board of
Directors/Trustees without shareholder approval. However,
shareholders will be notified of a material change in an
operating policy. Each Fund's fundamental policies may not be
changed without the approval of at least a majority of the
outstanding shares of the Fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
Throughout this Statement of Additional Information, "the
Fund" is intended to refer to each Fund listed on the cover page,
unless otherwise indicated.
PAGE 10
RISK FACTORS
All Funds
Debt Obligations
Yields on short, intermediate, and long-term securities are
dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the
credit quality and rating of the issue. Debt securities with
longer maturities tend to have higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower
yields. The market prices of debt securities usually vary,
depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio debt securities, and
a decline in interest rates will generally increase the value of
portfolio debt securities. The ability of the Fund to achieve
its investment objective is also dependent on the continuing
ability of the issuers of the debt securities in which the Fund
invests to meet their obligations for the payment of interest and
principal when due. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to
trends in the economy, industries and financial markets, such
efforts will not eliminate all risk. There can, of course, be no
assurance that the Fund will achieve its investment
objective.
After purchase by the Fund, a debt security may cease to be
rated or its rating may be reduced below the minimum required for
purchase by the Fund. For the Prime Reserve and U.S. Treasury
Money Funds, the procedures set forth in Rule 2a-7, under the
Investment Company Act of 1940, may require the prompt sale of
any such security. For the other Funds, neither event will
require a sale of such security by the Fund. However, T. Rowe
Price will consider such event in its determination of whether
the Fund should continue to hold the security. To the extent
that the ratings given by Moody's or S&P may change as a result
of changes in such organizations or their rating systems, the
Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained
in the prospectus. When purchasing unrated securities, T. Rowe
Price, under the supervision of the Fund's Board of Directors,
determines whether the unrated security is of a qualify
comparable to that which the Fund is allowed to purchase.
All Funds, (except Prime Reserve and U.S. Treasury Money Funds)
PAGE 11
Because of its investment policy, the Fund may or may not be
suitable or appropriate for all investors. The Fund is not a
money market fund and is not an appropriate investment for those
whose primary objective is principal stability. The value of the
portfolio securities of the Fund will fluctuate based upon market
conditions. Although the Fund seeks to reduce risk by investing
in a diversified portfolio, such diversification does not
eliminate all risk. There can, of course, be no assurance that
the Fund will achieve its investment objective.
Prime Reserve and U.S. Treasury Money Funds
There can be no assurance that the Funds will achieve their
investment objectives or be able to maintain their net asset
value per share at $1.00. The price of the Fund is not
guaranteed or insured by the U.S. Government and its yield is not
fixed. An increase in interest rates could reduce the value of
the Fund's portfolio investments, and a decline in interest rates
could increase the value.
Reference is also made to the sections entitled "Types of
Securities" and "Portfolio Management Practices" for discussions
of the risks associated with the investments and practices
described therein as they apply to the Fund.
Adjustable Rate, GNMA, New Income, Short-Term Bond, High
Yield, and Personal Strategy Funds
Mortgage securities differ from conventional bonds in that
principal is paid back over the life of the security rather than
at maturity. As a result, the holder of a mortgage security
(i.e., the Fund) receives monthly scheduled payments of principal
and interest, and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. The
incidence of unscheduled principal prepayments is also likely to
increase in mortgage pools owned by the Fund when prevailing
mortgage loan rates fall below the mortgage rates of the
securities underlying the individual pool. The effect of such
prepayments in a falling rate environment is to (1) cause the
Fund to reinvest principal payments at the then lower prevailing
interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security. Conversely,
the Fund may realize a gain on prepayments of mortgage pools
trading at a discount. Such prepayments will provide an early
return of principal which may then be reinvested at the then
higher prevailing interest rate.
The market value of adjustable rate mortgage securities
("ARMs"), like other U.S. government securities, will generally
vary inversely with changes in market interest rates, declining
PAGE 12
when interest rates rise and rising when interest rates decline.
Because of their periodic adjustment feature, ARMs should be more
sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage
securities. Thus, while having less risk of a decline during
periods of rapidly rising rates, ARMs may also have less
potential for capital appreciation than other investments of
comparable maturities. Interest rate caps on mortgages
underlying ARM securities may prevent income on the ARM from
increasing to prevailing interest rate levels and cause the
securities to decline in value. In addition, to the extent ARMs
are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of the holders'
principal investment to the extent of the premium paid. On the
other hand, if ARMs are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of principal
will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will
be taxable as ordinary income.
High Yield, New Income, Short-Term Bond, and Personal Strategy
Funds
Risk Factors of Foreign Investing
There are special risks in foreign investing. Certain of
these risks are inherent in any mutual fund investing in foreign
securities while others relate more to the countries in which the
Funds will invest. Many of the risks are more pronounced for
investments in developing or emerging countries, such as many of
the countries of Southeast Asia, Latin America, Eastern Europe
and the Middle East. Although there is no universally accepted
definition, a developing country is generally considered to be a
country which is in the initial stages of its industrialization
cycle with a per capita gross national product of less than
$8,000.
Political and Economic Factors. Individual foreign
economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are
not as stable as in the United States. For example, in 1991, the
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached. In
addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim
sovereignty of one another and there is a demilitarized border
between North and South Korea.
PAGE 13
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.
Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Funds'
assets denominated in that currency. Such changes will also
affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of
the Fund's securities denominated in that currency will rise.
When a given currency depreciates against the dollar (the dollar
strengthens) the value of the Funds' securities denominated in
that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. Foreign stock and bond markets are
generally not as developed or efficient as, and may be more
volatile than, those in the United States. While growing in
volume, they usually have substantially less volume than U.S.
markets and the Funds' portfolio securities may be less liquid
and subject to more rapid and erratic price movements than
securities of comparable U.S. companies. Equity securities may
trade at price/earnings multiples higher than comparable United
States securities and such levels may not be sustainable. Fixed
PAGE 14
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
differ from those in United States markets. Such differences may
include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.
Investment Funds. The Funds may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in securities
of companies listed and traded on the stock exchanges in these
respective countries. The Funds' investment in these funds is
subject to the provisions of the 1940 Act. If the Funds invest
in such investment funds, the Funds' shareholders will bear not
only their proportionate share of the expenses of the Funds
(including operating expenses and the fees of the investment
manager), but also will bear indirectly similar expenses of the
underlying investment funds. In addition, the securities of
these investment funds may trade at a premium over their net
asset value.
Information and Supervision. There is generally less
publicly available information about foreign companies comparable
to reports and ratings that are published about companies in the
United States. Foreign companies are also generally not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those
applicable to United States companies. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the
Funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his
or her proportionate share of such foreign taxes paid by the
Funds. (See "Tax Status," page __.)
PAGE 15
Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the possibility
of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of a Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia
are considered illiquid, each Fund will be required to include
such securities within its 15% restriction on investing in
illiquid securities.[/R]
High Yield and Personal Strategy Funds
Special Risks of Investing in Junk Bonds
The following special considerations are additional risk
factors associated with the Fund's investments in lower rated
debt securities.
PAGE 16
Youth and Growth of the Lower Rated Debt Securities Market.
The market for lower rated debt securities is relatively new and
its growth has paralleled a long economic expansion. Past
experience may not, therefore, provide an accurate indication of
future performance of this market, particularly during periods of
economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market,
the value of lower rated debt securities in the Fund's portfolio,
the Fund's net asset value and the ability of the bonds' issuers
to repay principal and interest, meet projected business goals
and obtain additional financing than on higher rated securities.
These circumstances also may result in a higher incidence of
defaults than with respect to higher rated securities. An
investment in this Fund is more speculative than investment in
shares of a fund which invests only in higher rated debt
securities.
Sensitivity to Interest Rate and Economic Changes. Prices
of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated
investments. Debt securities with longer maturities, which may
have higher yields, may increase or decrease in value more than
debt securities with shorter maturities. Market prices of lower
rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate
changes and may be more volatile than securities which pay
interest periodically and in cash. Where it deems it appropriate
and in the best interests of Fund shareholders, the Fund may
incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to
protect the interests of security holders of its portfolio
companies.
Liquidity and Valuation. Because the market for lower rated
securities may be thinner and less active than for higher rated
securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Nonrated
securities are usually not as attractive to as many buyers as
rated securities are, a factor which may make nonrated securities
less marketable. These factors may have the effect of limiting
the availability of the securities for purchase by the Fund and
may also limit the ability of the Fund to sell such securities at
their fair value either to meet redemption requests or in
response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of
lower rated debt securities, especially in a thinly traded
market. To the extent the Fund owns or may acquire illiquid or
restricted lower rated securities, these securities may involve
special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties. Changes in values of debt
PAGE 17
securities which the Fund owns will affect its net asset value
per share. If market quotations are not readily available for
the Fund's lower rated or nonrated securities, these securities
will be valued by a method that the Fund's Board of Directors
believes accurately reflects fair value. Judgment plays a
greater role in valuing lower rated debt securities than with
respect to securities for which more external sources of
quotations and last sale information are available.
Congressional Action. New and proposed laws may have an
impact on the market for lower rated debt securities. For
example, as a result of the Financial Institution's Reform,
Recovery, and Enforcement Act of 1989, savings and loan
associations were required to dispose of their high yield bonds
no later than July 1, 1994. Qualified affiliates of savings and
loan associations, however, may purchase and retain these
securities, and savings and loan associations may divest these
securities by sale to their qualified affiliates. T. Rowe Price
is unable at this time to predict what effect, if any, the
legislation may have on the market for lower rated debt
securities.
Taxation. Special tax considerations are associated with
investing in lower rated debt securities structured as zero
coupon or pay-in-kind securities. The Fund accrues income on
these securities prior to the receipt of cash payments. The Fund
must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax
laws and may, therefore, have to dispose of its portfolio
securities to satisfy distribution requirements.
INVESTMENT PROGRAM
Types of Securities
Set forth below is additional information about certain of
the investments described in the Fund's prospectus.
Debt Securities
Fixed income securities in which the Fund may invest
include, but are not limited to, those described below.
All Funds
U.S. Government Obligations. Bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in the
length of their maturities.
PAGE 18
U.S. Government Agency Securities. Issued or guaranteed by
U.S. Government sponsored enterprises and federal agencies.
These include securities issued by the Federal National Mortgage
Association, Government National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration,
Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; and the remainder are supported only by the credit of
the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
The GNMA, U.S. Treasury Money, Intermediate, and Long-Term
Funds may only invest in these securities if they are supported
by the full faith and credit of the U.S. government.
All Funds, except GNMA, U.S. Treasury Money, Intermediate and
Long-Term Funds
Bank Obligations. Certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates
of deposit are short-term obligations of commercial banks. A
bankers' acceptance is a time draft drawn on a commercial bank by
a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of
U.S. banks, U.S. branches of foreign banks, and foreign branches
of foreign banks.
Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures).
Corporate notes may have fixed, variable, or floating rates.
Commercial Paper. Short-term promissory notes issued by
corporations primarily to finance short-term credit needs.
Certain notes may have floating or variable rates.
Foreign Government Securities. Issued or guaranteed by a
foreign government, province, instrumentality, political
subdivision or similar unit thereof.
Savings and Loan Obligations. Negotiable certificates of
deposit and other short-term debt obligations of savings and loan
associations.
Supranational Agencies. Securities of certain supranational
entities, such as the International Development Bank.
<PAGE>
PAGE 19
All Funds, (except Prime Reserve and U.S. Treasury Money Funds)
Mortgage-Related Securities
Mortgage-related securities in which the Fund may invest
include, but are not limited to, those described below. The
GNMA, U.S. Treasury Intermediate and U.S. Treasury Long-Term
Funds may only invest in these securities to the extent they are
backed by the full faith and credit of the U.S. Government.
Mortgage-Backed Securities. Mortgage-backed securities are
securities representing an interest in a pool of mortgages. The
mortgages may be of a variety of types, including adjustable
rate, conventional 30-year fixed rate, graduated payment, and 15-
year. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the Fund. This
is in contrast to traditional bonds where principal is normally
paid back at maturity in a lump sum. Unscheduled prepayments of
principal shorten the securities' weighted average life and may
lower their total return. (When a mortgage in the underlying
mortgage pool is prepaid, an unscheduled principal prepayment is
passed through to the Fund. This principal is returned to the
Fund at par. As a result, if a mortgage security were trading at
a premium, its total return would be lowered by prepayments, and
if a mortgage security were trading at a discount, its total
return would be increased by prepayments.) The value of these
securities also may change because of changes in the market's
perception of the creditworthiness of the federal agency that
issued them. In addition, the mortgage securities market in
general may be adversely affected by changes in governmental
regulation or tax policies.
U.S. Government Agency Mortgage-Backed Securities. These
are obligations issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("Ginnie Mae" or
"GNMA"), the Federal National Mortgage Association ("Fannie Mae"
or "FNMA") and the Federal Home Loan Mortgage Corporation
("Freddie Mac" or "FHLMC"). FNMA and FHLMC obligations are not
backed by the full faith and credit of the U.S. Government as
GNMA certificates are, but FNMA and FHLMC securities are
supported by the instrumentality's right to borrow from the
United States Treasury. U.S. Government Agency Mortgage-Backed
PAGE 20
Certificates provide for the pass-through to investors of their
pro-rata share of monthly payments (including any prepayments)
made by the individual borrowers on the pooled mortgage loans,
net of any fees paid to the guarantor of such securities and the
servicer of the underlying mortgage loans. Each of GNMA, FNMA
and FHLMC guarantees timely distributions of interest to
certificate holders. GNMA and FNMA guarantee timely
distributions of scheduled principal. FHLMC has in the past
guaranteed only the ultimate collection of principal of the
underlying mortgage loan; however, FHLMC now issues
Mortgage-Backed Securities (FHLMC Gold PCs) which also guarantee
timely payment of monthly principal reductions.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned
corporate instrumentality of the United States within the
Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes
Ginnie Mae to guarantee the timely payment of the principal of
and interest on certificates that are based on and backed by a
pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing
Act of 1949 ("FHA Loans"), or guaranteed by the Department of
Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit
of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In
order to meet its obligations under such guaranty, Ginnie Mae is
authorized to borrow from the United States Treasury with no
limitations as to amount.
Fannie Mae Certificates. Fannie Mae is a federally
chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act of
1938. FNMA Certificates represent a pro-rata interest in a group
of mortgage loans purchased by Fannie Mae. FNMA guarantees the
timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith
and credit of the U.S. Government.
Freddie Mac Certificates. Freddie Mac is a corporate
instrumentality of the United States created pursuant to the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act").
Freddie Mac Certificates represent a pro-rata interest in a group
of mortgage loans (a "Freddie Mac Certificate group") purchased
by Freddie Mac. Freddie Mac guarantees timely payment of
interest and principal on certain securities it issues and timely
payment of interest and eventual payment of principal on other
securities is issues. The obligations of Freddie Mac are
obligations solely of Freddie Mac and are not backed by the full
faith and credit of the U.S. Government.
<PAGE>
PAGE 21
When mortgages in the pool underlying a Mortgage-Backed
Security are prepaid by mortgagors or by result of foreclosure,
such principal payments are passed through to the certificate
holders. Accordingly, the life of the Mortgage-Backed Security
is likely to be substantially shorter than the stated maturity of
the mortgages in the underlying pool. Because of such variation
in prepayment rates, it is not possible to predict the life of a
particular Mortgage-Backed Security, but FHA statistics indicate
that 25- to 30-year single family dwelling mortgages have an
average life of approximately 12 years. The majority of Ginnie
Mae Certificates are backed by mortgages of this type, and,
accordingly, the generally accepted practice treats Ginnie Mae
Certificates as 30-year securities which prepay full in the 12th
year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
Fixed Rate Mortgage-Backed Securities bear a stated "coupon
rate" which represents the effective mortgage rate at the time of
issuance, less certain fees to GNMA, FNMA and FHLMC for providing
the guarantee, and the issuer for assembling the pool and for
passing through monthly payments of interest and principal.
Payments to holders of Mortgage-Backed Securities consist of
the monthly distributions of interest and principal less the
applicable fees. The actual yield to be earned by a holder of
Mortgage-Backed Securities is calculated by dividing interest
payments by the purchase price paid for the Mortgage-Backed
Securities (which may be at a premium or a discount from the face
value of the certificate).
Monthly distributions of interest, as contrasted to semi-
annual distributions which are common for other fixed interest
investments, have the effect of compounding and thereby raising
the effective annual yield earned on Mortgage-Backed Securities.
Because of the variation in the life of the pools of mortgages
which back various Mortgage-Backed Securities, and because it is
impossible to anticipate the rate of interest at which future
principal payments may be reinvested, the actual yield earned
from a portfolio of Mortgage-Backed Securities will differ
significantly from the yield estimated by using an assumption of
a certain life for each Mortgage-Backed Security included in such
a portfolio as described above.
U.S. Government Agency Multiclass Pass-Through Securities.
Unlike CMOs, U.S. Government Agency Multiclass Pass-Through
Securities, which include FNMA Guaranteed REMIC Pass-Through
Certificates and FHLMC Multi-Class Mortgage Participation
Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities.
PAGE 22
Multi-Class Residential Mortgage Securities. Such
securities represent interests in pools of mortgage loans to
residential home buyers made by commercial banks, savings and
loan associations or other financial institutions. Unlike GNMA,
FNMA and FHLMC securities, the payment of principal and interest
on Multi-Class Residential Mortgage Securities is not guaranteed
by the U.S. Government or any of its agencies. Accordingly,
yields on Multi-Class Residential Mortgage Securities have been
historically higher than the yields on U.S. government mortgage
securities. However, the risk of loss due to default on such
instruments is higher since they are not guaranteed by the U.S.
Government or its agencies. Additionally, pools of such
securities may be divided into senior or subordinated segments.
Although subordinated mortgage securities may have a higher yield
than senior mortgage securities, the risk of loss of principal is
greater because losses on the underlying mortgage loans must be
borne by persons holding subordinated securities before those
holding senior mortgage securities.
Privately-Issued Mortgage-Backed Certificates. These are
pass-through certificates issued by non-governmental issuers.
Pools of conventional residential mortgage loans created by such
issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or
indirect government guarantees of payment. Timely payment of
interest and principal of these pools is, however, generally
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance
and guarantees are issued by government entities, private
insurance or the mortgage poolers. Such insurance and guarantees
and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security
meets the Fund's quality standards. The Fund may buy mortgage-
related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers,
the investment manager determines that the securities meet the
Fund's quality standards.
Collateralized Mortgage Obligations (CMOs). CMOs are bonds
that are collateralized by whole loan mortgages or mortgage pass-
through securities. The bonds issued in a CMO deal are divided
into groups, and each group of bonds is referred to as a
"tranche." Under the traditional CMO structure, the cash flows
generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay
principal to the CMO bondholders. The bonds issued under a CMO
structure are retired sequentially as opposed to the pro rata
return of principal found in traditional pass-through
obligations. Subject to the various provisions of individual CMO
issues, the cash flow generated by the underlying collateral (to
the extent it exceeds the amount required to pay the stated
PAGE 23
interest) is used to retire the bonds. Under the CMO structure,
the repayment of principal among the different tranches is
prioritized in accordance with the terms of the particular CMO
issuance. The "fastest-pay" tranche of bonds, as specified in
the prospectus for the issuance, would initially receive all
principal payments. When that tranche of bonds is retired, the
next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are
retired. The sequential retirement of bond groups continues
until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash
flows of long maturity, monthly-pay collateral to formulate
securities with short, intermediate and long final maturities and
expected average lives.
In recent years, new types of CMO structures have evolved.
These include floating rate CMOs, planned amortization classes,
accrual bonds and CMO residuals. These newer structures affect
the amount and timing of principal and interest received by each
tranche from the underlying collateral. Under certain of these
new structures, given classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the Fund
invests, the investment may be subject to a greater or lesser
risk of prepayment than other types of mortgage-related
securities.
The primary risk of any mortgage security is the uncertainty
of the timing of cash flows. For CMOs, the primary risk results
from the rate of prepayments on the underlying mortgages serving
as collateral. An increase or decrease in prepayment rates
(resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs.
The prices of certain CMOs, depending on their structure and the
rate of prepayments, can be volatile. Some CMOs may also not be
as liquid as other securities.
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of
mortgages, the cash flow of which has been separated into its
interest and principal components. "IOs" (interest only
securities) receive the interest portion of the cash flow while
"POs" (principal only securities) receive the principal portion.
Stripped Agency Mortgage-Backed Securities may be issued by U.S.
Government Agencies or by private issuers similar to those
described below with respect to CMOs and privately-issued
mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest
rates. The value of the other mortgage-backed securities
described herein, like other debt instruments, will tend to move
in the opposite direction compared to interest rates. Under the
PAGE 24
Internal Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of original
issue discount, without a corresponding distribution of cash to
the Fund.
The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For
example, a rapid or slow rate of principal payments may have a
material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor
may fail to recoup fully its initial investment in an IO class of
a stripped mortgage-backed security, even if the IO class is
rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments of principal, the
price on a PO class will be affected more severely than would be
the case with a traditional mortgage-backed security.
The staff of the Securities and Exchange Commission has
advised the Fund that it believes the Fund should treat IOs and
POs, other than government-issued IOs or POs backed by fixed rate
mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. Under the Staff's
position, the determination of whether a particular
government-issued IO and PO backed by fixed rate mortgages may be
made on a case by case basis under guidelines and standards
established by the Fund's Board of Directors/Trustees. The
Fund's Board of Directors/Trustees has delegated to T. Rowe Price
the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of
collateral, including age and prepayment characteristics; rate of
interest on coupon relative to current market rates and the
effect of the rate on the potential for prepayments; complexity
of the issue's structure, including the number of tranches; size
of the issue and the number of dealers who make a market in the
IO or PO. The Fund will treat non-government-issued IOs and POs
not backed by fixed or adjustable rate mortgages as illiquid
unless and until the Securities and Exchange Commission modifies
its position.
Adjustable Rate Mortgages. Adjustable rate mortgage (ARM)
securities are collateralized by adjustable rate, rather than
fixed rate, mortgages.
ARMs, like fixed rate mortgages, have a specified maturity
date, and the principal amount of the mortgage is repaid over the
life of the mortgage. Unlike fixed rate mortgages, the interest
rate on ARMs is adjusted at regular intervals based on a
PAGE 25
specified, published interest rate "index" such as a Treasury
rate index. The new rate is determined by adding a specific
interest amount, the "margin," to the interest rate of the index.
Investment in ARM securities allows the Fund to participate in
changing interest rate levels through regular adjustments in the
coupons of the underlying mortgages, resulting in more variable
current income and lower price volatility than longer term fixed
rate mortgage securities. The ARM securities in which the Fund
expects to invest will generally adjust their interest rates at
regular intervals of one year or less. ARM securities are a less
effective means of locking in long-term rates than fixed rate
mortgages since the income from adjustable rate mortgages will
increase during periods of rising interest rates and decline
during periods of falling rates.
Characteristics of Adjustable Rate Mortgage Securities -
Interest Rate Indices. The interest rates paid on adjustable
rate securities are readjusted periodically to an increment over
some predetermined interest rate index. Such readjustments occur
at intervals ranging from one to 60 months. There are three main
categories of indexes: (1) those based on U.S. Treasury
securities (2) those derived from a calculated measure such as a
cost of funds index ("COFI") or a moving average of mortgage
rates and (3) those based on actively traded or prominently
posted short-term, interest rates. Commonly utilized indexes
include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month, three-month, six-month or
one-year London Interbank Offered Rate (LIBOR), the prime rate of
a specific bank, or commercial paper rates. Some indexes, such
as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels. The market value of the Fund's
assets and of the net asset value of the Fund's shares will be
affected by the length of the adjustment period, the degree of
volatility in the applicable indexes and the maximum increase or
decrease of the interest rate adjustment on any one adjustment
date, in any one year and over the life of the securities. These
maximum increases and decreases are typically referred to as
"caps" and "floors", respectively.
A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move in a
manner different from indices based upon specific interest rates,
such as the One Year Treasury Index. Additionally, there can be
no assurance that the Cost of Funds Index will necessarily move
in the same direction or at the same rate as prevailing interest
rates. Furthermore, any movement in the Cost of Funds Index as
PAGE 26
compared to other indices based upon specific interest rates may
be affected by changes instituted by the FHLB of San Francisco in
the method used to calculate the Cost of Funds Index. To the
extent that the Cost of Funds Index may reflect interest changes
on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later
than would be produced by such other indices, and in a period of
declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a
higher level of principal prepayments on mortgage loans which
adjust in accordance with the Cost of Funds Index than mortgage
loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest
rate that the most creditworthy international banks dealing in
U.S. dollar-denominated deposits and loans charge each other for
large dollar-denominated loans. LIBOR is also usually the base
rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or 12 month intervals.
Caps and Floors. ARMs will frequently have caps and floors
which limit the maximum amount by which the interest rate to the
residential borrower may move up or down, respectively, each
adjustment period and over the life of the loan. Interest rate
caps on ARM securities may cause them to decrease in value in an
increasing interest rate environment. Such caps may also prevent
their income from increasing to levels commensurate with
prevailing interest rates. Conversely, interest rate floors on
ARM securities may cause their income to remain higher than
prevailing interest rate levels and result in an increase in the
value of such securities. However, this increase may be tempered
by the acceleration of prepayments.
Mortgage securities generally have a maximum maturity of up
to 30 years. However, due to the adjustable rate feature of ARM
securities, their prices are considered to have volatility
characteristics which approximate the average period of time
until the next adjustment of the interest rate. As a result, the
principal volatility of ARM securities may be more comparable to
short- and intermediate-term securities than to longer term fixed
rate mortgage securities. Prepayments however, will increase
their principal volatility. See also the discussion of Mortgage-
Backed Securities on page __.
Other Mortgage Related Securities. The Fund expects that
governmental, government-related or private entities may create
mortgage loan pools offering pass-through investments in addition
to those described above. The mortgages underlying these
securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may
PAGE 27
vary or whose terms to maturity may differ from customary long-
term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the investment
manager will, consistent with the Fund's objective, policies and
quality standards, consider making investments in such new types
of securities.
All Funds (except GNMA, U.S. Treasury Money, Intermediate and
Long-Term Funds)
Asset-Backed Securities
The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated
from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of
principal payments received on the underlying assets which in
turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be
more or less than the anticipated yield to maturity. Asset-
backed securities may be classified as pass-through certificates
or collateralized obligations.
Pass-through certificates are asset-backed securities which
represent an undivided fractional ownership interest in an
underlying pool of assets. Pass-through certificates usually
provide for payments of principal and interest received to be
passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest
in the underlying assets, the holders thereof bear directly the
risk of any defaults by the obligors on the underlying assets not
covered by any credit support. See "Types of Credit Support".
Asset-backed securities issued in the form of debt
instruments, also known as collateralized obligations, are
generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card
or automobile receivables. The assets collateralizing such
asset-backed securities are pledged to a trustee or custodian for
the benefit of the holders thereof. Such issuers generally hold
no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments
on such asset-backed securities are obligations of the issuers,
in the event of defaults on the underlying assets not covered by
PAGE 28
any credit support (see "Types of Credit Support"), the issuing
entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed
securities are issued with only one class of security, many
asset-backed securities are issued in more than one class, each
with different payment terms. Multiple class asset-backed
securities are issued for two main reasons. First, multiple
classes may be used as a method of providing credit support.
This is accomplished typically through creation of one or more
classes whose right to payments on the asset-backed security is
made subordinate to the right to such payments of the remaining
class or classes. See "Types of Credit Support". Second,
multiple classes may permit the issuance of securities with
payment terms, interest rates or other characteristics differing
both from those of each other and from those of the underlying
assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests
with respect to the allocation of interest and principal of the
assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of
non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark
changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those
described above may be issued in the future. The Fund may invest
in such asset-backed securities if such investment is otherwise
consistent with its investment objectives and policies and with
the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures by
obligors on underlying assets to make payments, such securities
may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to
ensure that scheduled payments on the underlying pool are made in
a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from
third parties, through various means of structuring the
transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising
out of the structure of the transaction include "senior-
PAGE 29
subordinated securities" (multiple class asset-backed securities
with certain classes subordinate to other classes as to the
payment of principal thereon, with the result that defaults on
the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have
"reserve funds" (where cash or investments, sometimes funded from
a portion of the initial payments on the underlying assets, are
held in reserve against future losses) or that have been "over
collateralized" (where the scheduled payments on, or the
principal amount of, the underlying assets substantially exceeds
that required to make payment of the asset-backed securities and
pay any servicing or other fees). The degree of credit support
provided on each issue is based generally on historical
information respecting the level of credit risk associated with
such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-
backed security.
Automobile Receivable Securities. The Fund may invest in
Asset Backed Securities which are backed by receivables from
motor vehicle installment sales contracts or installment loans
secured by motor vehicles ("Automobile Receivable Securities").
Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts")
typically have shorter durations and lower incidences of
prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to
prepayment risk.
Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile
Contracts only by filing a financing statement and by having the
servicer of the Automobile Contracts, which is usually the
originator of the Automobile Contracts, take custody thereof. In
such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that
such party could acquire an interest in the Automobile Contracts
superior to that of the holders of Automobile Receivable
Securities. Also although most Automobile Contracts grant a
security interest in the motor vehicle being financed, in most
states the security interest in a motor vehicle must be noted on
the certificate of title to create an enforceable security
interest against competing claims of other parties. Due to the
large number of vehicles involved, however, the certificate of
title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually
is not amended to reflect the assignment of the seller's security
interest for the benefit of the holders of the Automobile
Receivable Securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be
PAGE 30
available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle
owner the right to assert against the holder of the owner's
Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the Automobile Receivable
Securities.
Credit Card Receivable Securities. The Fund may invest in
Asset Backed Securities backed by receivables from revolving
credit card agreements ("Credit Card Receivable Securities").
Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile
Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order
to lengthen the maturity of Credit Card Receivable Securities,
most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through
to the security holder and principal payments received on such
Accounts are used to fund the transfer to the pool of assets
supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial
fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during
the initial period and the non-occurrence of specified events.
An acceleration in cardholders' payment rates or any other event
which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could
shorten the weighted average life and yield of the Credit Card
Receivable Security.
Credit cardholders are entitled to the protection of a
number of state and federal consumer credit laws, many of which
give such holder the right to set off certain amounts against
balances owed on the credit card, thereby reducing amounts paid
on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. T. Rowe Price anticipates that Asset Backed
Securities backed by assets other than those described above will
be issued in the future. The Fund may invest in such securities
in the future if such investment is otherwise consistent with its
investment objective and policies.
PAGE 31
There are, of course, other types of securities that are, or
may become available, which are similar to the foregoing and the
Fund reserves the right to invest in these securities.
High Yield Fund
Collateralized Bond or Loan Obligations
CBOs are bonds collateralized by corporate bonds and CLOs
are bonds collateralized by bank loans. CBOs and CLOs are
structured into tranches, and payments are allocated such that
each tranche has a predictable cash flow stream and average life.
CBOs are fairly recent entrants to the fixed income market. Most
issues to date have been collateralized by high yield bonds or
loans, with heavy credit enhancement.
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PAGE 32
Loan Participations and Assignments
Loan participations and assignments (collectively
"participations") will typically be participating interests in
loans made by a syndicate of banks, represented by an agent bank
which has negotiated and structured the loan, to corporate
borrowers to finance internal growth, mergers, acquisitions,
stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may also have been made to governmental
borrowers, especially governments of developing countries (LOC
debt). LOC debt will involve the risk that the governmental
entity responsible for the repayment of the debt may be unable or
unwilling to do so when due. The loans underlying such
participations may be secured or unsecured, and the Fund may
invest in loans collateralized by mortgages on real property or
which have no collateral. The loan participations themselves may
extend for the entire term of the loan or may extend only for
short "strips" that correspond to a quarterly or monthly floating
rate interest period on the underlying loan. Thus, a term or
revolving credit that extends for several years may be subdivided
into shorter periods.
The loan participations in which the Fund will invest will
also vary in legal structure. Occasionally, lenders assign to
another institution both the lender's rights and obligations
under a credit agreement. Since this type of assignment relieves
the original lender of its obligations, it is call a novation.
More typically, a lender assigns only its right to receive
payments of principal and interest under a promissory note,
credit agreement or similar document. A true assignment shifts
to the assignee the direct debtor-creditor relationship with the
underlying borrower. Alternatively, a lender may assign only
part of its rights to receive payments pursuant to the underlying
instrument or loan agreement. Such partial assignments, which
are more accurately characterized as "participating interests,"
do not shift the debtor-creditor relationship to the assignee,
who must rely on the original lending institution to collect sums
due and to otherwise enforce its rights against the agent bank
which administers the loan or against the underlying borrower.
Pursuant to an SEC no-action letter, and because the Fund is
allowed to purchase debt and debt securities, including debt
securities at private placement, the Fund will treat loan
participations as securities and not subject to its fundamental
investment restriction prohibiting the Fund from making
loans.
There may not be a recognizable, liquid public market for
loan participations. To the extent this is the case, the Fund
would consider the loan participation as illiquid and subject to
the Fund's restriction on investing no more than 15% of its net
assets in illiquid securities.
PAGE 33
Where required by applicable SEC positions, the Fund will
treat both the corporate borrower and the bank selling the
participation interest as an issuer for purposes of its
fundamental investment restriction on diversification.
Various service fees received by the Fund from loan
participations, may be treated as non-interest income depending
on the nature of the fee (commitment, takedown, commission,
service or loan origination). To the extent the service fees are
not interest income, they will not qualify as income under
Section 851(b) of the Internal Revenue Code. Thus the sum of
such fees plus any other non-qualifying income earned by the Fund
cannot exceed 10% of total income.
Trade Claims
Trade claims are non-securitized rights of payment arising
from obligations other than borrowed funds. Trade claims
typically arise when, in the ordinary course of business, vendors
and suppliers extend credit to a company by offering payment
terms. Generally, when a company files for bankruptcy protection
payments on these trade claims cease and the claims are subject
to compromise along with the other debts of the company. Trade
claims typically are bought and sold at a discount reflecting the
degree of uncertainty with respect to the timing and extent of
recovery. In addition to the risks otherwise associated with
low-quality obligations, trade claims have other risks, including
the possibility that the amount of the claim may be disputed by
the obligor.
Over the last few years a market for the trade claims of
bankrupt companies has developed. Many vendors are either
unwilling or lack the resources to hold their claim through the
extended bankruptcy process with an uncertain outcome and timing.
Some vendors are also aggressive in establishing reserves against
these receivables, so that the sale of the claim at a discount
may not result in the recognition of a loss.
Trade claims can represent an attractive investment
opportunity because these claims typically are priced at a
discount to comparable public securities. This discount is a
reflection of both a less liquid market, a smaller universe of
potential buyers and the risks peculiar to trade claim investing.
It is not unusual for trade claims to be priced at a discount to
public securities that have an equal or lower priority claim.
PAGE 34
As noted above, investing in trade claims does carry some
unique risks which include:
o Establishing the Amount of the Claim. Frequently, the
supplier's estimate of its receivable will differ from
the customer's estimate of its payable. Resolution of
these differences can result in a reduction in the amount
of the claim. This risk can be reduced by only
purchasing scheduled claims (claims already listed as
liabilities by the debtor) and seeking representations
from the seller.
o Defenses to Claims. The debtor has a variety of defenses
that can be asserted under the bankruptcy code against
any claim. Trade claims are subject to these defenses,
the most common of which for trade claims relates to
preference payments. (Preference payments are all
payments made by the debtor during the 90 days prior to
the filing. These payments are presumed to have
benefited the receiving creditor at the expense of the
other creditors. The receiving creditor may be required
to return the payment unless it can show the payments
were received in the ordinary course of business.) While
none of these defenses can result in any additional
liability of the purchaser of the trade claim, they can
reduce or wipe out the entire purchased claim. This risk
can be reduced by seeking representations and
indemnification from the seller.
o Documentation/Indemnification. Each trade claim
purchased requires documentation that must be negotiated
between the buyer and seller. This documentation is
extremely important since it can protect the purchaser
from losses such as those described above. Legal
expenses in negotiating a purchase agreement can be
fairly high. Additionally, it is important to note that
the value of an indemnification depends on the sellers
credit.
o Volatile Pricing Due to Illiquid Market. There are
only a handful of brokers for trade claims and the quoted
price of these claims can be volatile. Generally, it is
expected that Trade Claims would be considered illiquid
investments.
o No Current Yield/Ultimate Recovery. Trade claims are
almost never entitled to earn interest. As a result, the
return on such an investment is very sensitive to the
length of the bankruptcy, which is uncertain. Although
not unique to trade claims, it is worth noting that the
ultimate recovery on the claim is uncertain and there is
no way to calculate a conventional yield to maturity on
PAGE 35
this investment. Additionally, the exit for this
investment is a plan of reorganization which may include
the distribution of new securities. These securities may
be as illiquid as the original trade claim investment.
o Tax Issue. Although the issue is not free from doubt, it
is likely that Trade Claims would be treated as non-
securities investments. As a result, any gains would be
considered "non-qualifying" under the Internal Revenue
Code. The Fund may have up to 10% of its gross income
(including capital gains) derived from non-qualifying
sources.
High Yield and Personal Strategy Funds
Zero Coupon and Pay-in-Kind Bonds
A zero coupon security has no cash coupon payments.
Instead, the issuer sells the security at a substantial discount
from its maturity value. The interest received by the investor
from holding this security to maturity is the difference between
the maturity value and the purchase price. The advantage to the
investor is that reinvestment risk of the income received during
the life of the bond is eliminated. However, zero-coupon bonds
like other bonds retain interest rate and credit risk and usually
display more price volatility than those securities that pay a
cash coupon.
Pay-in-Kind (PIK) Instruments are securities that pay
interest in either cash or additional securities, at the issuer's
option, for a specified period. PIK's, like zero coupon bonds,
are designed to give an issuer flexibility in managing cash flow.
PIK bonds can be either senior or subordinated debt and trade
flat (i.e., without accrued interest). The price of PIK bonds is
expected to reflect the market value of the underlying debt plus
an amount representing accrued interest since the last payment.
PIK's are usually less volatile than zero coupon bonds, but more
volatile than cash pay securities.
For federal income tax purposes, these types of bonds will
require the recognition of gross income each year even though no
cash may be paid to the Fund until the maturity or call date of
the bond. The Fund will nonetheless be required to distribute
substantially all of this gross income each year to comply with
the Internal Revenue Code, and such distributions could reduce
the amount of cash available for investment by the Fund.
High Yield, Personal Strategy, and New Income Funds
Warrants
The Fund may acquire warrants. Warrants are pure
speculation in that they have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but
only the right to buy them. Warrants differ from call options in
that warrants are issued by the issuer of the security which may
be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying
securities.
Adjustable Rate, High Yield, New Income, Short-Term Bond, and
Personal Strategy Funds
Hybrid Instruments
Hybrid Instruments have recently been developed and combine
the elements of futures contracts or options with those of debt,
preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these Hybrid Instruments are indexed to the
price of a commodity, particular currency, or a domestic or
foreign debt or equity securities index. Hybrid Instruments may
take a variety of forms, including, but not limited to, debt
instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or
commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to
the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a
combination of the risks of investing in securities, options,
futures and currencies, including volatility and lack of
<PAGE>
PAGE 36
liquidity. Reference is made to the discussion of futures,
options, and forward contracts herein for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the
related commodity or currency may not move in the same direction
or at the same time. Hybrid Instruments may bear interest or pay
preferred dividends at below market (or even relatively nominal)
rates. Alternatively, Hybrid Instruments may bear interest at
above market rates but bear an increased risk of principal loss
(or gain). In addition, because the purchase and sale of Hybrid
Instruments could take place in an over-the-counter market or in
a private transaction between the Fund and the seller of the
Hybrid Instrument, the creditworthiness of the counter party to
the transaction would be a risk factor which the Fund would have
to consider. Hybrid Instruments also may not be subject to
regulation of the Commodities Futures Trading Commission
("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and
sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
All Funds
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or
delayed delivery basis ("When-Issueds") and may purchase
securities on a forward commitment basis ("Forwards"). Any or
all of the Fund's investments in debt securities may be in the
form of When-Issueds and Forwards. The price of such securities,
which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs
within 90 days of the purchase for When-Issueds, but may be
substantially longer for Forwards. During the period between
purchase and settlement, no payment is made by the Fund to the
issuer and no interest accrues to the Fund. The purchase of
these securities will result in a loss if their value declines
prior to the settlement date. This could occur, for example, if
interest rates increase prior to settlement. The longer the
period between purchase and settlement, the greater the risks
are. At the time the Fund makes the commitment to purchase these
securities, it will record the transaction and reflect the value
of the security in determining its net asset value. The Fund
will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value
to commitments for them during the time between the purchase and
the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not
available to the Fund (to the extent of the securities used for
cover). Such securities either will mature or, if necessary, be
sold on or before the settlement date.
To the extent the Fund remains fully or almost fully
invested (in securities with a remaining maturity of more than
one year) at the same time it purchases these securities, there
will be greater fluctuations in the Fund's net asset value than
if the Fund did not purchase them.
<PAGE>
PAGE 37
Additional Adjustable Rate Securities
Certain securities may be issued with adjustable interest
rates that are reset periodically by pre-determined formulas or
indexes in order to minimize movements in the principal value of
the investment. Such securities may have long-term maturities,
but may be treated as a short-term investment under certain
conditions. Generally, as interest rates decrease or increase,
the potential for capital appreciation or depreciation on these
securities is less than for fixed-rate obligations. These
securities may take the following forms:
Variable Rate Securities. Variable rate instruments are
those whose terms provide for the adjustment of their interest
rates on set dates and which, upon such adjustment, can
reasonably be expected to have a market value that approximates
its par value. A variable rate instrument, the principal amount
of which is scheduled to be paid in 397 days or less, is deemed
to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A variable rate instrument
which is subject to a demand feature entitles the purchaser to
receive the principal amount of the underlying security or
securities, either (i) upon notice of no more than 30 days or
(ii) at specified intervals not exceeding 397 days and upon no
more than 30 days' notice, is deemed to have a maturity equal to
the longer of the period remaining until the next readjustment of
the interest rate or the period remaining until the principal
amount can be recovered through demand.
Floating Rate Securities. Floating rate instruments are
those whose terms provide for the adjustment of their interest
rates whenever a specified interest rate changes and which, at
any time, can reasonably be expected to have a market value that
approximates its par value. The maturity of a floating rate
instrument is deemed to be the period remaining until the date
(noted on the face of the instrument) on which the principal
amount must be paid, or in the case of an instrument called for
redemption, the date on which the redemption payment must be
made. Floating rate instruments with demand features are deemed
to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
Put Option Bonds. Long-term obligations with maturities
longer than one year may provide purchasers an optional or
mandatory tender of the security at par value at predetermined
intervals, often ranging from one month to several years (e.g., a
30-year bond with a five-year tender period). These instruments
are deemed to have a maturity equal to the period remaining to
the put date.
PAGE 38
Adjustable Rate, High Yield, New Income, Prime Reserve, Short-
Term Bond, and Personal Strategy Funds
Illiquid or Restricted Securities
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities
Act of 1933 (the "1933 Act"). Where registration is required,
the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to
sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair
value as determined in accordance with procedures prescribed by
the Fund's Board of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid
securities, the Fund should be in a position where more than 15%
of the value of its net assets is invested in illiquid assets,
including restricted securities, the Fund will take appropriate
steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities
which, while privately placed, are eligible for purchase and sale
under Rule 144A under the 1933 Act. This rule permits certain
qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not
registered under the 1933 Act. T. Rowe Price under the
supervision of the Fund's Board of Directors/Trustees, will
consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Fund's restriction of investing
no more than 15% (10% for Prime Reserve Fund) of its net assets
in illiquid securities. A determination of whether a Rule 144A
security is liquid or not is a question of fact. In making this
determination, T. Rowe Price will consider the trading markets
for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, T. Rowe Price could
consider the (1) frequency of trades and quotes, (2) number of
dealers and potential purchases, (3) dealer undertakings to make
a market, and (4) the nature of the security and of marketplace
trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The
liquidity of Rule 144A securities would be monitored, and if as a
result of changed conditions it is determined that a Rule 144A
security is no longer liquid, the Fund's holdings of illiquid
securities would be reviewed to determine what, if any, steps are
required to assure that the Fund does not invest more than 15%
(10% for Prime Reserve and U.S. Treasury Money Funds) of its net
PAGE 39
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
New Income and Short-Term Bond Funds
Industry Concentration
When the market for corporate debt securities is dominated
by issues in the gas utility, gas transmission utility, electric
utility, telephone utility, or petroleum industry, the Fund will
as a matter of fundamental policy concentrate more than 25%, but
not more than 50%, of its assets, in any one such industry, if
the Fund has cash for such investment (i.e., will not sell
portfolio securities to raise cash) and, if in T. Rowe Price's
judgment, the return available and the marketability, quality,
and availability of the debt securities of such industry
justifies such concentration in light of the Fund's investment
objective. Domination would exist with respect to any one such
industry, when, in the preceding 30-day period, more than 25% of
all new-issue corporate debt offerings (within the four highest
grades of Moody's or S&P and with maturities of 10 years or less)
of $25,000,000 or more consisted of issues in such industry.
Although the Fund will normally purchase corporate debt
securities in the secondary market as opposed to new offerings,
T. Rowe Price believes that the new issue-based dominance
standard, as defined above, is appropriate because it is easily
determined and represents an accurate correlation to the
secondary market. Investors should understand that concentration
in any industry may result in increased risk. Investments in any
of these industries may be affected by environmental conditions,
energy conservation programs, fuel shortages, difficulty in
obtaining adequate return on capital in financing operations and
large construction programs, and the ability of the capital
markets to absorb debt issues. In addition, it is possible that
the public service commissions which have jurisdiction over these
industries may not grant future increases in rates sufficient to
offset increases in operating expenses. These industries also
face numerous legislative and regulatory uncertainties at both
federal and state government levels. Management believes that
any risk to the Fund which might result from concentration in any
industry will be minimized by the Fund's practice of diversifying
its investments in other respects. The Fund's policy with
respect to industry concentration is a fundamental policy. (For
investment restriction on industry concentration, see Investment
Restriction (4) on page __.)
<PAGE>
PAGE 40
PORTFOLIO MANAGEMENT PRACTICES
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional
investors or other persons, pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash,
U.S. government securities, letters of credit or such other
collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to
receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment
of the collateral or a fee from the borrower. The Fund has a
right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading
on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and
sales of such securities in such foreign markets. The Fund will
not have the right to vote securities while they are being lent,
but it will call a loan in anticipation of any important vote.
The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by T. Rowe Price to be of good standing and will not be
made unless, in the judgment of T. Rowe Price, the consideration
to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange
Commission and certain state regulatory agencies, the Fund may
make loans to, or borrow funds from, other mutual funds sponsored
or advised by T. Rowe Price or Rowe Price-Fleming International,
Inc. (collectively, "Price Funds"). The Fund has no current
intention of engaging in these practices at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which
an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Any
such dealer or bank will be on T. Rowe Price's approved list.
<PAGE>
PAGE 41
At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified
interest. Repurchase agreements are generally for a short period
of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be treated as
illiquid securities. The Fund will only enter into repurchase
agreements where (i) (A) Prime Reserve and U.S. Treasury Money
Funds--the underlying securities are either U.S. government
securities or securities that, at the time the repurchase
agreement is entered into, are rated in the highest rating
category by the requisite number of NRSROs (as required by Rule
2a-7 under the 1940 Act) and otherwise are of the type (excluding
maturity limitations) which the Fund's investment guidelines
would allow it to purchase directly, (B) Adjustable Rate, GNMA,
High Yield, New Income, Short-Term Bond, Personal Strategy, and
U.S. Treasury Intermediate and Long-Term Funds--the underlying
securities are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase
directly, (ii) the market value of the underlying security,
including interest accrued, will be at all times equal to or
exceed the value of the repurchase agreement, and (iii) payment
for the underlying security is made only upon physical delivery
or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating
the underlying security and losses, including: (a) possible
decline in the value of the underlying security during the period
while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements
Although the Fund has no current intention, in the
foreseeable future, of engaging in reverse repurchase agreements,
the Fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Fund is
the seller of, rather than the investor in, securities, and
agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of the securities because it avoids
certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund,
subject to Investment Restriction (1). (See "Investment
Restrictions," page __.)
PAGE 42
High Yield Fund
Short Sales
The Fund may make short sales for hedging purposes to
protect the Fund against companies whose credit is deteriorating.
Short sales are transactions in which the Fund sells a security
it does not own in anticipation of a decline in the market value
of that security. The Fund's short sales would be limited to
situations where the Fund owns a debt security of a company and
would sell short the common or preferred stock or another debt
security at a different level of the capital structure of the
same company. No securities will be sold short if, after the
effect is given to any such short sale, the total market value of
all securities sold short would exceed 2% of the value of the
Fund's net assets.
To complete a short sale transaction, the Fund must borrow
the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow
the security, the Fund also may be required to pay a premium,
which would increase the cost of the security sold. The proceeds
of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position
is closed out.
Until the Fund replaces a borrowed security in connection
with a short sale, the Fund will: (a) maintain daily a segregated
account, containing cash or U.S. government securities, at such a
level that (i) the amount deposited in the account plus the
amount deposited with the broker as collateral will equal the
current value of the security sold short and (ii) the amount
deposited in the segregated account plus the amount deposited
with the broker as collateral will not be less than the market
value of the security at the time its was sold short; or (b)
otherwise cover its short position.
The Fund will incur a loss as a result of the short sale if
the price of the security sold short increases between the date
of the short sale and the date on which the Fund replaces the
borrowed security. The Fund will realize a gain if the security
sold short declines in price between those dates. This result is
the opposite of what one would expect from a cash purchase of a
long position in a security. The amount of any gain will be
PAGE 43
decreased, and the amount of any loss increased, by the amount of
any premium, dividends or interest the Fund may be required to
pay in connection with a short sale. Any gain or loss on the
security sold short would be separate from a gain or loss on the
Fund security being hedged by the short sale.
All Funds
Options
Writing Covered Call Options
The Fund may write (sell) American or European style
"covered" call options and purchase options to close out options
previously written by a Fund. In writing covered call options,
the Fund expects to generate additional premium income which
should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved
in the option. Covered call options will generally be written on
securities or currencies which, in T. Rowe Price's opinion, are
not expected to have any major price increases or moves in the
near future but which, over the long term, are deemed to be
attractive investments for the Fund.
A call option gives the holder (buyer) the "right to
purchase" a security or currency at a specified price (the
exercise price) at expiration of the option (European style) or
at any time until a certain date (the expiration date) (American
style). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to
deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the
case of a call option, a writer is required to deposit in escrow
the underlying security or currency or other assets in accordance
with the rules of a clearing corporation.
The Fund will write only covered call options. This means
that the Fund will own the security or currency subject to the
option or an option to purchase the same underlying security or
currency, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to the
fluctuating market value of the optioned securities or
currencies.
PAGE 44
Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objective.
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast
to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When
writing a covered call option, a Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the
underlying security or currency above the exercise price, but
conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or
currencies not subject to an option, the Fund has no control over
when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any
time prior to the expiration of its obligation as a writer. If a
call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call
option is exercised, the Fund will realize a gain or loss from
the sale of the underlying security or currency. The Fund does
not consider a security or currency covered by a call to be
"pledged" as that term is used in the Fund's policy which limits
the pledging or mortgaging of its assets.
The premium received is the market value of an option. The
premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made,
T. Rowe Price, in determining whether a particular call option
should be written on a particular security or currency, will
consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those
options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This
liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (close of
the New York Stock Exchange), or, in the absence of such sale,
the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
Closing transactions will be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
PAGE 45
security or currency from being called, or, to permit the sale of
the underlying security or currency. Furthermore, effecting a
closing transaction will permit the Fund to write another call
option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund
desires to sell a particular security or currency from its
portfolio on which it has written a call option, or purchased a
put option, it will seek to effect a closing transaction prior
to, or concurrently with, the sale of the security or currency.
There is, of course, no assurance that the Fund will be able to
effect such closing transactions at favorable prices. If the
Fund cannot enter into such a transaction, it may be required to
hold a security or currency that it might otherwise have sold.
When the Fund writes a covered call option, it runs the risk of
not being able to participate in the appreciation of the
underlying securities or currencies above the exercise price, as
well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may
be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the
Fund.
In order to comply with the requirements of several states,
the Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market
value of the Fund's net assets. Should these state laws change
or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating
PAGE 46
the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and
puts on identical securities or currencies with identical
maturity dates.
Writing Covered Put Options
The Fund may write American or European style covered put
options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at
the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis,
which means that the Fund would maintain in a segregated account
cash, U.S. government securities or other liquid high-grade debt
obligations in an amount not less than the exercise price or the
Fund will own an option to sell the underlying security or
currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all
times while the put option is outstanding. (The rules of a
clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in
circumstances where T. Rowe Price wishes to purchase the
underlying security or currency for the Fund's portfolio at a
price lower than the current market price of the security or
currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the
Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this
technique could be used to enhance current return during periods
of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency
would decline below the exercise price less the premiums
received. Such a decline could be substantial and result in a
significant loss to the Fund. In addition, the Fund, because it
does not own the specific securities or currencies which it may
be required to purchase in exercise of the put, cannot benefit
from appreciation, if any, with respect to such specific
securities or currencies.
PAGE 47
In order to comply with the requirements of several states,
the Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies
covering put or call options exceeds 25% of the market value of
the Fund's net assets. Should these state laws change or should
the Fund obtain a waiver of its application, the Fund reserves
the right to increase this percentage. In calculating the 25%
limit, the Fund will offset, against the value of assets covering
written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put
options. As the holder of a put option, the Fund has the right
to sell the underlying security or currency at the exercise price
at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter
into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase
put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies.
An example of such use of put options is provided below.
The Fund may purchase a put option on an underlying security
or currency (a "protective put") owned by the Fund as a defensive
technique in order to protect against an anticipated decline in
the value of the security or currency. Such hedge protection is
provided only during the life of the put option when the Fund, as
the holder of the put option, is able to sell the underlying
security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's
exchange value. For example, a put option may be purchased in
order to protect unrealized appreciation of a security or
currency where T. Rowe Price deems it desirable to continue to
hold the security or currency because of tax considerations. The
premium paid for the put option and any transaction costs would
reduce any capital gain otherwise available for distribution when
the security or currency is eventually sold.
The Fund may also purchase put options at a time when the
Fund does not own the underlying security or currency. By
purchasing put options on a security or currency it does not own,
the Fund seeks to benefit from a decline in the market price of
the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than
the exercise price during the life of the put option, the Fund
will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price
of the underlying security or currency must decline sufficiently
PAGE 48
below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale
transaction.
To the extent required by the laws of certain states, the
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing put and call options. Should these
state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The premium paid
by the Fund when purchasing a put option will be recorded as an
asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale
price at the time at which the net asset value per share of the
Fund is computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset will be
terminated upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery
of the underlying security or currency upon the exercise of the
option.
Purchasing Call Options
The Fund may purchase American or European style call
options. As the holder of a call option, the Fund has the right
to purchase the underlying security or currency at the exercise
price at any time during the option period (American style) or at
the expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may
purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its
current return. The Fund may also purchase call options in order
to acquire the underlying securities or currencies. Examples of
such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of
acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call
options enables the Fund to acquire the securities or currencies
at the exercise price of the call option plus the premium paid.
At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to the
Fund in purchasing a large block of securities or currencies that
would be more difficult to acquire by direct market purchases.
So long as it holds such a call option rather than the underlying
security or currency itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying
security or currency and in such event could allow the call
PAGE 49
option to expire, incurring a loss only to the extent of the
premium paid for the option.
To the extent required by the laws of certain states, the
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing call and put options. Should these
state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it
owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for
this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While
the Fund would look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer
option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by
the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid
market while dealer options have none. Consequently, the Fund
will generally be able to realize the value of a dealer option it
has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when the Fund writes a dealer option,
it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option.
While the Fund will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of
entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a
closing purchase transaction, it will not be able to liquidate
securities (or other assets) or currencies used as cover until
the option expires or is exercised. In the event of insolvency
of the contra party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in
material losses to the Fund. For example, since the Fund must
maintain a secured position with respect to any call option on a
PAGE 50
security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the
option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased
dealer options and the assets used to secure the written dealer
options are illiquid securities. The Fund may treat the cover
used for written OTC options as liquid if the dealer agrees that
the Fund may repurchase the OTC option it has written for a
maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds
the intrinsic value of the option. Accordingly, the Fund will
treat dealer options as subject to the Fund's limitation on
illiquid securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its treatment
of such instrument accordingly.
High Yield Fund
Spread Option Transactions
The Fund may purchase from and sell to securities dealers
covered spread options. Such covered spread options are not
presently exchange listed or traded. The purchase of a spread
option gives the Fund the right to put, or sell, a security that
it owns at a fixed dollar spread or fixed yield spread in
relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to the Fund in purchasing
covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is
no assurance that closing transactions will be available. The
purchase of spread options will be used to protect the Fund
against adverse changes in prevailing credit quality spreads,
i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of
the spread option. The security covering the spread option will
be maintained in a segregated account by the Fund's custodian.
The Fund does not consider a security covered by a spread option
to be "pledged" as that term is used in the Fund's policy
limiting the pledging or mortgaging of its assets. The Fund may
also buy and sell uncovered spread options. Such options would
be used for the same purposes and be subject to similar risks as
covered spread options. However, in an uncovered spread option,
the Fund would not own either of the securities involved in the
spread.
<PAGE>
PAGE 51
Futures Contracts
Transactions in Futures
The Fund may enter into futures contracts, including stock
index, interest rate and currency futures ("futures or futures
contracts").
Stock index futures contracts may be used to provide a hedge
for a portion of the Fund's portfolio, as a cash management tool,
or as an efficient way for T. Rowe Price to implement either an
increase or decrease in portfolio market exposure in response to
changing market conditions. The Fund may purchase or sell
futures contracts with respect to any stock index. Nevertheless,
to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose
movements will have a significant correlation with movements in
the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a
hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the
effective return on securities or currencies held or intended to
be acquired by the Fund. In this regard, the Fund could sell
interest rate or currency futures as an offset against the effect
of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect
of expected declines in interest rates or currency exchange
rates.
The Fund will enter into futures contracts which are traded
on national or foreign futures exchanges, and are standardized as
to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are traded in London, at the London
International Financial Futures Exchange, in Paris, at the MATIF,
and in Tokyo, at the Tokyo Stock Exchange. Although techniques
other than the sale and purchase of futures contracts could be
used for the above-referenced purposes, futures contracts offer
an effective and relatively low cost means of implementing the
Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
PAGE 52
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded
on a commodities exchange will be considered "related options".
This policy may be modified by the Board of Directors/Trustees
without a shareholder vote and does not limit the percentage of
the Fund's assets at risk to 5%.
In accordance with the rules of the State of California, the
Fund may have to apply the above 5% test without excluding the
value of initial margin and premiums paid for bona fide hedging
positions.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the
position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover or held in an
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a debt security) for a
specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures
contract is bought or sold and margin deposits must be
PAGE 53
maintained. Entering into a contract to buy is commonly referred
to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or sale
of a futures contract. Upon entering into a futures contract,
and to maintain the Fund's open positions in futures contracts,
the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of
cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as
"initial margin." The margin required for a particular futures
contract is set by the exchange on which the contract is traded,
and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are
customarily purchased and sold on margins that may range upward
from less than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by
increase in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of
favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the broker will pay
the excess to the Fund.
These subsequent payments, called "variation margin," to and
from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short
positions in the futures contract more or less valuable, a
process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require
actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for
the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
PAGE 54
There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the futures
contract.
As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
Treasury Bills on an exchange may be fulfilled at any time before
delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one
contract of September Treasury Bills on the same exchange. In
such instance, the difference between the price at which the
futures contract was sold and the price paid for the offsetting
purchase, after allowance for transaction costs, represents the
profit or loss to the Fund.
The Standard & Poor's 500 Stock Index, composed of 500
selected common stocks, most of which are listed on the New York
Stock Exchange, provides another example of how futures contracts
operate. The S&P 500 Index assigns relative weightings to the
common stocks included in the Index, and the Index fluctuates
with changes in the market values of those common stocks. In the
case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $75,000 (500 units x $150). The stock
index futures contract specifies that no delivery of the actual
stock making up the index will take place. Instead, settlement
in cash occurs. Over the life of the contract, the gain or loss
realized by the Fund will equal the difference between the
purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into
a futures contract to buy 500 units of the S&P 500 Index at a
specified future date at a contract price of $150 and the S&P 500
Index is at $154 on that future date, the Fund will gain $2,000
(500 units x gain of $4). If the Fund enters into a futures
contract to sell 500 units of the stock index at a specified
future date at a contract price of $150 and the S&P 500 Index is
at $152 on that future date, the Fund will lose $1,000 (500 units
x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts
are volatile and are influenced, among other things, by actual
and anticipated changes in the market and interest rates, which
in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a futures contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
<PAGE>
PAGE 55
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
positions or short futures positions. The Fund may close its
positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts
only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible
to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of unexpected market
behavior, market or interest rate trends. There are several
PAGE 56
risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. T. Rowe Price
will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the
Fund's underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging
purposes is also subject to T. Rowe Price's ability to correctly
predict movements in the direction of the market. It is possible
that, when the Fund has sold futures to hedge its portfolio
against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the
futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a
certain degree, T. Rowe Price believes that over time the value
of the Fund's portfolio will tend to move in the same direction
as the market indices used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions, which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
PAGE 57
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by T.
Rowe Price might not result in a successful hedging transaction
over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of
futures in which it may invest.
Options on futures are similar to options on underlying
instruments except that options on futures give the purchaser the
right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at
any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by the
delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds (in the case
of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put
options on interest rate futures, the Fund may write or purchase
call and put options on financial indices. Such options would be
used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of
the Fund and other T. Rowe Price Funds. Such aggregated orders
would be allocated among the Funds and the other T. Rowe Price
Funds in a fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
PAGE 58
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in
futures or options transactions other than those described above,
it reserves the right to do so. Such futures and options trading
might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the
National Futures Association nor any domestic exchange regulates
activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of
trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a
position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or
foreign options transaction occurs. For these reasons, when the
PAGE 59
Fund trades foreign futures or foreign options contracts, it may
not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations and the rules
of the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In
particular, funds received from the Fund for foreign futures or
foreign options transactions may not be provided the same
protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time the Fund's order is
placed and the time it is liquidated, offset or exercised.
Intermediate and Long-Term Funds
Limitations on Futures and Options for
Intermediate and Long-Term Funds
The Funds will not purchase a futures contract or option
thereon if, with respect to positions in futures or options on
futures which do not represent bona fide hedging, the aggregate
initial margin and premiums on such positions would exceed 5% of
the Fund's net asset value. In addition, neither of the Funds
will enter into a futures transaction if it would be obligated to
purchase or deliver under outstanding open futures contracts
amounts which would exceed 15% of the Fund's total assets.
A Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities covering
call options or subject to delivery under put options exceeds 15%
of the market value of the Fund's total assets.
A Fund will not write a covered put option if, as a result,
the aggregate market value of all portfolio securities subject to
such put options or covering call options exceeds 15% of the
market value of the Fund's total assets.
In order to comply with the laws of certain states, a Fund
will not invest more than 5% of its total assets in premiums on
put options. Should these state laws change or should a Fund
obtain a waiver of their applications, the Fund may invest up to
15% of its total assets in premiums on put options.
In order to comply with the laws of certain states, a Fund
will not invest more than 5% of its total assets in premiums on
call options. Should these state laws change or should a Fund
obtain a waiver of their applications, the Fund may invest up to
15% of its total assets in premiums on call options.
PAGE 60
In order to comply with the laws of certain states, a Fund
will not purchase puts, calls, straddles, spreads and any
combination thereof if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 5%
of its total assets. Should these state laws change or should a
Fund obtain a waiver of their application, the Fund may invest a
higher percentage of its total assets in puts, calls, straddles,
or spreads.
The total amount of a Fund's total assets invested in
futures and options under any combination of the policies
described in paragraphs 1-6 above will not exceed 15% of the
Fund's total assets.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the
interbank market conducted directly between currency traders
(usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions
are charged at any stage for trades.
The Fund may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency
involved in the underlying security transactions, the Fund will
be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
Second, when T. Rowe Price believes that one currency may
experience a substantial movement against another currency,
including the U.S. dollar, it may enter into a forward contract
to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
PAGE 61
proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Fund
may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in the Fund.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered
into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly
uncertain. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the
longer term investment decisions made with regard to overall
diversification strategies. However, T. Rowe Price believes that
it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of
the Fund will be served.
Third, the Fund may use forward contracts when the Fund
wishes to hedge out of the dollar into a foreign currency in
order to create a synthetic bond or money market instrument--the
security would be issued in U.S. dollars but the dollar component
would be transformed into a foreign currency through a forward
contract.
The Fund may enter into forward contacts for any other
purpose consistent with the Fund's investment objective and
program. However, the Fund will not enter into a forward
contract, or maintain exposure to any such contract(s), if the
amount of foreign currency required to be delivered thereunder
would exceed the Fund's holdings of liquid, high-grade debt
securities and currency available for cover of the forward
contract(s). In determining the amount to be delivered under a
contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the
portfolio security and make delivery of the foreign currency, or
it may retain the security and either extend the maturity of the
forward contract (by "rolling" that contract forward) or may
initiate a new forward contract.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in
PAGE 62
forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices
decline during the period between the Fund's entering into a
forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent of the price
of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange
contracts will generally be limited to the transactions described
above. However, the Fund reserves the right to enter into
forward foreign currency contracts for different purposes and
under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless
deemed appropriate by T. Rowe Price. It also should be realized
that this method of hedging against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange at a
future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any
potential gain which might result from an increase in the value
of that currency.
Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts
The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on
currencies, which will be treated as Section 1256 contracts or
straddles.
PAGE 63
Transactions which are considered Section 1256 contracts
will be considered to have been closed at the end of the Fund's
fiscal year and any gains or losses will be recognized for tax
purposes at that time. Such gains or losses from the normal
closing or settlement of such transactions will be characterized
as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument.
The Fund will be required to distribute net gains on such
transactions to shareholders even though it may not have closed
the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts,
including options and futures on currencies, which offset a
foreign dollar denominated bond or currency position may be
considered straddles for tax purposes, in which case a loss on
any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding
period of the securities or currencies comprising the straddle
will be deemed not to begin until the straddle is terminated.
For securities offsetting a purchased put, this adjustment of the
holding period may increase the gain from sales of securities
held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an
equity security will not include the period of time the option is
outstanding.
Losses on written covered calls and purchased puts on
securities, excluding certain "qualified covered call" options on
equity securities, may be long-term capital loss, if the security
covering the option was held for more than twelve months prior to
the writing of the option.
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward
exchange contracts on currencies is qualifying income for
purposes of the 90% requirement. In addition, gains realized on
the sale or other disposition of securities, including option,
futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, the Fund
may be required to defer the closing out of option, futures or
foreign forward exchange contracts) beyond the time when it would
otherwise be advantageous to do so. It is anticipated that
unrealized gains on Section 1256 option, futures and foreign
PAGE 64
forward exchange contracts, which have been open for less than
three months as of the end of the Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.
INVESTMENT RESTRICTIONS
Fundamental policies may not be changed without the approval
of the lesser of (1) 67% of the Fund's shares present at a
meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (2) more
than 50% of the Fund's outstanding shares. Other restrictions in
the form of operating policies are subject to change by the
Fund's Board of Directors/Trustees without shareholder approval.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after,
and is caused by, an acquisition of securities or assets of, or
borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may
(i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments
or engage in other transactions, which may involve
a borrowing, in a manner consistent with the
Fund's investment objective and program, provided
that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) less
liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in
accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other
persons to the extent permitted by applicable law.
(2) Commodities. Purchase or sell physical
commodities; except that the Fund (other than the
Prime Reserve and Treasury Money Funds) may enter
into futures contracts and options thereon;
(3) (a) Industry Concentration (All Funds, except High
Yield, New Income, Prime Reserve and Short-Term
Bond Funds). Purchase the securities of any
PAGE 65
issuer if, as a result, more than 25% of the value
of the Fund's total assets would be invested in
the securities of issuers having their principal
business activities in the same industry;
(b) Industry Concentration (High Yield Fund).
Purchase the securities of any issuer if, as a
result, more than 25% of the value of the Fund's
total assets would be invested in the securities
of issuers having their principal business
activities in the same industry; provided,
however, that the Fund will normally invest more
than 25% of its total assets in the securities of
the banking industry including, but not limited
to, bank certificates of deposit and bankers'
acceptances, when the Fund's position in issues
maturing in one year or less equals 35% or more of
the Fund's total assets;
(c) Industry Concentration (New Income Fund).
Purchase the securities of any issuer if, as a
result, more than 25% of the value of the Fund's
total assets would be invested in the securities
of issuers having their principal business
activities in the same industry; provided,
however, that the Fund will invest more than 25%
of its total assets, but not more than 50%, in any
one of the gas utility, gas transmission utility,
electric utility, telephone utility, and petroleum
industries under certain circumstances, and
further provided that this limitation does not
apply to securities of the banking industry
including, but not limited to, certificates of
deposit and bankers' acceptances;
(d) Industry Concentration (Prime Reserve Fund).
Purchase the securities of any issuer if, as a
result, more than 25% of the value of the Fund's
total assets would be invested in the securities
of issuers having their principal business
activities in the same industry; provided,
however, that this limitation does not apply to
securities of the banking industry including, but
not limited to, certificates of deposit and
bankers' acceptances; and
(e) Industry Concentration (Short-Term Bond Fund).
Purchase the securities of any issuer if, as a
result, more than 25% of the value of the Fund's
total assets would be invested in the securities
of issuers having their principal business
PAGE 66
activities in the same industry; provided,
however, that the Fund will normally invest more
than 25% of its total assets in the securities of
the banking industry including, but not limited
to, bank certificates of deposit and bankers'
acceptances when the Fund's position in issues
maturing in one year or less equals 35% or more of
the Fund's total assets; provided, further, that
the Fund will invest more than 25% of its total
assets, but not more than 50%, in any one of the
gas utility, gas transmission utility, electric
utility, telephone utility, and petroleum
industries under certain circumstances;
(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an
interfund lending program with other Price Funds
provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed
33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt
securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One
Issuer. Purchase a security if, as a result, with
respect to 75% of the value of its total assets,
more than 5% of the value of the Fund's total
assets would be invested in the securities of a
single issuer, except securities issued or
guaranteed by the U.S. Government or any of its
agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One
Issuer. Purchase a security if, as a result, with
respect to 75% of the value of the Fund's total
assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities);
(7) Real Estate. Purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prevent the
Fund from investing in securities or other
instruments backed by real estate or securities of
companies engaged in the real estate business);
<PAGE>
PAGE 67
(8) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940; or
(9) Underwriting. Underwrite securities issued by
other persons, except to the extent that the Fund
may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in
connection with the purchase and sale of its
portfolio securities in the ordinary course of
pursuing its investment program.
NOTES
The following Notes should be read in connection
with the above-described fundamental policies.
The Notes are not fundamental policies.
With respect to investment restrictions (1) and
(4) the Fund will not borrow from or lend to any
other T. Rowe Price Fund unless each Fund applies
for and receives an exemptive order from the SEC
or the SEC issues rules permitting such
transactions. The Fund has no current intention
of engaging in any such activity and there is no
assurance the SEC would grant any order requested
by the Fund or promulgate any rules allowing the
transactions.
With respect to investment restriction (1), the
Prime Reserve and Treasury Money Funds have no
current intention of engaging in any borrowing
transactions.
With respect to investment restriction (2), the
Fund does not consider currency contracts or
hybrid instruments to be commodities.
For purposes of investment restriction (3), U.S.,
state or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industries are determined by reference to the
classifications of industries set forth in the
Fund's Semi-annual and Annual Reports.
For purposes of investment restriction (4), the
Fund will consider the acquisition of a debt
security to include the execution of a note or
other evidence of an extension of credit with a
term of more than nine months.
PAGE 68
For purposes of investment restriction (5), the
Fund will consider a repurchase agreement fully
collateralized with U.S. government securities to
be U.S. government securities.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional
securities when money borrowed exceeds 5% of its
total assets.
(2) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
(3) (a) Equity Securities (All Funds, except
Personal Strategy, High Yield and New Income
Funds). Purchase any common stocks or other
equity securities, or securities convertible into
equity securities except as set forth in its
operating policy on investment companies;
(b) Equity Securities (Personal Strategy
Funds). Purchase any common stocks or other
equity securities, except as set forth in its
prospectus and operating policy on investment
companies;
(c) Equity Securities (High Yield Fund). Invest
more than 20% of the Fund's total assets in equity
securities (including up to 5% in warrants);
(d) Equity Securities (New Income Fund). Invest
more than 25% of its total assets in equity
securities;
(4) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not
represent bona fide hedging, the aggregate initial
margin and premiums on such positions would exceed
5% of the Fund's net asset value.
(5) Illiquid Securities. Purchase illiquid securities
if, as a result, more than 15% (10% for the Prime
Reserve and Treasury Money Funds) of its net
assets would be invested in such securities;
(6) Investment Companies. Purchase securities of
open-end or closed-end investment companies except
in compliance with the Investment Company Act of
1940 and applicable state law. Duplicate fees may
result from such purchases;
(7) Margin. Purchase securities on margin, except (i)
for use of short-term credit necessary for
clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection
with futures contracts or other permissible
investments;
<PAGE>
PAGE 69
(8) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by the
Fund as security for indebtedness except as may be
necessary in connection with permissible
borrowings or investments and then such
mortgaging, pledging or hypothecating may not
exceed 33 1/3% of the Fund's total assets at the
time of borrowing or investment;
(9) Oil and Gas Programs. Purchase participations or
other direct interests or enter into leases with
respect to, oil, gas, or other mineral exploration
or development programs;
(10) Options, Etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement
of Additional Information;
(11) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of
any issuer if, to the knowledge of the Fund's
management, those officers and directors of the
Fund, and of its investment manager, who each own
beneficially more than .5% of the outstanding
securities of such issuer, together own
beneficially more than 5% of such securities.
(12) (a) Short Sales (All Funds except High Yield
Fund). Effect short sales of securities;
(b) Short Sales (High Yield Fund). Effect short
sales of securities, other than as set forth in
its prospectus and Statement of Additional
Information;
(13) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any foreign, state or local government, their
agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's total
assets would be invested in the securities issuers
which at the time of purchase had been in
operation for less than three years (for this
purpose, the period of operation of any issuer
shall include the period of operation of any
predecessor or unconditional guarantor of such
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or
PAGE 70
(14) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the total
assets of the Fund would be invested in warrants
which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of
the value of the total assets of the Fund would be
invested in warrants whether or not so listed.
For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or
market and warrants acquired by the Fund in units
or attached to securities may be deemed to be
without value.
Personal Strategy Funds
Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, the Fund may invest all
of its assets in a single investment company or a series thereof
in connection with a "master-feeder" arrangement. Such an
investment would be made where the Fund (a "Feeder"), and one or
more other Funds with the same investment objective and program
as the Fund, sought to accomplish its investment objective and
program by investing all of its assets in the shares of another
investment company (the "Master"). The Master would, in turn,
have the same investment objective and program as the Fund. The
Fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of
Feeder funds.
MANAGEMENT OF FUND
The officers and directors/trustees of the Fund are
listed below. Unless otherwise noted, the address of each is 100
East Pratt Street, Baltimore, Maryland 21202. Except as
indicated, each has been an employee of T. Rowe Price for more
than five years. In the list below, the Fund's
directors/trustees who are considered "interested persons" of T.
Rowe Price as defined under Section 2(a)(19) of the Investment
Company Act of 1940 are noted with an asterisk (*). These
directors/trustees are referred to as inside directors by virtue
of their officership, directorship, and/or employment with T.
Rowe Price.
All Funds
Independent Directors/Trustees
ROBERT P. BLACK, Retired; formerly President, Federal Reserve
Bank of Richmond; Address: 10 Dahlgren Road, Richmond, Virginia
23233
CALVIN W. BURNETT, PH.D., President, Coppin State College;
Director, Maryland Chamber of Commerce and Provident Bank of
Maryland; President, Baltimore Area Council Boy Scouts of
America; Vice President, Board of Directors, The Walters Art
Gallery; Address: 2000 North Warwick Avenue, Baltimore, Maryland
21216
ANTHONY W. DEERING, Director, President and Chief Operating
Officer, The Rouse Company, real estate developers, Columbia,
Maryland; Advisory Director, Kleinwort, Benson (North America)
Corporation, a registered broker-dealer; Address: 10275 Little
Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
President, EA Engineering, Inc., Baltimore, Maryland; Address:
<PAGE>
PAGE 71
The Legg Mason Tower, 111 South Calvert Street, Suite 2700,
Baltimore, Maryland 21202
JOHN G. SCHREIBER, President, Schreiber Investments, a real
estate investment company; Director and formerly (1/80-12/90)
Executive Vice President, JMB Realty Corporation, a national real
estate investment manager and developer; Address: 1115 East
Illinois Road, Lake Forest, Illinois 60045
ANNE MARIE WHITTEMORE, Partner, law firm of McGuire, Woods,
Battle & Boothe, Richmond, Virginia; formerly, Chairman (1991-
1993) and Director (1989-1993), Federal Reserve Bank of Richmond;
Director, Owens & Minor, Inc., USF&G Corporation, Old Dominion
University, and nominated to the Board of James River
Corporation; Member, Richmond Bar Association and American Bar
Association; Address: One James Center, 901 East Cary Street,
Richmond, Virginia 23219-4030
Officers
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, Rowe Price-Fleming International,
Inc. and T. Rowe Price Retirement Plan Services, Inc.
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T.
Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
Adjustable Rate Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Managing
Director, and Chief Executive Officer, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Trust
Company and T. Rowe Price Retirement Plan Services, Inc.,
Chartered Investment Counselor
*PETER VAN DYKE, President and Director--Managing Director, T.
Rowe Price; Vice President of Rowe Price-Fleming International,
Inc. and T. Rowe Price Trust Company
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
PAGE 72
HEATHER R. LANDON, Executive Vice President--Vice President, T.
Rowe Price and T. Rowe Price Trust Company
MICHAEL J. CONELIUS, Vice President--Assistant Vice President, T.
Rowe Price
VEENA A. KUTLER, Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International, Inc.
JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company; formerly, (1972-1989) charter
member of the U.S. Senior Executive Services and Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental Protection
Agency
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Rowe Price-Fleming International, Inc.
GNMA Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Managing
Director and Chief Executive Officer, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Trust
Company and T. Rowe Price Retirement Plan Services, Inc.;
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Trustee--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
PETER VAN DYKE, President--Managing Director, T. Rowe Price; Vice
President, Rowe Price-Fleming International, Inc. and T. Rowe
Price Trust Company
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International, Inc.; formerly (4/80-5/90)
Vice President and Director, Private Finance, New York Life
Insurance Company, New York, New York
VEENA A. KUTLER, Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International, Inc.
HEATHER R. LANDON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company
JAMES M. McDONALD, Vice President--Vice President, T. Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company; formerly (1972-1989) charter
member of the U.S. Senior Executive Service and Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental Protection
Agency
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Rowe Price-Fleming International, Inc.
<PAGE>
PAGE 73
High Yield Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Managing
Director, and Chief Executive Officer, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Trust
Company and T. Rowe Price Retirement Plan Services, Inc.,
Chartered Investment Counselor
*RICHARD S. SWINGLE, President and Director--Managing Director,
T. Rowe Price
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
CATHERINE B. BRAY, Vice President--Vice President, T. Rowe Price;
formerly (7/87-3/89) Fixed Income Analyst, Salomon Brothers, New
York, New York
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
HUBERT M. STILES, JR., Vice President--Vice President, T. Rowe
Price
JAY W. VAN ERT, Vice President--Vice President, T. Rowe Price;
formerly (7/86-5/89) High Yield Credit Analyst, United Savings
Bank of Texas, Houston, Texas
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
THEA N. WILLIAMS, Vice President--Assistant Vice President, T.
Rowe Price
MICHAEL J. CONELIUS, Assistant Vice President--Assistant Vice
President, T. Rowe Price
JAMES M. McDONALD, Assistant Vice President--Vice President, T.
Rowe Price
New Income Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Managing
Director, and Chief Executive Officer, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Trust
Company and T. Rowe Price Retirement Plan Services, Inc.,
Chartered Investment Counselor
*CARTER O. HOFFMAN, Vice President and Director--Managing
Director, T. Rowe Price; Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
*CHARLES P. SMITH, President and Director--Managing Director, T.
Rowe Price; Vice President, Rowe Price-Fleming International,
Inc.
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Rowe Price Fleming International, Inc.; formerly (4/80-5/90)
PAGE 74
Vice President and Director, Private Finance, New York Life
Insurance Company, New York, New York
HEATHER R. LANDON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company
JAMES M. McDONALD, Vice President--Vice President, T. Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company; formerly (1972-1989) charter
member of the U.S. Senior Executive Service and Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental Protection
Agency
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price;
Vice President, Rowe Price-Fleming International, Inc. and T.
Rowe Price Trust Company
Prime Reserve Fund
*GEORGE J. COLLINS, Vice President and Director--President,
Managing Director, and Chief Executive Officer, T. Rowe Price;
Director, Rowe Price-Fleming International, Inc., T. Rowe Price
Trust Company and T. Rowe Price Retirement Plan Services, Inc.,
Chartered Investment Counselor
*CARTER O. HOFFMAN, Chairman of the Board--Managing Director, T.
Rowe Price; Chartered Investment Counselor
EDWARD A. WIESE, President--Vice President, T. Rowe Price, Rowe
Price-Fleming International, Inc. and T. Rowe Price Trust Company
ROBERT P. CAMPBELL, Executive Vice President--Vice President, T.
Rowe Price and Rowe Price-Fleming International Inc.; formerly
(4/80-5/90) Vice President and Director, Private Finance, New
York Life Insurance Company, New York, New York
JAMES M. MCDONALD, Executive Vice President--Vice President, T.
Rowe Price
PATRICE L. BERCHTENBREITER, Vice President--Vice President, T.
Rowe Price
PAUL W. BOLTZ, Vice President--Vice President and Financial
Economist of T. Rowe Price
MICHAEL J. CONELIUS, Vice President--Assistant Vice President, T.
Rowe Price
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
<PAGE>
PAGE 75
Short-Term Bond Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Managing
Director, and Chief Executive Officer, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Trust
Company and T. Rowe Price Retirement Plan Services, Inc.,
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
VEENA A. KUTLER, President--Vice President, T. Rowe Price and
Rowe Price-Fleming International, Inc.
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International, Inc.; formerly (4/80-5/90)
Vice President and Director, Private Finance, New York Life
Insurance Company, New York, New York
CHRISTY M. DIPIETRO, Vice President--Vice President, T. Rowe
Price and T. Rowe Price Trust Company
JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Rowe Price-Fleming International, Inc.
EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price,
Rowe Price-Fleming International, Inc. and T. Rowe Price Trust
Company
Intermediate, Long-Term and Money Funds
*GEORGE J. COLLINS, President and Director--President, Managing
Director, and Chief Executive Officer, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Trust
Company and T. Rowe Price Retirement Plan Services, Inc.,
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
*CHARLES P. SMITH, Executive Vice President and Director--
Managing Director, T. Rowe Price; Vice President, Rowe Price-
Fleming International, Inc.
*PETER VAN DYKE, Executive Vice President and Director--Managing
Director, T. Rowe Price; Vice President, Rowe Price-Fleming
International, Inc. and T. Rowe Price Trust Company
EDWARD A. WIESE, Executive Vice President--Vice President, T.
Rowe Price, Rowe Price-Fleming International, Inc. and T. Rowe
Price Trust Company
PAUL W. BOLTZ, Vice President--Vice President and Financial
Economist of T. Rowe Price
PAGE 76
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International Inc.; formerly (4/80-5/90)
Vice President and Director, Private Finance, New York Life
Insurance Company, New York, New York
VEENA A. KUTLER, Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International, Inc.
HEATHER R. LANDON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company
JAMES M. McDONALD, Vice President--Vice President, T. Rowe Price
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
Personal Strategy Fund
The Fund's Executive Committee, consisting of the Fund's
interested directors/trustees, has been authorized by its
respective Board of Directors/Trustees to exercise all powers of
the Board to manage the Fund in the intervals between meetings of
the Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of the Fund, as a group, owned less than 1% of the outstanding
shares of the Fund.
As of February 28, 1994, Yachtcrew & Co., FBO Spectrum
Income Account, State Street Bank and Trust Co., 1776 Heritage
Drive-4W, North Quincy, MA 02171-2010 beneficially owned more
than 5% of the outstanding shares of the GNMA, High Yield, New
Income and Short-Term Bonds Funds, and T. Rowe Price Trust Co.
Inc., Attn: Installation Team for Conversion Assets, New England
Electric Plan, 25 Research Drive, Westborough, MA 01582
beneficially owned more than 5% of then outstanding shares of the
Money Fund.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price provides the
Fund with discretionary investment services. Specifically, T.
Rowe Price is responsible for supervising and directing the
investments of the Fund in accordance with the Fund's investment
objectives, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. T. Rowe
Price is also responsible for effecting all security transactions
on behalf of the Fund, including the negotiation of commissions
and the allocation of principal business and portfolio brokerage.
In addition to these services, T. Rowe Price provides the Fund
with certain corporate administrative services, including:
PAGE 77
maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal and state
laws; monitoring the financial, accounting, and administrative
functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer
agent; assisting the Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as
officers, directors, and committee members of the Fund without
cost to the Fund.
The Management Agreement also provides that T. Rowe Price,
its directors, officers, employees, and certain other persons
performing specific functions for the Fund will only be liable to
the Fund for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of
two components: a Group Management Fee ("Group Fee") and an
Individual Fund Fee ("Fund Fee"). The Fee is paid monthly to T.
Rowe Price on the first business day of the next succeeding
calendar month and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of
the daily Group Fee accruals ("Daily Group Fee Accruals") for
each month. The Daily Group Fee Accrual for any particular day
is computed by multiplying the Price Funds' group fee accrual as
determined below ("Daily Price Funds' Group Fee Accrual") by the
ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
PAGE 78
For the purpose of calculating the Group Fee, the Price
Funds include all the mutual funds distributed by T. Rowe Price
Investment Services, Inc., (excluding T. Rowe Price Spectrum
Fund, Inc. and any institutional or private label mutual funds).
For the purpose of calculating the Daily Price Funds' Group Fee
Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Fund's prospectus as of the
close of business on the previous business day on which the Fund
was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the
daily Fund Fee accruals ("Daily Fund Fee Accruals") for each
month. The Daily Fund Fee Accrual for any particular day is
computed by multiplying the fraction of one (1) over the number
of calendar days in the year by the individual Fund Fee Rate and
multiplying this product by the net assets of the Fund for that
day, as determined in accordance with the Fund's prospectus as of
the close of business on the previous business day on which the
Fund was open for business. The individual fund fees for each
Fund are listed in the chart below:
Individual Fund Fees
Adjustable Rate Fund 0.10%
GNMA Fund 0.15%
High Yield Fund 0.30%
New Income Fund 0.15%
Prime Reserve Fund 0.05%
Short-Term Bond Fund 0.10%
Intermediate Fund 0.05%
Long-Term Fund 0.05%
Money Fund 0.00%
Personal Strategy Fund 0.__%
The following chart sets forth the total management fees, if
any, paid to T. Rowe Price by each Fund, during the last three
years:
Fund 1994 1993 1992
Adjustable Rate $ 526,000 $ 627,000 *
GNMA 4,626,000 4,102,000 $ 3,069,000
High Yield 10,554,000 8,014,000 5,701,000
New Income 7,750,000 7,113,000 6,348,000
Prime Reserve 13,617,000 15,620,000 18,486,000
Short-Term Bond 2,873,000 2,136,000 1,398,000
Intermediate 755,000 571,000 309,000
Long-Term 180,000 125,000 4,000
Money 2,084,000 165,000 2,140,000
* Due to the Fund's expense limitation in effect at that time,
no management fee was paid by the Fund to T. Rowe Price.
PAGE 79
Limitation on Fund Expenses
The Management Agreement between the Fund and T. Rowe Price
provides that the Fund will bear all expenses of its operations
not specifically assumed by T. Rowe Price. However, in
compliance with certain state regulations, T. Rowe Price will
reimburse the Fund for certain expenses which in any year exceed
the limits prescribed by any state in which the Fund's shares are
qualified for sale. Presently, the most restrictive expense
ratio limitation imposed by any state is 2.5% of the first $30
million of the Fund's average daily net assets, 2% of the next
$70 million of the Fund's assets, and 1.5% of net assets in
excess of $100 million. Reimbursement by the Fund to T. Rowe
Price of any expenses paid or assumed under a state expense
limitation may not be made more than two years after the end of
the fiscal year in which the expenses were paid or assumed.
The following chart sets forth expense ratio limitations and
the periods for which they are effective. For each, T. Rowe
Price has agreed to bear any Fund expenses which would cause the
Fund's ratio of expenses to average net assets to exceed the
indicated percentage limitations. The expenses borne by T. Rowe
Price are subject to reimbursement by the Fund through the
indicated reimbursement date, provided no reimbursement will be
made if it would result in the Fund's expense ratio exceeding its
applicable limitation.
Expense
Limitation Ratio Reimbursement
Fund Period Limitation Date
Adjustable Rate+ January 1, 1994- 0.70% May 31, 1998
May 31, 1996
Intermediate++ March 1, 1993- 0.80% February 28, 1997
February 28, 1995
Long-Term++ March 1, 1993- 0.80% February 28, 1997
February 28, 1995
Personal StrategyJuly 1, 1994- 0.__% May 31, 1988
May 31, 1996
+ The Adjustable Rate Fund previously operated under a 0.40%
limitation that expired December 31, 1993. The reimbursement
period for this limitation extends through June 30, 1995.
++ The Intermediate and Long-Term Funds' operated under a 0.80%
limitation that expired February 29, 1993. The reimbursement
period for this limitation extends through February 28, 1995.
Each of the above-referenced Fund's Management Agreement also
provides that one or more additional expense limitation periods
(of the same or different time periods) may be implemented after
the expiration of the current expense limitation, and that with
PAGE 80
respect to any such additional limitation period, the Fund may
reimburse T. Rowe Price, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional
expense limitation.
Pursuant to the Adjustable Rate Fund's current expense
limitation, $938,000 of management fees were not accrued by the
Fund for the year ended February 28, 1994.
Pursuant to the Intermediate Fund's current expense
limitation, $77,000 of unaccrued 1993 fees for the Fund,
representing the entire unaccrued balance, were reimbursed to T.
Rowe Price during the year ended February 28, 1994.
Pursuant to the Long-Term Fund's current expense limitation,
$61,000 of management fees were not accrued by the Fund for the
year ended February 28, 1994. Additionally, $303,000 of
unaccrued fees from the prior period for the Fund was subject to
reimbursement through February 28, 1995.
GNMA, High Yield, New Income, Prime Reserve and Short-Term Bond
Funds
T. Rowe Price Spectrum Fund, Inc.
The Fund is a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc.
("Spectrum Fund"), T. Rowe Price, T. Rowe Price Services, Inc.
and various other T. Rowe Price funds which, along with the Fund,
are funds in which Spectrum Fund invests (collectively all such
funds "Underlying Price Funds").
The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund determines that
such Underlying Fund's share of the aggregate expenses of
Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the
Underlying Price Fund will bear those expenses in proportion to
the average daily value of its shares owned by Spectrum Fund,
provided further that no Underlying Price Fund will bear such
expenses in excess of the estimated savings to it. Such savings
are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been
invested directly in the Underlying Price Funds and the resulting
reduction in shareholder servicing costs. Although such cost
savings are not certain, the estimated savings to the Underlying
Price Funds generated by the operation of Spectrum Fund are
expected to be sufficient to offset most, if not all, of the
expenses incurred by Spectrum Fund.
<PAGE>
PAGE 81
All Funds
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the Fund's
distributor. Investment Services is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. The
offering of the Fund's shares is continuous.
Investment Services is located at the same address as the
Fund and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to the Fund
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that the Fund will pay all fees and expenses in
connection with: registering and qualifying its shares under the
various state "blue sky" laws; preparing, setting in type,
printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services
will pay all fees and expenses in connection with: printing and
distributing prospectuses and reports for use in offering and
selling Fund shares; preparing, setting in type, printing, and
mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and
offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in
connection with the sale of its shares in all states in which the
shares are qualified and in which Investment Services is
qualified as a broker-dealer. Under the Underwriting Agreement,
Investment Services accepts orders for Fund shares at net asset
value. No sales charges are paid by investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company is the custodian for the
Fund's domestic securities and cash, but it does not participate
in the Fund's investment decisions. Portfolio securities
purchased in the U.S. are maintained in the custody of the Bank
and may be entered into the Federal Reserve Book Entry System, or
the security depository system of the Depository Trust
PAGE 82
Corporation. The Fund (other than the GNMA, Prime Reserve and
U.S. Treasury Intermediate, Long-Term and Money Funds) has
entered into a Custodian Agreement with The Chase Manhattan Bank,
N.A., London, pursuant to which portfolio securities which are
purchased outside the United States are maintained in the custody
of various foreign branches of The Chase Manhattan Bank and such
other custodians, including foreign banks and foreign securities
depositories as are approved by the Fund's Board of
Directors/Trustees in accordance with regulations under the
Investment Company Act of 1940. The Bank's main office is at 225
Franklin Street, Boston, Massachusetts 02110. The address for
The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman
Street, London, EC2P 2HD, England.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and
sale of portfolio securities on behalf of the Fund are made by T.
Rowe Price. T. Rowe Price is also responsible for implementing
these decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. The
Fund's purchases and sales of fixed-income portfolio securities
are normally done on a principal basis and do not involve the
payment of a commission although they may involve the designation
of selling concessions. That part of the discussion below
relating solely to brokerage commissions would not normally apply
to the Fund (except to the extent it purchases equity securities
(New Income, High Yield and Personal Strategy Funds only)).
However, it is included because T. Rowe Price does manage a
significant number of common stock portfolios which do engage in
agency transactions and pay commissions and because some research
and services resulting from the payment of such commissions may
benefit the Fund.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it
is T. Rowe Price's policy to obtain quality execution at the most
favorable prices through responsible brokers and dealers and, in
the case of agency transactions, at competitive commission rates.
However, under certain conditions, the Fund may pay higher
brokerage commissions in return for brokerage and research
services. As a general practice, over-the-counter orders are
executed with market-makers. In selecting among market-makers,
T. Rowe Price generally seeks to select those it believes to be
actively and effectively trading the security being purchased or
sold. In selecting broker-dealers to execute the Fund's
PAGE 83
portfolio transactions, consideration is given to such factors as
the price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and brokerage and
research services provided by them. It is not the policy of T.
Rowe Price to seek the lowest available commission rate where it
is believed that a broker or dealer charging a higher commission
rate would offer greater reliability or provide better price or
execution.
Fixed Income Securities
Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe
Price may effect principal transactions on behalf of the Fund
with a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances, or otherwise deal
with any such broker or dealer in connection with the acquisition
of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions,
including designations in fixed price offerings.
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
transactions executed on behalf of the Fund. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
PAGE 84
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services from
brokers and dealers. These services include information on the
economy, industries, groups of securities, individual companies,
statistical information, accounting and tax law interpretations,
political developments, legal developments affecting portfolio
securities, technical market action, pricing and appraisal
services, credit analysis, risk measurement analysis, performance
analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective.
Research services are received primarily in the form of written
reports, computer generated services, telephone contacts and
personal meetings with security analysts. In addition, such
services may be provided in the form of meetings arranged with
corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services
are generated by third parties but are provided to T. Rowe Price
by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays
cash for certain research services received from external
sources. T. Rowe Price also allocates brokerage for research
services which are available for cash. While receipt of research
services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could
be materially increased if it attempted to generate such
additional information through its own staff. To the extent that
research services of value are provided by brokers or dealers, T.
Rowe Price may be relieved of expenses which it might otherwise
bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
PAGE 85
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and
execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, T.
Rowe Price has adopted a brokerage allocation policy embodying
the concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause an account to
pay commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates or net prices charged by broker-dealers reflect
the value of their research services, T. Rowe Price would expect
to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offerings in which the Funds
participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage business where
special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet
the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers or dealers,
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers or dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
PAGE 86
research services they provide. Actual brokerage received by any
firm may be less than the suggested allocations but can, and
often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above.
In no case is a broker or dealer excluded from receiving business
from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers or dealers through which T. Rowe
Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe
Price. Conversely, research services received from brokers or
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Fund. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
PAGE 87
To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
At the present time, T. Rowe Price does not recapture commissions
or underwriting discounts or selling group concessions in
connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
elimination of all or a portion of the selling-group concession
or underwriting discount when purchasing tax-exempt municipal
securities on behalf of its clients in underwritten offerings.
Adjustable Rate, High Yield, New Income, Short-Term Bond, and
Personal Strategy Funds
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between
the Fund and T. Rowe Price, T. Rowe Price is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that T. Rowe Price may place orders for the Fund's
portfolio transactions with broker-dealers through the same
trading desk T. Rowe Price uses for portfolio transactions in
domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities
are located. These brokers and dealers may include certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"), persons
indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary,
owns 25% of the common stock of Rowe Price-Fleming International,
Inc. ("RPFI"), an investment adviser registered under the
Investment Advisers Act of 1940. Fifty percent of the common
stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is
50% owned by Robert Fleming Holdings and 50% owned by Jardine
Matheson Holdings Limited. Orders for the Fund's portfolio
transactions placed with affiliates of Robert Fleming Holdings
and JFG will result in commissions being received by such
affiliates.
The Board of Directors/Trustees of the Fund has authorized T.
Rowe Price to utilize certain affiliates of Robert Fleming and
JFG in the capacity of broker in connection with the execution of
the Fund's portfolio transactions. These affiliates include, but
are not limited to, Jardine Fleming Securities Limited ("JFS"), a
wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and
Robert Fleming, Inc. (a New York brokerage firm). Other
PAGE 88
affiliates of Robert Fleming Holding and JFG also may be used.
Although it does not believe that the Fund's use of these brokers
would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors/Trustees of the Fund has agreed
that the procedures set forth in Rule 17e-1 under that Act will
be followed when using such brokers.
Other
The Funds engaged in portfolio transactions involving broker-
dealers in the following amounts for the fiscal years ended
February 28, 1994, February 28, 1993 and February 29, 1992:
Fund 1994 1993 1992
______ ____ ____ ____
Adjustable Rate $ 793,565,000 $ 1,876,498,000 $ 427,475,000
GNMA 2,306,951,000 1,528,454,000 1,438,762,000
High Yield 18,554,222,000 16,168,606,000 6,702,967,000
New Income 20,265,475,000 15,193,999,000 6,648,064,000
Prime Reserve 29,024,172,000 36,478,989,000 29,975,769,000
Short-Term Bond 4,266,837,000 5,805,958,000 5,534,535,000
Intermediate 81,970,000 91,923,000 218,317,000
Long-Term 142,513,000 192,941,000 192,774,000
Money 3,449,951,000 2,804,196,000 23,290,378,000
The entire amount for each of these years represented
principal transactions as to which the Adjustable Rate, GNMA,
Prime Reserve, U.S. Treasury Intermediate, Long-Term and Money
Funds have no knowledge of the profits or losses realized by the
respective broker-dealers for the fiscal years ended February 28,
1994, February 28, 1993 and February 29, 1992. With respect to
the High Yield, New Income and Short-Term Bond Funds, the
following amounts consisted of principal transactions as to which
the Funds have no knowledge of the profits or losses realized by
the respective broker-dealers for the fiscal years ended February
28, 1994, February 28, 1993 and February 29, 1992:
Fund 1994 1993 1992
______ ____ ____ ____
High Yield $17,956,306,000 $15,737,460,000 $6,682,140,000
New Income 20,206,382,000 15,189,019,000 6,518,595,000
Short-Term Bond 0 0 5,034,535,000
The following amounts involved trades with brokers acting as
agents or underwriters for the fiscal years ended February 28,
1994, February 28, 1993, and February 29, 1992:
PAGE 89
Fund 1994 1993 1992
______ ____ ____ ____
High Yield $597,916,000 $431,147,000 $ 20,827,000
New Income 59,093,000 4,980,000 129,469,000
Short-Term Bond 0 0 5,000,000
The amounts shown below involved trades with brokers acting
as agents or underwriters, in which such brokers received total
commissions, including discounts received in connection with
underwritings for the fiscal years ended February 28, 1994,
February 28, 1993 and February 29, 1992:
Fund 1994 1993 1992
______ ____ ____ ____
High Yield $16,730,000 $3,661,000 $1,201,000
New Income 169,000 20,000 402,000
Short-Term Bond 0 0 15,000
The percentage of total portfolio transactions, placed with
firms which provided research, statistical, or other services to
T. Rowe Price in connection with the management of the Funds, or
in some cases, to the Funds for the fiscal years ended February
28, 1994, February 28, 1993 and February 29, 1992, are shown
below:
Fund 1994 1993 1992
______ ____ ____ ____
Adjustable Rate 100% 94% 100%
GNMA 91% 91% 99%
High Yield 70% 70% 59%
New Income 61% 61% 87%
Prime Reserve 87% 81% 76%
Short-Term Bond 61% 84% 79%
Intermediate 85% 98% 100%
Long-Term 98% 99% 100%
Money 66% 75% 60%
The portfolio turnover rates for the following Funds for the
fiscal years ended February 28, 1994, February 28, 1993 and
February 29, 1992 are as follows:
<PAGE>
PAGE 90
Fund 1994 1993 1992
______ ____ ____ ____
Adjustable Rate 70.4% 110.8% 98.4%
GNMA 92.5% 94.2% 66.0%
High Yield 107.0% 104.4% 58.9%
New Income 58.3% 85.8% 49.7%
Short-Term Bond 90.8% 68.4% 380.7%
Intermediate 20.2% 22.8% 91.4%
Long-Term 59.4% 165.4% 162.4%
Prime Reserve Fund
The Fund, in pursuing its objectives, may engage in short-term
trading to take advantage of market variations. The Fund will
seek to protect principal, improve liquidity of its securities,
or enhance yield by purchasing and selling securities based upon
existing or anticipated market discrepancies.
Money Fund
The Fund, in pursuing its objectives, may engage in short-term
trading to take advantage of market variations. The Fund will
seek to protect principal, improve liquidity of its securities,
or enhance yield by purchasing and selling securities based upon
existing or anticipated market discrepancies.
PRICING OF SECURITIES
Adjustable Rate, GNMA, High Yield, New Income, Short-Term Bond,
Personal Strategy, U.S. Treasury Intermediate and Long-Term
Funds
Fixed income securities are generally traded in the over-the-
counter market. Investments in domestic securities with
remaining maturities of one year or more and foreign securities
are stated at fair value using a bid-side valuation as furnished
by dealers who make markets in such securities or by an
independent pricing service, which considers yield or price of
bonds of comparable quality, coupon, maturity, and type, as well
as prices quoted by dealers who make markets in such securities.
Domestic securities with remaining maturities less than one year
are stated at fair value which is determined by using a matrix
system that establishes a value for each security based on bid-
side money market yields.
There are a number of pricing services available, and the
Board of Directors, on the basis of ongoing evaluation of these
services, may use or may discontinue the use of any pricing
service in whole or in part.
PAGE 91
Personal Strategy Funds
Equity securities listed or regularly traded on a securities
exchange (including NASDAQ) are valued at the last quoted sales
price on the day the valuations are made. A security which is
listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for
such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at
a price within the limits of the latest bid and asked prices
deemed by the Board of Directors/Trustees, or by persons
delegated by the Board, best to reflect fair value.
Prime Reserve and U.S. Treasury Money Funds
Securities with more than 60 days remaining to maturity are
stated at fair value which is determined by using a matrix system
that establishes a value for each security based on money market
yields. Securities originally purchased with remaining
maturities of 60 days or less are valued at amortized cost. In
addition, securities purchased with maturities in excess of 60
days, but which currently have maturities of 60 days or less, are
valued at their amortized cost for the 60 days prior to maturity-
- -such amortization being based on the fair value of the
securities on the 61st day prior to maturity.
All Funds
For the purposes of determining the Fund's net asset value
per share, all assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at the mean of
the bid and offer prices of such currencies against U.S. dollars
quoted by any major bank.
Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value, as determined in good faith by or
under the supervision of officers of the Funds, as authorized by
the Board of Directors.
Prime Reserve and Money Funds
Maintenance of Net Asset Value Per Share
It is the policy of the Fund to attempt to maintain a net
asset value of $1.00 per share by rounding to the nearest one
cent. This method of valuation is commonly referred to as "penny
rounding" and is permitted by Rule 2a-7 under the Investment
Company Act of 1940. Under Rule 2a-7:
(a) the Board of Directors of the Fund must undertake to
assure, to the extent reasonably practical taking into
account current market conditions affecting the Fund's
investment objectives, that the Fund's net asset value will
not deviate from $1.00 per share;
Prime Reserve Fund
(b) the Fund must (i) maintain a dollar-weighted average
portfolio maturity appropriate to its objective of
maintaining a stable price per share, (ii) not purchase any
instrument with a remaining maturity greater than 397 days
(or in the case of U.S. government securities greater than
PAGE 92
762 days), and (iii) maintain a dollar-weighted average
portfolio maturity of 90 days or less;
Money Fund
(b) The Fund must (i) maintain a dollar-weighted average
portfolio maturity appropriate to its objective of
maintaining a stable price per share, (ii) not purchase any
instrument with a remaining maturity greater than 762 days,
and (iii) maintain a dollar-weighted average portfolio
maturity of 90 days or less;
Prime Reserve and Money Funds
(c) the Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to those U.S.
dollar-denominated instruments which the Fund's Board of
Directors determines present minimal credit risks, and which
are eligible securities as defined by Rule 2a-7; and
(d) the Board of Directors must determine that (i) it is in
the best interest of the Fund and its shareholders to
maintain a stable price per share under the penny rounding
method; and (ii) the Fund will continue to use the penny
rounding method only so long as the Board of Directors
believes that it fairly reflects the market based net asset
value per share.
Although the Fund believes that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do so
on a continuous basis. If the Fund's net asset value per share
declined, or was expected to decline, below $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of
such reduction or suspension of dividends, an investor would
PAGE 93
receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption,
a price per share lower than that which he paid. On the other
hand, if the Fund's net asset value per share were to increase,
or were anticipated to increase above $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
supplement dividends in an effort to maintain the net asset value
at $1.00 per share.
<PAGE>
PAGE 94
Prime Reserve Fund
Prime Money Market Securities Defined. Prime money market
securities are those which are described as First Tier Securities
under Rule 2a-7 of the Investment Company Act of 1940. These
include any security with a remaining maturity of 397 days or
less that is rated (or that has been issued by an issuer that is
rated with respect to a class of short-term debt obligations, or
any security within that class that is comparable in priority and
security with the security) by any two nationally recognized
statistical rating organizations (NRSROs) (or if only one NRSRO
has issued a rating, that NRSRO) in the highest rating category
for short-term debt obligations (within which there may be sub-
categories). First Tier Securities also include unrated
securities comparable in quality to rated securities, as
determined by T. Rowe Price under the supervision of the Fund's
Board of Directors.
All Funds
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is
equal to the Fund's net asset value per share or share price.
The Fund determines its net asset value per share by subtracting
the Fund's liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of the Fund is normally calculated as of the close of
trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale
redemption and repurchase of shares) for the Fund may be
suspended at times (a) during which the NYSE is closed, other
than customary weekend and holiday closings, (b) during which
trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net
assets, or (d) during which a governmental body having
jurisdiction over the Fund may by order permit such a suspension
for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange
Commission (or any succeeding governmental authority) shall
PAGE 95
govern as to whether the conditions prescribed in (b), (c), or
(d) exist.
DIVIDENDS AND DISTRIBUTIONS
Unless you elect otherwise, the Fund's annual capital gain
distribution, if any, will be reinvested on the reinvestment date
using the NAV per share of that date. The reinvestment date
normally precedes the payment date by about 10 days although the
exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
A portion of the dividends paid by the Fund may be eligible
for the dividends-received deduction for corporate shareholders.
For tax purposes, it does not make any difference whether
dividends and capital gain distributions are paid in cash or in
additional shares. The Fund must declare dividends equal to at
least 98% of ordinary income (as of December 31) and capital
gains (as of October 31) in order to avoid a federal excise tax
and distribute 100% of ordinary income and capital gains as of
its tax year-end to avoid federal income tax.
At the time of your purchase, the Fund's net asset value may
reflect undistributed capital gains or net unrealized
appreciation of securities held by the Fund. A subsequent
distribution to you of such amounts, although constituting a
return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, the Fund is
permitted to carry forward its net realized capital losses, if
any, for eight years and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or
distribute such gains. On May 31, 1994, the books of each Fund
(other than the Personal Strategy Fund) indicated that each
Fund's aggregate net assets included undistributed net income,
net realized capital gains, and unrealized appreciation which are
listed below.
<PAGE>
PAGE 96
Undistributed Net Realized Unrealized
Fund Net Income Capital Gains Appreciation
Adjustable Rate
GNMA
High Yield
New Income
Prime Reserve
Short-Term Bond
Intermediate
Long-Term
Money
If, in any taxable year, the Fund should not qualify as a
regulated investment company under the Code: (i) the Fund would
be taxed at normal corporate rates on the entire amount of its
taxable income, if any, without deduction for dividends or other
distributions to shareholders; and (ii) the Fund's distributions
to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been
considered capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be
subject to U.S. tax. For shareholders who are not engaged in a
business in the U.S., this tax would be imposed at the rate of
30% upon the gross amount of the dividends in the absence of a
Tax Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized
by the Fund are not subject to tax unless the foreign shareholder
is a nonresident alien individual who was physically present in
the U.S. during the tax year for more than 182 days.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations, are taxable as ordinary
income. If the net effect of these transactions is a gain, the
dividend paid by the Fund will be increased; if the result is a
loss, the income dividend paid by the Fund will be decreased.
Adjustments to reflect these gains and losses will be made at the
end of the Fund's taxable year.
YIELD INFORMATION
From time to time, the Fund may advertise a yield figure
calculated in the following manner:
PAGE 97
Adjustable Rate and GNMA Funds
In conformity with regulations of the Securities and
Exchange Commission, an income factor is calculated for each
security in the portfolio based upon the security's coupon rate.
The income factors are then adjusted for any gains or losses
which have resulted from prepayments of principal during the
period. The income factors are then totalled for all securities
in the portfolio. Next, expenses of the Fund for the period net
of expected reimbursements, are deducted from the income to
arrive at net income, which is then converted to a per-share
amount by dividing net income by the average number of shares
outstanding during the period. The net income per share is
divided by the net asset value on the last day of the period to
produce a monthly yield which is then annualized. Quoted yield
factors are for comparison purposes only, and are not intended to
indicate future performance or forecast the dividend per share of
the Fund.
The yields of the Adjustable Rate and GNMA Funds calculated
under the above-described method for the month ended May 31, 1994
were ____% and _____%, respectively.
High Yield, New Income, Short-Term Bond, Intermediate and Long-
Term Funds
An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with
regulations of the Securities and Exchange Commission. The
income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period net of
expected reimbursements are deducted from the income to arrive at
net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding
during the period. The net income per share is divided by the
net asset value on the last day of the period to produce a
monthly yield which is then annualized. Quoted yield factors are
for comparison purposes only, and are not intended to indicate
future performance or forecast the dividend per share of the
Fund.
The yields of the High Yield, New Income, Short-Term Bond,
Intermediate and Long-Term Funds calculated under the above-
described method for the month ended May 31, 1994, was _____%,
_____%, _____%, _____% and _____%, respectively.
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PAGE 98
Prime Reserve and Money Funds
The Fund's current and historical yield for a period is
calculated by dividing the net change in value of an account
(including all dividends accrued and dividends reinvested in
additional shares) by the account value at the beginning of the
period to obtain the base period return. This base period return
is divided by the number of days in the period then multiplied by
365 to arrive at the annualized yield for that period. The
Fund's annualized compound yield for such period is compounded by
dividing the base period return by the number of days in the
period, and compounding that figure over 365 days.
The seven-day yields ending May 31, 1993 for the Prime
Reserve and Money Funds were _____% and ______%, respectively,
and the Funds' compound yield for the same period were _____% and
_____%, respectively.
All Funds
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes
the reinvestment of all capital gain distributions and income
dividends for the period or periods indicated, without regard to
tax consequences to a shareholder in the Fund. Total return is
calculated as the percentage change between the beginning value
of a static account in the Fund and the ending value of that
account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of the Fund.
Each average annual compound rate of return is derived from the
cumulative performance of the Fund over the time period
specified. The annual compound rate of return for the Fund over
any other period of time will vary from the average.
<PAGE>
PAGE 99
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
2/28/94 2/28/94 2/28/94 2/28/94
Adjustable Rate U.S. Government Fund
T. Rowe Price Adjustable Rate
U.S. Government Fund, Inc. 3.11% 9.30%
(9/30/91)
Lipper Average of Adjustable
Rate Mortgage Funds 3.17 10.27
Merrill Lynch 1-3 Year
Govt. Index 3.48 16.22
Salomon Brothers 1-Year
Treasury Index 2.61 11.17
Salomon Brothers 2-Year
Treasury Index 3.46 16.51
GNMA Fund
T. Rowe Price GNMA Fund 3.71 61.78% 96.72
(11/26/85)
Salomon Brothers 30-Year
GNMA Index 4.67 69.52 124.78
Lehman Brothers GNMA Bond Index 4.49 68.70 123.75
Lipper GNMA Funds Average 3.78 60.10 100.59
High Yield Fund
High Yield Fund 16.59 58.38 176.57
(12/31/84)
Merrill Lynch High Yield Index 14.16 84.90 225.33
Merrill Lynch Medium Quality Long
Corporate Index 8.89 85.02 223.61
Lipper's Average of High Current
Yield Funds 16.66 71.26 174.45
New Income Fund
New Income Fund 5.36 61.39 162.15% 514.54
(8/31/73)
Salomon Bros. Broad Investment
Grade Index 5.58 69.34 202.62 N/A
Salomon Bros. High Grade Corporate
Bond Index 6.73 81.35 264.06 605.12
Lehman Bros. Govt./Corp.
Bond Index 5.71 69.42 198.31 574.11
PAGE 100
Short-Term Bond Fund
T. Rowe Price Short-Term Bond Fund 4.36 47.78 122.71
(3/2/84)
T. Rowe Price Prime Reserve Fund 2.60 30.24 88.03
Donoghue Average of all Taxable
Money Funds 2.70 30.32 86.25
Lehman Bros. 1-3 Year Govt./Corp.
Bond Index 3.62 50.11 139.27
Lipper Short Investment Grade
Debt Funds Average 3.95 49.71 136.46
U.S. Treasury Intermediate Fund
Intermediate Fund 3.80 47.81
(9/29/89)
Lehman Brothers Intermediate
Treasury Index 4.23 48.86
U.S. Treasury Long-Term Fund
Long-Term Fund 5.89 52.29
(9/29/89)
Lehman Brothers Government/Corporate
Bond Index 5.71 54.53
Lehman Brothers Long Treasury Index 8.32 64.05
Merrill Lynch 10-15 Year
Treasury Index 6.54 61.96
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
2/28/94 2/28/94 2/28/94 2/28/94
Adjustable Rate U.S. Government Fund
T. Rowe Price Adjustable Rate
U.S. Government Fund, Inc. 3.11% 3.75%
(9/30/91)
Lipper Average of Adjustable
Rate Mortgage Funds 3.17 4.13
Merrill Lynch 1-3 Year
Govt. Index 3.48 6.42
Salomon Brothers 1-Year
Treasury Index 2.61 4.48
Salomon Brothers 2-Year
Treasury Index 3.46 6.53
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PAGE 101
GNMA Fund
T. Rowe Price GNMA Fund 3.71 61.78% 96.72
(11/26/85)
Salomon Brothers 30-Year
GNMA Index 4.67 69.52 124.78
Lehman Brothers GNMA Bond Index 4.49 68.70 123.75
Lipper GNMA Funds Average 3.78 60.10 100.59
High Yield Fund
High Yield Fund 16.59 9.63 11.74
(12/31/84)
Merrill Lynch High Yield Index 14.16 13.08 13.74
Merrill Lynch Medium Quality Long
Corporate Index 8.89 13.09 13.67
Lipper's Average of High Current
Yield Funds 16.66 11.28 11.55
New Income Fund
New Income Fund 5.36 10.05 10.12% 9.26
(8/31/73)
Salomon Bros. Broad Investment
Grade Index 5.58 11.11 11.71 N/A
Salomon Bros. High Grade Corporate
Bond Index 6.73 12.64 13.79 9.99
Lehman Bros. Govt./Corp.
Bond Index 5.71 11.12 11.55 9.75
Short-Term Bond Fund
T. Rowe Price Short-Term Bond Fund 4.36 8.12 8.34
(3/2/84)
T. Rowe Price Prime Reserve Fund 2.60 5.42 6.52
Donoghue Average of all Taxable
Money Funds 2.70 5.44 6.42
Lehman Bros. 1-3 Year Govt./Corp.
Bond Index 3.62 8.46 9.12
Lipper Short Investment Grade
Debt Funds Average 3.95 8.40 8.99
U.S. Treasury Intermediate Fund
Intermediate Fund 3.80 9.25
(9/29/89)
Lehman Brothers Intermediate
Treasury Index 4.23 9.43
<PAGE>
PAGE 102
U.S. Treasury Long-Term Fund
Long-Term Fund 5.89 9.99
(9/29/89)
Lehman Brothers Government/Corporate
Bond Index 5.71 10.36
Lehman Brothers Long Treasury Index 8.32 11.86
Merrill Lynch 10-15 Year
Treasury Index 6.54 11.54
Outside Sources of Information
From time to time, in reports and promotional literature, one
or more of the T. Rowe Price funds, including this Fund, may
compare its performance to Overnight Government Repurchase
Agreements, Treasury bills, notes, and bonds, certificates of
deposit, and six-month money market certificates. Performance
may also be compared to (1) indices of broad groups of managed or
unmanaged securities considered to be representative of or
similar to Fund portfolio holdings; (2) other mutual funds; or
(3) other measures of performance set forth in publications such
as:
Advertising News Service, Inc., "Bank Rate Monitor+ - The
Weekly Financial Rate Reporter" is a weekly publication which
lists the yields on various money market instruments offered to
the public by 100 leading banks and thrift institutions in the
U.S., including loan rates offered by these banks. Bank
certificates of deposit differ from mutual funds in several
ways: the interest rate established by the sponsoring bank is
fixed for the term of a CD; there are penalties for early
withdrawal from CDs; and the principal on a CD is insured.
Donoghue Organization, Inc., "Donoghue's Money Fund Report" is
a weekly publication which tracks net assets, yield, maturity
and portfolio holdings on approximately 380 money market mutual
funds offered in the U.S. These funds are broken down into
various categories such as U.S. Treasury, Domestic Prime and
Euros, Domestic Prime and Euros and Yankees, and Aggressive.
First Boston High Yield Index. It shows statistics on the
Composite Index and analytical data on new issues in the
marketplace and low-grade issuers.
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund
Performance Analysis" is a monthly publication which tracks net
assets, total return, principal return and yield on
approximately 950 fixed income mutual funds offered in the
United States.
PAGE 103
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices" is a monthly publication which lists principal, coupon
and total return on over 100 different taxable bond indices
tracked by Merrill Lynch, together with the par weighted
characteristics of each Index. The index used as a benchmark
for the High Yield Fund is the High Yield Index. The two
indices used as benchmarks for the Short-Term Bond Fund are the
91-Day Treasury Bill Index and the 1-2.99 Year Treasury Note
Index.
Morningstar, Inc., is a widely used independent research firm
which rates mutual funds by overall performance, investment
objectives and assets.
Salomon Brothers Inc., "Analytical Record of Yields and Yield
Spreads" is a publication which tracks historical yields and
yield spreads on short-term market rates, public obligations of
the U.S. Treasury and agencies of the U.S. government, public
corporate debt obligations, municipal debt obligations and
preferred stocks.
Salomon Brothers Inc., "Bond Market Round-up" is a weekly
publication which tracks the yields and yield spreads on a
large, but select, group of money market instruments, public
corporate debt obligations, and public obligations of the U.S.
Treasury and agencies of the U.S. Government.
Salomon Brothers Inc., "High Yield Composite Index" is an index
which provides performance and statistics for the high yield
market place.
Salomon Brothers Inc., "Market Performance" is a monthly
publication which tracks principal return, total return and
yield on the Salomon Brothers Broad investment - Grade Bond
Index and the components of the Index.
Shearson Lehman Brothers, Inc., "The Bond Market Report" is a
monthly publication which tracks principal, coupon and total
return on the Shearson Lehman Govt./Corp. Index and Shearson
Lehman Aggregate Bond Index, as well as all the components of
these Indices.
Telerate Systems, Inc., is a market data distribution network
which tracks a broad range of financial markets including, the
daily rates on money market instruments, public corporate debt
obligations and public obligations of the U.S. Treasury and
agencies of the U.S. Government.
Wall Street Journal, is a national daily financial news
publication which lists the yields and current market values on
money market instruments, public corporate debt obligations,
PAGE 104
public obligations of the U.S. Treasury and agencies of the
U.S. government as well as common stocks, preferred stocks,
convertible preferred stocks, options and commodities; in
addition to indices prepared by the research departments of
such financial organizations as Shearson Lehman/American
Express Inc., and Merrill Lynch, Pierce, Fenner and Smith,
Inc., including information provided by the Federal Reserve
Board.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, etc. will also be used.
All Funds, Except Prime Reserve Fund
Benefits of Investing in High-Quality Bond Funds
o Higher Income
Bonds have generally provided a higher income than money
market securities because yield usually increased with longer
maturities. For instance, the yield on the 30-year Treasury
bond usually exceeds the yield on the 1-year Treasury bill or
5-year Treasury note. However, securities with longer
maturities fluctuate more in price than those with shorter
maturities. Therefore, the investor must weigh the
advantages of higher yields against the possibility of
greater fluctuation in the principal value of your
investment.
o Income Compounding
Investing in bond mutual funds allows investors to benefit
from easy and convenient compounding, because you can
automatically reinvest monthly dividends in additional fund
shares. Each month investors earn interest on a larger
number of shares. Also, reinvesting dividends removes the
temptation to spend the income.
o Broad Diversification
Each share of a mutual fund represents an interest in a large
pool of securities, so even a small investment is broadly
diversified by maturity. Since most bonds trade efficiently
only in very large blocks,mutual funds provide a degree of
diversification that may be difficult for individual
investors to achieve on their own.
<PAGE>
PAGE 105
o Lower Portfolio Volatility
Investing a portion of one's assets in longer term, high-
quality bonds can help smooth out the fluctuations in your
overall investment results, because bond prices do not
necessarily move with stock prices. Also, bonds usually have
higher income yields than stocks, thus increasing the total
income component of your portfolio. This strategy should
also add stability to overall results, as income is always a
positive component of total return.
o Liquidity
A bond fund can supplement a money market fund or bank
account as a source of capital for unexpected contingencies.
T. Rowe Price fixed-income funds offer you easy access to
money through free checkwriting and convenient redemption or
exchange features. Of course, the value of a bond fund's
shares redeemed through checkwriting may be worth more or
less than their value at the time of their original purchase.
o Suitability
High-quality bond funds are most suitable for the following
objectives: obtaining a higher current income with minimal
credit risk; compounding of income over time; or diversifying
overall investments to reduce volatility.
All Funds
IRAs
An IRA is a long-term investment whose objective is to
accumulate personal savings for retirement. Due to the long-term
nature of the investment, even slight differences in performance
will result in significantly different assets at retirement.
Mutual funds, with their diversity of choice, can be used for IRA
investments. Generally, individuals may need to adjust their
underlying IRA investments as their time to retirement and
tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds
and may help investors achieve various long-term investment
goals, such as investing money for retirement, saving for a down
payment on a home, or paying college costs. To explain how the
Fund could be used to assist investors in planning for these
goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be made
PAGE 106
available. These currently include: the Asset Mix Worksheet
which is designed to show shareholders how to reduce their
investment risk by developing a diversified investment plan; the
College Planning Guide which discusses various aspects of
financial planning to meet college expenses and assists parents
in projecting the costs of a college education for their
children; the Retirement Planning Kit (also available in a PC
version) includes a detailed workbook to determine how much money
you may need for retirement and suggests how you might invest to
achieve your objectives; and the Retirees Financial Guide which
includes a detailed workbook to determine how much money you can
afford to spend and still preserve your purchasing power and
suggests how you might invest to reach your goal. From time to
time, other worksheets and guides may be made available as well.
Of course, an investment in the Fund cannot guarantee that such
goals will be met.
To assist investors in understanding the different returns
and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown below.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 years 20 years 10 years 5 years
Small-Company Stocks 15.3% 18.8% 10.0% 13.3%
Large-Company Stocks 12.3 12.8 14.9 14.5
Foreign Stocks N/A 14.4 17.9 2.3
Long-Term Corporate Bonds 5.6 10.2 14.0 13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4 11.3
Treasury Bills 4.6 7.5 6.4 5.6
U.S. Inflation 4.3 5.9 3.7 3.9
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
PAGE 107
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown below.
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/93 $10,000
Investment
After Period
_____________________ ______________________ ____________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.3% 5.4% 24.9% -9.3%$ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2% 29.1% -15.6%$ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0% 33.4% -21.9%$100,031
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-93 and Lehman Brothers Government/Corporate Bond
Index from 1974-75), and 30-day Treasury bills from January
1974 through December 1993. Past performance does not
guarantee future results. Figures include changes in
principal value and reinvested dividends and assume the same
asset mix is maintained each year. This exhibit is for
illustrative purposes only and is not representative of the
performance of any T. Rowe Price fund.
** Based on inflation rate of 5.9% for the 20-year period ended
12/31/93.
Insights
From time to time, Insights, a T. Rowe Price publication of
reports on specific investment topics and strategies, may be
PAGE 108
included in the Fund's fulfillment kit. Such reports may include
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in
kind redemption of portfolio securities of the Fund, brokerage
fees could be incurred by the shareholder in a subsequent sale of
such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for
securities or assets other than cash will be limited to (1) bona
fide reorganizations; (2) statutory mergers; or (3) other
acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Fund; (b) are acquired
for investment and not for resale except in accordance with
applicable law; (c) have a value that is readily ascertainable
via listing on or trading in a recognized United States or
international exchange or market; and (d) are not illiquid.
All Funds, Except GNMA Fund
CAPITAL STOCK
The Fund's Charter authorizes the Board of Directors to
classify and reclassify any and all shares which are then
unissued, including unissued shares of capital stock into any
number of classes or series, each class or series consisting of
such number of shares and having such designations, such powers,
preferences, rights, qualifications, limitations, and
PAGE 109
restrictions, as shall be determined by the Board subject to the
Investment Company Act and other applicable law. The shares of
any such additional classes or series might therefore differ from
the shares of the present class and series of capital stock and
from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to
applicable law, and might thus be superior or inferior to the
capital stock or to other classes or series in various
characteristics. The Board of Directors may increase or decrease
the aggregate number of shares of stock or the number of shares
of stock of any class or series that the Fund has authorized to
issue without shareholder approval.
Except to the extent that the Fund's Board of Directors
might provide by resolution that holders of shares of a
particular class are entitled to vote as a class on specified
matters presented for a vote of the holders of all shares
entitled to vote on such matters, there would be no right of
class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no
provision entitling the holders of the present class of capital
stock to a vote as a class on any matter. Accordingly, the
preferences, rights, and other characteristics attaching to any
class of shares, including the present class of capital stock,
might be altered or eliminated, or the class might be combined
with another class or classes, by action approved by the vote of
the holders of a majority of all the shares of all classes
entitled to be voted on the proposal, without any additional
right to vote as a class by the holders of the capital stock or
of another affected class or classes.
Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Fund, a special meeting of shareholders of
the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of
PAGE 110
all the votes of the Fund entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Fund the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Fund, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Fund to the extent required by
Section 16(c) of the Investment Company Act of 1940.
GNMA Fund
DESCRIPTION OF THE FUND
For tax and business reasons, the Fund was organized in 1985
as a Massachusetts Business Trust and is registered with the
Securities and Exchange Commission under the Investment Company
Act of 1940 as a diversified, open-end investment company,
commonly known as a "mutual fund."
The Declaration of Trust permits the Board of Trustees to
issue an unlimited number of full and fractional shares of a
single class. The Declaration of Trust also provides that the
Board of Trustees may issue additional series or classes of
shares. Each share represents an equal proportionate beneficial
interest in the Fund. In the event of the liquidation of the
Fund, each share is entitled to a pro rata share of the net
assets of the Fund.
Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of trustees (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing trustees unless and
until such time as less than a majority of the trustees holding
office have been elected by shareholders, at which time the
trustees then in office will call a shareholders' meeting for the
election of trustees. Pursuant to Section 16(c) of the
Investment Company Act of 1940, holders of record of not less
than two-thirds of the outstanding shares of the Fund may remove
a trustee by a vote cast in person or by proxy at a meeting
called for that purpose. Except as set forth above, the trustees
shall continue to hold office and may appoint successor trustees.
Voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in the election of trustees can, if
they choose to do so, elect all the trustees of the Trust, in
which event the holders of the remaining shares will be unable to
elect any person as a trustee. No amendments may be made to the
Declaration of Trust without the affirmative vote of a majority
of the outstanding shares of the Trust.
PAGE 111
Shares have no preemptive or conversion rights; the right of
redemption and the privilege of exchange are described in the
prospectus. Shares are fully paid and nonassessable, except as
set forth below. The Trust may be terminated (i) upon the sale
of its assets to another diversified, open-end management
investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon
liquidation and distribution of the assets of the Trust, if
approved by the vote of the holders of a majority of the
outstanding shares of the Trust. If not so terminated, the Trust
will continue indefinitely.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Fund. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Fund and
requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by
the Fund or a Trustee. The Declaration of Trust provides for
indemnification from Fund property for all losses and expenses of
any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations,
a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the Fund, the shareholders
of the Fund paying such liability will be entitled to
reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund in such a way so as
to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the
Securities Act of 1933, and the Fund or its shares are registered
under the laws of all states which require registration, as well
as the District of Columbia and Puerto Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, whose address is 919
Third Avenue, New York, New York 10022, is legal counsel to the
Fund.
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INDEPENDENT ACCOUNTANTS
GNMA, High Yield, New Income, Prime Reserve, Short-Term Bond and
Money Funds
Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore,
Maryland 21202, are independent accountants to the Fund.
Adjustable Rate, Intermediate and Long-Term Funds
Coopers & Lybrand, 217 East Redwood Street, Baltimore,
Maryland 21202, are independent accountants to the Fund.
Financial Statements
The financial statements of the Fund for the year ended
February 28, 1994, and the report of independent accountants are
included in the Fund's Annual Report for the period February 28,
1994. A copy of the Annual Report accompanies this Statement of
Additional Information. The following financial statements and
the report of independent accountants appearing in the Annual
Report for the year ended February 28, 1994 are incorporated into
this Statement of Additional Information by reference:
NEW PRIME SHORT-
GNMA INCOME RESERVE TERM BOND
____ ______ _______ _________
Report of Independent
Accountants 12 15 11 17
Statement of Net Assets,
February 28, 1994 6-7 6-10 5-8 6-11
Statement of Operations, year
ended February 28, 1994 8 11 8 12
Statement of Changes in Net
Assets, years ended
February 28, 1994 and
February 28, 1993 9 12 9 13
Notes to Financial Statements
February 28, 1994 9-11 12-14 9-10 14-15
Financial Highlights 11 14 11 16
<PAGE>
PAGE 113
MONEY INTERMEDIATE LONG-TERM
_____ ____________ __________
Report of Independent
Accountants 18 19 19
Statement of Net Assets,
February 28, 1994 7-9 8-9 10-11
Statement of Operations, year
ended February 28, 1994 11 11 11
Statement of Changes in Net
Assets, years ended
February 28, 1994 and
February 28, 1993 12 12 12
Notes to Financial Statements
February 28, 1994 13-14 13-14 13-14
Financial Highlights 15 16 17
ADJUSTABLE RATE HIGH YIELD
_______________ __________
Report of Independent
Accountants 13 19
Portfolio of Investments,
February 28, 1994 5-7 6-13
Statement of Assets and
Liabilities, February 28, 1994 7 14
Statement of Operations, year
ended February 28, 1994 8 15
Statement of Changes in Net
Assets, years ended
February 28, 1994 and
February 28, 1993 9 16
Notes to Financial Statements
February 28, 1994 10-11 16-18
Financial Highlights 12 18
RATINGS OF COMMERCIAL PAPER
Adjustable Rate, High Yield, Prime Reserve and Short-Term Bond
Funds
Moody's Investors Service, Inc.: The rating of Prime-1 is the
highest commercial paper rating assigned by Moody's. Among the
factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in
certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and
quality of long-term debt; trend of earnings over a period of 10
PAGE 114
years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the
management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such
obligations. These factors are all considered in determining
whether the commercial paper is rated P1, P2, or P3.
Standard & Poor's Corporation: Commercial paper rated A (highest
quality) by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; long-term senior
debt is rated "A" or better, although in some cases "BBB" credits
may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A1, A2, or A3.
Prime Reserve Fund
Fitch Investors Service, Inc.: Fitch 1 - Highest grade.
Commercial paper assigned this rating is regarded as having the
strongest degree of assurance for timely payment. Fitch 2 - Very
good grade. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest
issues.
RATINGS OF CORPORATE DEBT SECURITIES
Adjustable Rate, High Yield, New Income, Short-Term Bond, and
Personal Strategy Funds
Moody's Investors Services, Inc. (Moody's)
Aaa-Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge."
Aa-Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A-Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Baa-Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
PAGE 115
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba-Bonds rated Ba are judged to have speculative elements:
their futures cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
B-Bonds rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with
respect to principal or interest.
Ca-Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked short-comings.
Standard & Poor's Corporation (S&P)
AAA-This is the highest rating assigned by Standard & Poor's
to a debt obligation and indicates an extremely strong capacity
to pay principal and interest.
AA-Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong.
A-Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB-Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, C, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
PAGE 116
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight
market fluctuation other than through changes in the money rate.
The prime feature of a "AAA" bond is the showing of earnings
several times or many times interest requirements for such
stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features
may enter, such as a wide margin of protection through
collateral, security or direct lien on specific property.
Sinking funds or voluntary reduction of debt by call or purchase
or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable.
Their merits are not greatly unlike those of "AAA" class but a
bond so rated may be junior though of strong lien, or the margin
of safety is less strikingly broad. The issue may be the
obligation of a small company, strongly secured, but influenced
as to rating by the lesser financial power of the enterprise and
more local type of market.
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PAGE 117
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements.
A Statement of Assets and Liabilities of Registrant as
of ____________ appears in the Statement of Additional
Information. Such Statement has been examined by
_____________, independent accountants, and has been
included in the Statement of Additional Information in
reliance on the report of such accountants appearing in
the Statement of Additional Information given upon their
authority as experts in auditing and accounting.+ All
other financial statements, schedules and historical
information have been omitted as the subject matter is
not required, not present, or not present in amounts
sufficient to require submission.
(b) Exhibits.
(1) Articles of Incorporation of Registrant, dated May
12, 1994
(2) By-Laws of Registrant, dated May 12, 1994
(3) Inapplicable
(4) See Article SIXTH, Capital Stock, Paragraphs (b)-
(g) of the Articles of Incorporation, Article II,
Shareholders, Sections 2.01-2.11 and Article VIII,
Capital Stock, Sections 8.01-8.05 of the By-Laws
filed as Exhibits to this Registration Statement
(5)(a) Investment Management Agreement between the
Registrant on behalf of the T. Rowe Price Personal
Strategy Balanced Fund and T. Rowe Price
Associates, Inc. (to be filed by amendment)
(5)(b) Investment Management Agreement between the
Registrant on behalf of the T. Rowe Price Personal
Strategy Growth Fund and T. Rowe Price Associates,
Inc. (to be filed by amendment)
+ Omitted from Registration Statement as initially filed
since Registrant has no assets or liabilities and has
never had any assets or liabilities. Registrant
proposes to raise its minimum capital through an
initial private offering of shares at $____ per share.<PAGE>
PAGE 118
(5)(c) Investment Management Agreement between the
Registrant on behalf of the T. Rowe Price Personal
Strategy Income Fund and T. Rowe Price Associates,
Inc. (to be filed by amendment)
(6) Underwriting Agreement between Registrant and T.
Rowe Price Investment Services, Inc. (to be filed
by amendment)
(7) Inapplicable
(8)(a) Custodian Agreement between T. Rowe Price Funds and
State Street Bank and Trust Company (to be filed by
amendment)
(8)(b) Global Custody Agreement between the Chase
Manhattan Bank, N.A. and the T. Rowe Price Funds
(to be filed by amendment)<PAGE>
PAGE 119
(9)(a) Transfer Agency and Service Agreement between T.
Rowe Price Services, Inc. and T. Rowe Price Funds
(to be filed by amendment)
(9)(b) Agreement between T. Rowe Price Associates, Inc.
and T. Rowe Price Funds for Fund Accounting
Services (to be filed by amendment)
(9)(c) Agreement between T. Rowe Price Retirement Plan
Services, Inc. and the Taxable Funds (to be filed
by amendment)
(10) Opinion of Counsel, dated May 17, 1994
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
Item 25. Persons Controlled by or Under Common Control With
Registrant.
None
<PAGE>
PAGE 120
Item 26. Number of Holders of Securities.
As of May 17, 1994, there were zero shareholders in the T. Rowe
Price Personal Strategy Funds, Inc.
Item 27. Indemnification.
If approved by the other named insureds, the Registrant intends
to become a named insured on comprehensive Errors and Omissions
and Officers and Directors insurance policies written by the
Evanston Insurance Company, The Chubb Group, and ICI Mutual
Insurance Co. These policies provide coverage for the named
insureds, which include T. Rowe Price Associates, Inc.
("Manager"), Rowe Price-Fleming International, Inc.
("Price-Fleming"), T. Rowe Price Investment Services, Inc., T.
Rowe Price Services, Inc., T. Rowe Price Trust Company, T. Rowe
Price Stable Asset Management, Inc., RPF International Bond Fund
and thirty-six other investment companies, namely, T. Rowe Price
Growth Stock Fund, Inc., T. Rowe Price New Horizons Fund, Inc.,
T. Rowe Price New Era Fund, Inc., T. Rowe Price New Income Fund,
Inc., T. Rowe Price Prime Reserve Fund, Inc., T. Rowe Price Tax-
Free Income Fund, Inc., T. Rowe Price Tax-Exempt Money Fund,
Inc., T. Rowe Price International Funds, Inc., T. Rowe Price
Growth & Income Fund, Inc., T. Rowe Price Tax-Free
Short-Intermediate Fund, Inc., T. Rowe Price Short-Term Bond
Fund, Inc., T. Rowe Price High Yield Fund, Inc., T. Rowe Price
Tax-Free High Yield Fund, Inc., T. Rowe Price New America Growth
Fund, T. Rowe Price Equity Income Fund, T. Rowe Price GNMA Fund,
T. Rowe Price Capital Appreciation Fund, T. Rowe Price State Tax-
Free Income Trust, T. Rowe Price California Tax-Free Income
Trust, T. Rowe Price Science & Technology Fund, Inc., T. Rowe
Price Small-Cap Value Fund, Inc., Institutional International
Funds, Inc., T. Rowe Price U.S. Treasury Funds, Inc., T. Rowe
Price Index Trust, Inc., T. Rowe Price Spectrum Fund, Inc., T.
Rowe Price Balanced Fund, Inc., T. Rowe Price Adjustable Rate
U.S. Government Fund, Inc., T. Rowe Price Mid-Cap Growth Fund,
Inc., T. Rowe Price OTC Fund, Inc., T. Rowe Price Tax-Free
Insured Intermediate Bond Fund, Inc., T. Rowe Price Dividend
Growth Fund, Inc., T. Rowe Price Blue Chip Growth Fund, Inc., T.
Rowe Price Summit Funds, Inc., T. Rowe Price Summit Municipal
Funds, Inc., T. Rowe Price Equity Series, Inc., and T. Rowe Price
International Series, Inc. The Registrant and the thirty-six
investment companies listed above, with the exception of
Institutional International Funds, Inc., T. Rowe Price Equity
Series, Inc., and T. Rowe Price International Series, Inc., will
be collectively referred to as the Price Funds. The investment
manager for the Price Funds, including T. Rowe Price Equity
Series, Inc., is the Manager. Price-Fleming is the investment
manager to T. Rowe Price International Funds, Inc., Institutional
PAGE 121
International Funds, Inc., and T. Rowe Price International
Series, Inc., and is 50% owned by TRP Finance, Inc., a wholly-
owned subsidiary of the Manager, 25% owned by Copthall Overseas
Limited, a wholly-owned subsidiary of Robert Fleming Holdings
Limited, and 25% owned by Jardine Fleming International Holdings
Limited. In addition to the corporate insureds, the policies
also cover the officers, directors, and employees of each of the
named insureds. The premium is allocated among the named
corporate insureds in accordance with the provisions of Rule 17d-
1(d)(7) under the Investment Company Act of 1940.
General. The Charter of the Corporation provides that
to the fullest extent permitted by Maryland or federal law,
no director of officer of the Corporation shall be
personally liable to the Corporation or the holders of
Shares for money damages and each director and officer shall
be indemnified by the Corporation; provided, however, that
nothing herein shall be deemed to protect any director or
officer of the Corporation against any liability to the
Corporation of the holders of Shares to which such director
or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or
her office.
<PAGE>
PAGE 122
Article X, Section 10.01 of the Registrant's By-Laws
provides as follows:
Section 10.01 Indemnification and Payment of Expenses
in Advance. The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer,
employee, or agent of the Corporation, or who is or has been
serving at the request of the Corporation as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, who,
by reason of his position was, is, or is threatened to be
made a party to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter collectively
referred to as a "Proceeding") against any judgments,
penalties, fines, settlements, and reasonable expenses
(including attorneys' fees) incurred by such Indemnitee in
connection with any Proceeding, to the fullest extent that
such indemnification may be lawful under applicable Maryland
law, as from time to time amended. The Corporation shall
pay any reasonable expenses so incurred by such Indemnitee
in defending a Proceeding in advance of the final
disposition thereof to the fullest extent that such advance
payment may be lawful under applicable Maryland law, as from
time to time amended. Subject to any applicable limitations
and requirements set forth in the Corporation's Articles of
<PAGE>
PAGE 123
Incorporation and in these By-Laws, any payment of
indemnification or advance of expenses shall be made in
accordance with the procedures set forth in applicable
Maryland law, as from time to time amended.
Notwithstanding the foregoing, nothing herein shall
protect or purport to protect any Indemnitee against any
liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of
his office ("Disabling Conduct").
Anything in this Article X to the contrary
notwithstanding, no indemnification shall be made by the
Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or
other body before whom the Proceeding was brought that
the Indemnitee was not liable by reason of Disabling
Conduct; or
(b) in the absence of such a decision, there is a
reasonable determination, based upon a review of the
facts, that the Indemnitee was not liable by reason of
Disabling Conduct, which determination shall be made
by:
(i) the vote of a majority of a quorum of directors
who are neither "interested persons" of the
Corporation as defined in Section 2(a)(19) of the
Investment Company Act of 1940, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary
notwithstanding, any advance of expenses by the Corporation
to any Indemnitee shall be made only upon the undertaking by
such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to
indemnification as above provided, and only if one of the
following conditions is met:
(a) the Indemnitee provides a security for his
undertaking; or
<PAGE>
PAGE 124
(b) the Corporation shall be insured against losses
arising by reason of any lawful advances; or
(c) there is a determination, based on a review of
readily available facts, that there is reason to
believe that the Indemnitee will ultimately be
found entitled to indemnification, which
determination shall be made by:
(i) a majority of a quorum of directors who are
neither "interested persons" of the
Corporation as defined in Section 2(a)(19)
of the Investment Company Act of 1940, nor
parties to the Proceeding; or
(ii) an independent legal counsel in a written
opinion.
Section 10.02 of the Registrant's By-Laws provides as
follows:
Section 10.02 Insurance of Officers, Directors,
Employees and Agents. To the fullest extent permitted by
applicable Maryland law and by Section 17(h) of the
Investment Company Act of 1940, as from time to time
amended, the Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or who is or was
serving at the request of the Corporation as a director,
officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise,
against any liability asserted against him and incurred by
him in or arising out of his position, whether or not the
Corporation would have the power to indemnify him against
such liability.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant
to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
<PAGE>
PAGE 125
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in
the successful defense of any action, suit proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), a Maryland
corporation, is a corporate joint venture 50% owned by TRP Finance, Inc., a
wholly-owned subsidiary of the Manager, and was organized in 1979 to provide
investment counsel service with respect to foreign securities for
institutional investors in the United States. Price-Fleming, in addition to
managing private counsel client accounts, also sponsors registered investment
companies which invest in foreign securities, serves as general partner of
RPFI International Partners, Limited Partnership, and provides investment
advice to the T. Rowe Price Trust Company, trustee of the International Common
Trust Fund.
T. Rowe Price Investment Services, Inc. ("Investment Services"), a wholly-
owned subsidiary of the Manager, is a Maryland corporation organized in 1980
for the purpose of acting as the principal underwriter and distributor for the
Price Funds. Investment Services is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. In 1984, Investment Services expanded its activities
to include a discount brokerage service.
TRP Distribution, Inc., a wholly-owned subsidiary of Investment Services, is a
Maryland corporation organized in 1991. It was organized for and engages in
the sale of certain investment related products prepared by Investment
Services.
T. Rowe Price Associates Foundation, Inc., was organized in 1981 for the
purpose of making charitable contributions to religious, charitable,
scientific, literary and educational organizations. The Foundation (which is
not a subsidiary of the Manager) is funded solely by contributions from the
Manager and income from investments.
T. Rowe Price Services, Inc. ("Price Services"), a wholly-owned subsidiary of
the Manager, is a Maryland corporation organized in 1982 and is registered as
a transfer agent under the Securities Exchange Act of 1934. Price Services
provides transfer agent, dividend disbursing, and certain other services,
including shareholder services, to the Price Funds.
T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a wholly-owned
subsidiary of the Manager, was incorporated in Maryland in 1991 and is
registered as a transfer agent under the Securities Exchange Act of 1934. RPS
provides administrative, recordkeeping, and subaccounting services to
administrators of employee benefit plans.
T. Rowe Price Trust Company ("Trust Company"), a wholly-owned subsidiary of
the Manager, is a Maryland chartered limited purpose trust company, organized
in 1983 for the purpose of providing fiduciary services. The Trust Company
serves as trustee/custodian for employee benefit plans, common trust funds and
a few trusts.
T. Rowe Price Threshold Fund II, L.P., a Delaware limited partnership, was
organized in 1986 by the Manager, and invests in private financings of small
PAGE 126
companies with high growth potential; the Manager is the General Partner of
the partnership.
RPFI International Partners, Limited Partnership, is a Delaware limited
partnership organized in 1985 for the purpose of investing in a diversified
group of small and medium-sized rapidly growing non-U.S. companies.
Price-Fleming is the general partner of this partnership, and certain clients
of Price-Fleming are its limited partners.
T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"), is a Maryland
corporation and a wholly-owned subsidiary of the Manager established in 1986
to provide real estate services. Subsidiaries of Real Estate Group are: T.
Rowe Price Realty Income Fund I Management, Inc., a Maryland corporation
(General Partner of T. Rowe Price Realty Income Fund I, A No-Load Limited
Partnership), T. Rowe Price Realty Income Fund II Management, Inc., a Maryland
corporation (General Partner of T. Rowe Price Realty Income Fund II, America's
Sales-Commission-Free Real Estate Limited Partnership), T. Rowe Price Realty
Income Fund III Management, Inc., a Maryland corporation (General Partner of
T. Rowe Price Realty Income Fund III, America's Sales-Commission-Free Real
Estate Limited Partnership, a Delaware limited partnership), and T. Rowe Price
Realty Income Fund IV Management, Inc., a Maryland corporation (General
Partner of T. Rowe Price Realty Income Fund IV, America's
Sales-Commission-Free Real Estate Limited Partnership). Real Estate Group
serves as investment manager to T. Rowe Price Renaissance Fund, Ltd., A
Sales-Commission-Free Real Estate Investment, established in 1989 as a
Maryland corporation which qualifies as a REIT.
T. Rowe Price Stable Asset Management, Inc. ("Stable Asset Management") is a
Maryland corporation organized in 1988 as a wholly-owned subsidiary of the
Manager. Stable Asset Management, which is registered as an investment
adviser under the Investment Advisers Act of 1940, specializes in the
management of investment portfolios which seek stable and consistent
investment returns through the use of guaranteed investment contracts, bank
investment contracts, structured or synthetic investment contracts, and
short-term fixed-income securities.
T. Rowe Price Recovery Fund Associates, Inc., a Maryland corporation, is a
wholly-owned subsidiary of the Manager organized in 1988 for the purpose of
serving as the General Partner of T. Rowe Price Recovery Fund, L.P., a
Delaware limited partnership which invests in financially distressed
companies.
T. Rowe Price (Canada), Inc. is a Maryland corporation organized in 1988 as a
wholly-owned subsidiary of the Manager. This entity is registered as an
investment adviser under the Investment Advisers Act of 1940, and may apply
for registration as an investment manager under the Securities Act of Ontario
in order to be eligible to provide certain services to the RPF
International Bond Fund, a trust (whose shares are sold in Canada) which
Price-Fleming serves as investment adviser.
Since 1983, the Manager has organized several distinct Maryland limited
partnerships, which are informally called the Pratt Street Ventures
partnerships, for the purpose of acquiring interests in growth-oriented
businesses.
PAGE 127
Tower Venture, Inc., a wholly-owned subsidiary of the Manager, is a Maryland
corporation organized in 1989 for the purpose of serving as a general partner
of 100 East Pratt St., L.P., a Maryland limited partnership whose limited
partners also include the Manager. The purpose of the partnership is to
further develop and improve the property at 100 East Pratt Street, the site of
the Manager's headquarters, through the construction of additional office,
retail and parking space.
TRP Suburban, Inc. is a Maryland corporation organized in 1990 as a
wholly-owned subsidiary of the Manager. TRP Suburban has entered into
agreements with McDonogh School and CMANE-McDonogh-Rowe Limited Partnership to
construct an office building in Owings Mills, Maryland, which houses the
Manager's transfer agent, plan administrative services, retirement plan
services and operations support functions.
TRP Finance, Inc. and TRP Finance MRT, Inc., wholly-owned subsidiaries of the
Manager, are Delaware corporations organized in 1990 to manage certain passive
corporate investments and other intangible assets. TRP Finance MRT, Inc. was
dissolved on October 4, 1993.
T. Rowe Price Strategic Partners Fund, L.P. is a Delaware limited partnership
organized in 1990 for the purpose of investing in small public and private
companies seeking capital for expansion or undergoing a restructuring of
ownership. The general partner of the Fund is T. Rowe Price Strategic
Partners, L.P., a Delaware limited partnership whose general partner is T.
Rowe Price Strategic Partners Associates, Inc., ("Strategic Associates"), a
Maryland corporation which is a wholly-owned subsidiary of the Manager.
Strategic Associates also serves as the general partner of T. Rowe Price
Strategic Partners II, L.P., a Delaware limited partnership established in
1992, which in turn serves as general partner of T. Rowe price Strategic
Partners Fund II, L.P., a Delaware limited partnership organized in 1992.
Listed below are the directors of the Manager who have other substantial
businesses, professions, vocations, or employment aside from that of Director
of the Manager:
JAMES E. HALBKAT, JR., Director of the Manager. Mr. Halbkat is President of
U.S. Monitor Corporation, a provider of public response systems. Mr. Halbkat's
address is: P.O. Box 23109, Hilton Head Island, South Carolina 29925.
JOHN W. ROSENBLUM, Director of the Manager. Mr. Rosenblum is the Tayloe
Murphy Professor at the University of Virginia, and a director of: Chesapeake
Corporation, a manufacturer of paper products, Cadmus Communications Corp., a
provider of printing and communication services; Comdial Corporation, a
manufacturer of telephone systems for businesses; and Cone Mills Corporation,
a textiles producer. Mr. Rosenblum's address is: P.O. Box 6550,
Charlottesville, Virginia 22906.
ROBERT L. STRICKLAND, Director of the Manager. Mr. Strickland is Chairman of
Lowe's Companies, Inc., a retailer of specialty home supplies. Mr.
Strickland's address is 604 Two Piedmont Plaza Building, Winston-Salem, North
Carolina 27104.
PHILIP C. WALSH, Director of the Manager. Mr. Walsh is a Consultant to Cyprus
Amax Minerals Company, Englewood, Colorado, and a director of Piedmont Mining
Company, Inc., Charlotte, North Carolina. Mr. Walsh's address is: Blue Mill
Road, Morristown, New Jersey 07960.
PAGE 128
With the exception of Messrs. Halbkat, Rosenblum, Strickland, and Walsh, all
of the directors of the Manager are employees of the Manager.
George J. Collins, who is Chief Executive Officer, President, and a Managing
Director of the Manager, is a Director of Price-Fleming.
George A. Roche, who is Chief Financial Officer and a Managing Director of the
Manager, is a Vice President and a Director of Price-Fleming.
M. David Testa, who is a Managing Director of the Manager, is Chairman of the
Board of Price-Fleming.
<PAGE>
PAGE 129
Henry H. Hopkins, Charles P. Smith, and Peter Van Dyke, who are Managing
Directors of the Manager, are Vice Presidents of Price-Fleming.
Robert P. Campbell, Roger L. Fiery, III, Robert C. Howe, Veena A. Kutler,
George A. Murnaghan, William F. Wendler, II, and Edward A. Wiese, who are Vice
Presidents of the Manager, are Vice Presidents of Price-Fleming.
Alvin M. Younger, Jr., who is a Managing Director and the Secretary and
Treasurer of the Manager, is Secretary and Treasurer of Price-Fleming.
Nolan L. North, who is a Vice President and Assistant Treasurer of the
Manager, is Assistant Treasurer of Price-Fleming.
Leah P. Holmes, who is an Assistant Vice President of the Manager, is a Vice
President of Price-Fleming.
Barbara A. Van Horn, who is Assistant Secretary of the Manager, is Assistant
Secretary of Price-Fleming.
Certain directors and officers of the Manager are also officers and/or
directors of one or more of the Price Funds and/or one or more of the
affiliated entities listed herein.
See also "Management of Fund," in Registrant's Statement of Additional
Information.
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is Investment
Services. Investment Services acts as the principal underwriter for the other
thirty-six Price Funds. Investment Services, a wholly-owned subsidiary of the
Manager, is registered as a broker-dealer under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc.
Investment Services was formed for the limited purpose of distributing the
shares of the Price Funds and will not engage in the general securities
business. Since the Price Funds are sold on a no-load basis, Investment
Services does not receive any commission or other compensation for acting as
principal underwriter.
<PAGE>
PAGE 130
(b) The address of each of the directors and officers of Investment
Services listed below is 100 East Pratt Street, Baltimore, Maryland 21202.
Positions and
Name and Principal Positions and Offices Offices with
Business Address With Underwriter Registrant
__________________ _____________________ _____________
James Sellers Riepe President and Director Vice President and
Trustee
Henry Holt Hopkins Vice President and Vice
Director President
Mark E. Rayford Director None
Charles E. Vieth Vice President and None
Director
Patricia M. Archer Vice President None
Edward C. Bernard Vice President None
Joseph C. Bonasorte Vice President None
Meredith C. Callanan Vice President None
Laura H. Chasney Vice President None
Victoria C. Collins Vice President None
Christopher W. Dyer Vice President None
Forrest R. Foss Vice President None
Patricia O'Neil Goodyear Vice President None
James W. Graves Vice President None
Andrea G. Griffin Vice President None
Thomas Grizzard Vice President None
David J. Healy Vice President None
Joseph P. Healy Vice President None
Walter J. Helmlinger Vice President None
Eric G. Knauss Vice President None
Douglas G. Kremer Vice President None
Sharon Renae Krieger Vice President None
Keith Wayne Lewis Vice President None
David L. Lyons Vice President None
Sarah McCafferty Vice President None
Maurice Albert Minerbi Vice President None
Nancy M. Morris Vice President None
George A. Murnaghan Vice President None
Steven Ellis Norwitz Vice President None
Kathleen M. O'Brien Vice President None
Charles S. Peterson Vice President None
Pamela D. Preston Vice President None
Lucy Beth Robins Vice President None
John Richard Rockwell Vice President None
Monica R. Tucker Vice President None
William F. Wendler, II Vice President None
Terri L. Westren Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Alvin M. Younger, Jr. Secretary and Treasurer None
Mark S. Finn Controller None
Catherine L.
Berkenkemper Assistant Vice President None
Richard J. Barna Assistant Vice President None
Ronae M. Brock Assistant Vice President None
Brenda E. Buhler Assistant Vice President None
Patricia Sue Butcher Assistant Vice President None
John A. Galateria Assistant Vice President None
Janelyn A. Healey Assistant Vice President None
PAGE 131
Keith J. Langrehr Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Janice D. McCrory Assistant Vice President None
Sandra J. McHenry Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Kristin E. Seeberger Assistant Vice President None
Arthur J. Silber Assistant Vice President None
Linda C. Wright Assistant Vice President None
Nolan L. North Assistant Treasurer None
Barbara A. VanHorn Assistant Secretary None
(c) Not applicable. Investment Services will not receive any compensation
with respect to its activities as underwriter for the Price Funds since the
Price Funds are sold on a no-load basis.
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be maintained by T.
Rowe Price Personal Strategy Funds, Inc. under Section 31(a) of the
Investment Company Act of 1940 and the rules thereunder will be maintained
by T. Rowe Price Personal Strategy Funds, Inc. at its offices at 100 East
Pratt Street, Baltimore, Maryland 21202. Transfer, dividend disbursing,
and shareholder service activities are performed by T. Rowe Price Services,
Inc. at 100 Each Pratt Street, Baltimore, Maryland 21202. Custodian
activities for T. Rowe Price Personal Strategy Funds, Inc. are performed at
State Street Bank and Trust Company's Service Center (State Street South),
1776 Heritage Drive, Quincy, Massachusetts 02171.
Item 31. Management Services.
Registrant is not a party to any management-related service contract, other
than as set forth in the Prospectus.
Item 32. Undertakings.
a. The undersigned Registrant hereby undertakes to file an amendment to
the Registration Statement with certified financial statements showing
the initial capital received before accepting subscriptions from any
persons in excess of 25 if it raises its initial capital pursuant to
Section 14(a)(3) of the 1940 Act.
b. The Registrant will file, within four to six months from the effective
date of its registration statement, a post-effective amendment using
financial statements which need not be certified.
c. If requested to do so by the holders of at least 10% of all votes
entitled to be cast, the Corporation will call a meeting of
shareholders for the purpose of voting on the question of removal of a
director or directors and will assist in communications with other
shareholders to the extent required by Section 16(c).
d. Each series of the Registrant agrees to furnish, upon request and free
of charge, a copy of its latest Report to Shareholders to each person
to whom its prospectus is delivered.
<PAGE>
PAGE 132
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, this 17th day of May, 1994.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
/s/James S. Riepe
By: James S. Riepe
Vice President and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
Signature Title Date
_________ _____ _____
/s/James S. Riepe
James S. Riepe Vice President and Director May 17, 1994
/s/Carmen F. Deyesu
Carmen F. Deyesu Treasurer (Chief Financial May 17, 1994
Officer)
<PAGE>
PAGE 1
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
ARTICLES OF INCORPORATION
FIRST: THE UNDERSIGNED, Henry H. Hopkins, whose address is 100 East
Pratt Street, Baltimore, Maryland 21202, being at least eighteen years of age,
acting as incorporator, does hereby form a corporation under the General Laws
of the State of Maryland.
SECOND: (a) The name of the corporation (which is hereinafter called
the "Corporation") is:
T. Rowe Price Personal Strategy Funds, Inc.
(b) The Corporation acknowledges that it is adopting its corporate
name through permission of T. Rowe Price Associates, Inc., a Maryland
corporation (hereinafter referred to as "Price Associates"), and acknowledges
that Price Associates has the sole and exclusive right to use or license the
use of the name "T. Rowe Price" in commerce. The Corporation agrees that if
at any time and for any cause, the investment adviser or distributor of the
Corporation ceases to be Price Associates or an affiliate of Price Associates,
the Corporation shall at the written request of Price Associates take all
requisite action to amend its charter to eliminate the name "T. Rowe Price"
from the Corporation's corporate name and from the designations of its shares
of capital stock. The Corporation further acknowledges that Price Associates
reserves the right to grant the non-exclusive right to use the name "T. Rowe
Price" to any other corporation, including other investment companies, whether
now in existence or hereafter created.
THIRD: (a) The purposes for which the Corporation is formed and the
business and objects to be carried on and promoted by it are:
(1) To engage generally in the business of investing,
reinvesting, owning, holding or trading in securities, as defined in the
Investment Company Act of 1940, as from time to time amended
(hereinafter referred to as the "Investment Company Act"), as an
investment company classified under the Investment Company Act as a
management company.
(2) To engage in any one or more businesses or transactions, or
to acquire all or any portion of any entity engaged in any one or more
businesses or transactions, which the Board of Directors may from time
to time authorize or approve, whether or not related to the business
described elsewhere in this Article or to any other business at the time
or theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any
other clause of this or any other Article of the charter of the Corporation,
and each shall be regarded as independent; and they are intended to be and
shall be construed as powers as well as purposes and objects of the
Corporation and shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of Maryland.
<PAGE>
PAGE 2
FOURTH: The present address of the principal office of the Corporation
in this State is:
100 East Pratt Street
Baltimore, Maryland 21202
FIFTH: The name and address of the resident agent of the Corporation in
this State are:
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
Said resident agent is a citizen of the State of Maryland, and actually
resides therein.
SIXTH: (a) The total number of shares of stock of all classes and
series which the Corporation initially has authority to issue is One Billion
(1,000,000,000) shares of capital stock (par value $.0001 per share),
amounting in aggregate par value to One Hundred Thousand Dollars ($100,000).
All of such shares are initially classified as "Common Stock" of the "T. Rowe
Price Personal Strategy Balanced Fund, T. Rowe Price Personal Strategy Growth
Fund, and T. Rowe Price Personal Strategy Income Fund" series. Each such
series shall consist, until further changed, of the lesser of (x)
1,000,000,000 shares or (y) the number of shares that could be issued by
issuing all of the shares of any series currently or hereafter classified less
the total number of shares then issued and outstanding in all of such series.
The Board of Directors may classify and reclassify any unissued shares of
capital stock (whether or not such shares have been previously classified or
reclassified) by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares of stock.
(b) The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of Common
Stock classified as the "T. Rowe Price Personal Strategy Balanced Fund, T.
Rowe Price Personal Strategy Growth Fund, and T. Rowe Price Personal Strategy
Income Fund" series and any additional series of Common Stock of the
Corporation (unless provided otherwise by the Board of Directors with respect
to any such additional series at the time it is established and designated):
(1) Assets Belonging to Series. All consideration received by
the Corporation from the issue or sale of shares of a particular series,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any investment or
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account
of the Corporation. Such consideration, assets, income, earnings,
profits and proceeds, together with any General Items allocated to that
series as provided in the following sentence, are herein referred to
collectively as "assets belonging to" that series. In the event that
there are any assets, income, earnings, profits or proceeds which are
not readily identifiable as belonging to any particular series
(collectively, "General Items"), such General Items shall be allocated
by or under the supervision of the Board of Directors to and among any
one or more of the series established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
PAGE 3
discretion, deems fair and equitable; and any General Items so allocated
to a particular series shall belong to that series. Each such
allocation by the Board of Directors shall be conclusive and binding for
all purposes.
(2) Liabilities of Series. The assets belonging to each
particular series shall be charged with the liabilities of the
Corporation in respect of that series and all expenses, costs, charges
and reserves attributable to that series, and any general liabilities,
expenses, costs, charges or reserves of the Corporation which are not
readily identifiable as pertaining to any particular series, shall be
allocated and charged by or under the supervision of the Board of
Directors to and among any one or more of the series established and
designated from time to time in such manner and on such basis as the
Board of Directors, in its sole discretion, deems fair and equitable.
The liabilities, expenses, costs, charges and reserves allocated and so
charged to a series are herein referred to collectively as "liabilities
of" that series. Each allocation of liabilities, expenses, costs,
charges and reserves by or under the supervision of the Board of
Directors shall be conclusive and binding for all purposes.
(3) Dividends and Distributions. Dividends and capital gains
distributions on shares of a particular series may be paid with such
frequency, in such form and in such amount as the Board of Directors may
determine by resolution adopted from time to time, or pursuant to a
standing resolution or resolutions adopted only once or with such
frequency as the Board of Directors may determine, after providing for
actual and accrued liabilities of that series. All dividends on shares
of a particular series shall be paid only out of the income belonging to
that series and all capital gains distributions on shares of a
particular series shall be paid only out of the capital gains belonging
to that series. All dividends and distributions on shares of a
particular series shall be distributed pro rata to the holders of that
series in proportion to the number of shares of that series held by such
holders at the date and time of record established for the payment of
such dividends or distributions, except that in connection with any
dividend or distribution program or procedure, the Board of Directors
may determine that no dividend or distribution shall be payable on
shares as to which the shareholder's purchase order and/or payment have
not been received by the time or times established by the Board of
Directors under such program or procedure.
Dividends and distributions may be paid in cash, property or
additional shares of the same or another series, or a combination
thereof, as determined by the Board of Directors or pursuant to any
program that the Board of Directors may have in effect at the time for
the election by shareholders of the form in which dividends or
distributions are to be paid. Any such dividend or distribution paid in
shares shall be paid at the current net asset value thereof.
(4) Voting. On each matter submitted to a vote of the
shareholders, each holder of shares shall be entitled to one vote for
each share standing in his name on the books of the Corporation,
irrespective of the series thereof, and all shares of all series shall
vote as a single class ("Single Class Voting"); provided, however, that
(i) as to any matter with respect to which a separate vote of any series
is required by the Investment Company Act or by the Maryland General
Corporation Law, such requirement as to a separate vote by that series
shall apply in lieu of Single Class Voting; (ii) in the event that the
separate vote requirement referred to in (i) above applies with respect
to one or more series, then, subject to (iii) below, the shares of all
PAGE 4
other series shall vote as a single class; and (iii) as to any matter
which does not affect the interest of a particular series, including
liquidation of another series as described in subsection (7) below, only
the holders of shares of the one or more affected series shall be
entitled to vote.
(5) Redemption by Shareholders. Each holder of shares of a
particular series shall have the right at such times as may be permitted
by the Corporation to require the Corporation to redeem all or any part
of his shares of that series, at a redemption price per share equal to
the net asset value per share of that series next determined after the
shares are properly tendered for redemption, less such redemption fee or
sales charge, if any, as may be established by the Board of Directors in
its sole discretion. Payment of the redemption price shall be in cash;
provided, however, that if the Board of Directors determines, which
determination shall be conclusive, that conditions exist which make
payment wholly in cash unwise or undesirable, the Corporation may, to
the extent and in the manner permitted by the Investment Company Act,
make payment wholly or partly in securities or other assets belonging to
the series of which the shares being redeemed are a part, at the value
of such securities or assets used in such determination of net asset
value.
Notwithstanding the foregoing, the Corporation may postpone payment
of the redemption price and may suspend the right of the holders of
shares of any series to require the Corporation to redeem shares of that
series during any period or at any time when and to the extent
permissible under the Investment Company Act.
(6) Redemption by Corporation. The Board of Directors may cause
the Corporation to redeem at net asset value the shares of any series
from a holder (i) if the Board of Directors of the Corporation
determines in its sole discretion that failure to so redeem such shares
may have materially adverse consequences to the holders of shares of the
Corporation or any series, or (ii) upon such other conditions with
respect to the maintenance of shareholder accounts of a minimum amount
as may from time to time be established by the Board of Directors in its
sole discretion.
(7) Liquidation. In the event of the liquidation of a
particular series, the shareholders of the series that is being
liquidated shall be entitled to receive, as a class, when and as
declared by the Board of Directors, the excess of the assets belonging
to that series over the liabilities of that series. The holders of
shares of any particular series shall not be entitled thereby to any
distribution upon liquidation of any other series. The assets so
distributable to the shareholders of any particular series shall be
distributed among such shareholders in proportion to the number of
shares of that series held by them and recorded on the books of the
Corporation. The liquidation of any particular series in which there
are shares then outstanding may be authorized by vote of a majority of
the Board of Directors then in office, subject to the approval of a
majority of the outstanding voting securities of that series, as defined
in the Investment Company Act, and without the vote of the holders of
shares of any other series. The liquidation of a particular series may
be accomplished, in whole or in part, by the transfer of assets of such
series to another series or by the exchange of shares of such series for
the shares of another series.
PAGE 5
(8) Net Asset Value Per Share. The net asset value per share of
any series shall be the quotient obtained by dividing the value of the
net assets of that series (being the value of the assets belonging to
that series less the liabilities of that series) by the total number of
shares of that series outstanding, all as determined by or under the
direction of the Board of Directors in accordance with generally
accepted accounting principles and the Investment Company Act. Subject
to the applicable provisions of the Investment Company Act, the Board of
Directors, in its sole discretion, may prescribe and shall set forth in
the By-Laws of the Corporation or in a duly adopted resolution of the
Board of Directors such bases and times for determining the value of the
assets belonging to, and the net asset value per share of outstanding
shares of, each series, or the net income attributable to such shares,
as the Board of Directors deems necessary or desirable. The Board of
Directors shall have full discretion, to the extent not inconsistent
with the Maryland General Corporation Law and the Investment Company
Act, to determine which items shall be treated as income and which items
as capital and whether any item of expense shall be charged to income or
capital. Each such determination and allocation shall be conclusive and
binding for all purposes.
The Board of Directors may determine to maintain the net asset
value per share of any series at a designated constant dollar amount and
in connection therewith may adopt procedures not inconsistent with the
Investment Company Act for the continuing declaration of income
attributable to that series as dividends and for the handling of any
losses attributable to that series. Such procedures may provide that in
the event of any loss, each shareholder shall be deemed to have
contributed to the capital of the Corporation attributable to that
series his pro rata portion of the total number of shares required to be
canceled in order to permit the net asset value per share of that series
to be maintained, after reflecting such loss, at the designated constant
dollar amount. Each shareholder of the Corporation shall be deemed to
have agreed, by his investment in any series with respect to which the
Board of Directors shall have adopted any such procedure, to make the
contribution referred to in the preceding sentence in the event of any
such loss.
(9) Equality. All shares of each particular series shall
represent an equal proportionate interest in the assets belonging to
that series (subject to the liabilities of that series), and each share
of any particular series shall be equal to each other share of that
series. The Board of Directors may from time to time divide or combine
the shares of any particular series into a greater or lesser number of
shares of that series without thereby changing the proportionate
interest in the assets belonging to that series or in any way affecting
the rights of holders of shares of any other series.
(10) Conversion or Exchange Rights. Subject to compliance with
the requirements of the Investment Company Act, the Board of Directors
shall have the authority to provide that holders of shares of any series
shall have the right to convert or exchange said shares into shares of
one or more other classes or series of shares in accordance with such
requirements and procedures as may be established by the Board of
Directors.
(c) The shares of Common Stock of the Corporation, or of any series of
Common Stock of the Corporation to the extent such Common Stock is divided
into series, may be further subdivided into classes (which may, for
convenience of reference be referred to a term other than "class"). Unless
otherwise provided in the Articles Supplementary establishing such classes,
all such shares, or all shares of a series of Common Stock in a series, shall
PAGE 6
have identical voting, dividend, and liquidation rights. Shares of the
classes shall also be subject to such front-end sales loads, contingent
deferred sales charges, expenses (including, without limitation, distribution
expenses under a Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other arrangement, however
designated), conversion rights, and class voting rights as shall be consistent
with Maryland law, the Investment Company Act of 1940, and the rules and
regulations of the National Association of Securities Dealers and shall be
contained in Articles Supplementary establishing such classes.
(d) For the purposes hereof and of any articles supplementary to the
charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series
shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as
the case may be.
(e) Unless otherwise prohibited by law, so long as the Corporation is
registered as an open-end management investment company under the Investment
Company Act, the Board of Directors shall have the power and authority,
without the approval of the holders of any outstanding shares, to increase or
decrease the number of shares of capital stock or the number of shares of
capital stock of any class or series that the Corporation has authority to
issue.
(f) The Corporation may issue and sell fractions of shares of capital
stock having pro rata all the rights of full shares, including, without
limitation, the right to vote and to receive dividends, and wherever the words
"share" or "shares" are used in the charter or By-Laws of the Corporation,
they shall be deemed to include fractions of shares, where the context does
not clearly indicate that only full shares are intended.
(g) The Corporation shall not be obligated to issue certificates
representing shares of any class or series of capital stock. At the time of
issue or transfer of shares without certificates, the Corporation shall
provide the shareholder with such information as may be required under the
Maryland General Corporation Law.
SEVENTH: The number of directors of the Corporation shall initially be
one (1), which number may be increased or decreased pursuant to the By-Laws of
PAGE 7
the Corporation, but shall never be less than the minimum number permitted by
the General Laws of the State of Maryland now or hereafter in force. James S.
Riepe shall serve as director until the first annual meeting and until his
successor is elected and qualified.
EIGHTH: (a) The following provisions are hereby adopted for the
purpose of defining, limiting, and regulating the powers of the Corporation
and of the directors and shareholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its stock of any class or
series, whether now or hereafter authorized, or securities convertible
into shares of its stock of any class or series, whether now or
hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the shareholders.
(2) No holder of any stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board
of Directors may determine to offer for subscription may, as the Board
of Directors in its sole discretion shall determine, be offered to the
holders of any class, series or type of stock or other securities at the
time outstanding to the exclusion of the holders of any or all other
classes, series or types of stock or other securities at the time
outstanding.
(3) The Board of Directors of the Corporation shall, consistent
with applicable law, have power in its sole discretion to determine from
time to time in accordance with sound accounting practice or other
reasonable valuation methods what constitutes annual or other net
profits, earnings, surplus, or net assets in excess of capital; to
determine that retained earnings or surplus shall remain in the hands of
the Corporation; to set apart out of any funds of the Corporation such
reserve or reserves in such amount or amounts and for such proper
purpose or purposes as it shall determine and to abolish any such
reserve or any part thereof; to distribute and pay distributions or
dividends in stock, cash or other securities or property, out of surplus
or any other funds or amounts legally available therefor, at such times
and to the shareholders of record on such dates as it may, from time to
time, determine; and to determine whether and to what extent and at what
times and places and under what conditions and regulations the books,
accounts and documents of the Corporation, or any of them, shall be open
to the inspection of shareholders, except as otherwise provided by
statute or by the By-Laws, and, except as so provided, no shareholder
shall have any right to inspect any book, account or document of the
Corporation unless authorized so to do by resolution of the Board of
Directors.
<PAGE>
PAGE 8
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of
the total number of shares of all classes and series of capital stock or
of the total number of shares of any class or series of capital stock
entitled to vote as a separate class, such action shall be valid and
effective if authorized by the affirmative vote of the holders of a
majority of the total number of shares of all classes and series
outstanding and entitled to vote thereon, or of the class or series
entitled to vote thereon as a separate class, as the case may be, except
as otherwise provided in the charter of the Corporation.
(5) The Corporation shall indemnify (i) its past and present
directors and officers, whether serving the Corporation or at its
request any other entity, to the full extent required or permitted by
the General Laws of the State of Maryland now or hereafter in force,
including the advance of expenses under the procedures and to the full
extent permitted by law, and (ii) other employees and agents to such
extent as shall be authorized by the Board of Directors or the By-Laws
and as permitted by law. Nothing contained herein shall be construed to
protect any director or officer of the Corporation against any liability
to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of his office. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is expressly
empowered to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment
of the charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the right of indemnification provided hereunder
with respect to acts or omissions occurring prior to such amendment or
repeal.
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment Company
Act, no director or officer of the Corporation shall be personally
liable to the Corporation or its shareholders for money damages;
provided, however, that nothing herein shall be construed to protect any
director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of his
office. No amendment of the charter of the Corporation or repeal of any
of its provisions shall limit or eliminate the limitation of liability
provided to directors and officers hereunder with respect to any act or
omission occurring prior to such amendment or repeal.
(7) The Corporation reserves the right from time to time to make
any amendments of its charter which may now or hereafter be authorized
by law, including any amendments changing the terms or contract rights,
as expressly set forth in its charter, of any of its outstanding stock
by classification, reclassification or otherwise.
(b) The enumeration and definition of particular powers of the Board
of Directors included in the foregoing shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the charter of the Corporation, or construed as
or deemed by inference or otherwise in any manner to exclude or limit any
powers conferred upon the Board of Directors under the General Laws of the
State of Maryland now or hereafter in force.
PAGE 9
NINTH: The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act, on this 12th day of May, 1994.
Witness:
/s/Jean Marie Jungblut /s/Henry H. Hopkins
_____________________________ ______________________________________
Henry H. Hopkins
jmj\Agmts\Articles.PSF
<PAGE>
PAGE 10
_____________________________________
ARTICLES OF INCORPORATION
OF
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
________________________________________
<PAGE>
PAGE 1
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
(A Maryland Corporation)
BY-LAWS
ARTICLE I
NAME OF CORPORATION,
LOCATION OF OFFICES AND SEAL
Section 1.01.Name: The name of the Corporation is T. ROWE PRICE
PERSONAL STRATEGY FUNDS, INC.
Section 1.02.Principal Office: The principal office of the Corporation
in the State of Maryland shall be located in the City of Baltimore. The
Corporation may, in addition, establish and maintain such other offices and
places of business, within or outside the State of Maryland, as the Board of
Directors may from time to time determine. [MGCL, Sections 2-103(4), 2-
108(a)(1)]
Section 1.03.Seal: The corporate seal of the Corporation shall be
circular in form, and shall bear the name of the Corporation, the year of its
incorporation, and the words "Corporate Seal, Maryland." The form of the seal
shall be subject to alteration by the Board of Directors and the seal may be
used by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. In lieu of affixing the corporate seal to any document
it shall be sufficient to meet the requirements of any law, rule, or
regulation relating to a corporate seal to affix the word "(Seal)" adjacent to
the signature of the authorized officer of the Corporation. Any officer or
Director of the Corporation shall have authority to affix the corporate seal
of the Corporation to any document requiring the same. [MGCL, Sections 1-
304(b), 2-103(3)]
ARTICLE II
SHAREHOLDERS
Section 2.01.Annual Meetings: The Corporation shall not be required to
hold an annual meeting of its shareholders in any year unless the Investment
Company Act of 1940 requires an election of directors by shareholders. In the
event that the Corporation shall be so required to hold an annual meeting,
such meeting shall be held at a date and time set by the Board of Directors,
which date shall be no later than 120 days after the occurrence of the event
PAGE 2
requiring the meeting. Any shareholders' meeting held in accordance with the
preceding sentence shall for all purposes constitute the annual meeting of
shareholders for the fiscal year of the corporation in which the meeting is
held. At any such meeting, the shareholders shall elect directors to hold the
offices of any directors who have held office for more than one year or who
have been elected by the Board of Directors to fill vacancies which result
from any cause. Except as the Articles of Incorporation or statute provides
otherwise, Directors may transact any business within the powers of the
Corporation as may properly come before the meeting. Any business of the
Corporation may be transacted at the annual meeting without being specially
designated in the notice, except such business as is specifically required by
statute to be stated in the notice. [MGCL, Section 2-501]
Section 2.02.Special Meetings: Special meetings of the shareholders may
be called at any time by the Chairman of the Board, the President, any Vice
President, or by the Board of Directors. Special meetings of the shareholders
shall be called by the Secretary on the written request of shareholders
entitled to cast at least ten (10) percent of all the votes entitled to be
cast at such meeting, provided that (a) such request shall state the purpose
or purposes of the meeting and the matters proposed to be acted on, and (b)
the shareholders requesting the meeting shall have paid to the Corporation the
reasonably estimated cost of preparing and mailing the notice thereof, which
the Secretary shall determine and specify to such shareholders. Unless
requested by shareholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted upon at
any special meeting of the shareholders held during the preceding twelve (12)
months. [MGCL, Section 2-502]
Section 2.03.Place of Meetings: All shareholders' meetings shall be
held at such place within the United States as may be fixed from time to time
by the Board of Directors. [MGCL, Section 2-503]
Section 2.04.Notice of Meetings: Not less than ten (10) days, nor more
than ninety (90) days before each shareholders' meeting, the Secretary or an
Assistant Secretary of the Corporation shall give to each shareholder entitled
to vote at the meeting, and each other shareholder entitled to notice of the
meeting, written notice stating (1) the time and place of the meeting, and (2)
the purpose or purposes of the meeting if the meeting is a special meeting or
if notice of the purpose is required by statute to be given. Such notice
shall be personally delivered to the shareholder, or left at his residence or
usual place of business, or mailed to him at his address as it appears on the
records of the Corporation. Notice shall be deemed to be given when deposited
in the United States mail addressed to the shareholders as aforesaid. No
notice of a shareholders' meeting need be given to any shareholder who shall
sign a written waiver of such notice, whether before or after the meeting,
which is filed with the records of shareholders' meetings, or to any
shareholder who is present at the meeting in person or by proxy. Notice of
adjournment of a shareholders' meeting to another time or place need not be
given if such time and place are announced at the meeting, unless the
adjournment is for more than one hundred twenty (120) days after the original
record date. Irregularities in the notice of any meeting to, or the
nonreceipt of any such notice by, any of the stockholders shall not invalidate
any action otherwise properly taken by or at any such meeting. [MGCL,
Sections 2-504, 2-511(d)]
Section 2.05.Voting - In General: Except as otherwise specifically
provided in the Articles of Incorporation or these By-Laws, or as required by
provisions of the Investment Company Act with respect to the vote of a series,
if any, of the Corporation, at every shareholders' meeting, each shareholder
shall be entitled to one vote for each share of stock of the Corporation
PAGE 3
validly issued and outstanding and held by such shareholder, except that no
shares held by the Corporation shall be entitled to a vote. Fractional shares
shall be entitled to fractional votes. Except as otherwise specifically
provided in the Articles of Incorporation, or these By-Laws, or as required by
provisions of the Investment Company Act, a majority of all the votes cast at
a meeting at which a quorum is present is sufficient to approve any matter
which properly comes before the meeting. The vote upon any question shall be
by ballot whenever requested by any person entitled to vote, but, unless such
a request is made, voting may be conducted in any way approved by the meeting.
[MGCL, Sections 2-214(a)(i), 2-506(a)(2), 2-507(a), 2-509(b)]
At any meeting at which there is an election of Directors, the Chairman
of the meeting may, and upon the request of the holders of ten (10) percent of
the stock entitled to vote at such election shall, appoint two inspectors of
election who shall first subscribe an oath or affirmation to execute
faithfully the duties of inspectors at such election with strict impartiality
and according to the best of their ability, and shall, after the election,
make a certificate of the result of the vote taken. No candidate for the
office of Director shall be appointed as an inspector.
Section 2.06.Shareholders Entitled to Vote: If, pursuant to Section
8.05 hereof, a record date has been fixed for the determination of
shareholders entitled to notice of or to vote at any shareholders' meeting,
each shareholder of the Corporation shall be entitled to vote in person or by
proxy, each share or fraction of a share of stock outstanding in his name on
the books of the Corporation on such record date. If no record date has been
fixed for the determination of shareholders, the record date for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day on which notice of
the meeting is mailed or the 30th day before the meeting, whichever is the
closer date to the meeting, or, if notice is waived by all shareholders, at
the close of business on the tenth (10th) day next preceding the date of the
meeting. [MGCL, Sections 2-507, 2-511]
Section 2.07.Voting - Proxies: The right to vote by proxy shall exist
only if the instrument authorizing such proxy to act shall have been executed
in writing by the shareholder himself, or by his attorney thereunto duly
authorized in writing. No proxy shall be valid more than eleven (11) months
after its date unless it provides for a longer period. All proxies shall be
delivered to the Secretary of the Corporation or to the person acting as
Secretary of the meeting before being voted, who shall decide all questions
concerning qualification of voters, the validity of proxies, and the
acceptance or rejection of votes. If inspectors of election have been
appointed by the chairman of the meeting, such inspectors shall decide all
such questions. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a shareholder shall be deemed valid unless challenged at or prior to
its exercise. [MGCL, Section 2-507(b)]
Section 2.08.Quorum: The presence at any shareholders' meeting, in
person or by proxy, of shareholders entitled to cast a majority of the votes
entitled to be cast at the meeting shall constitute a quorum. [MGCL, Section
2-506(a)]
Section 2.09.Absence of Quorum: In the absence of a quorum, the holders
of a majority of shares entitled to vote at the meeting and present thereat in
person or by proxy, or, if no shareholder entitled to vote is present in
person or by proxy, any officer present who is entitled to preside at or act
as Secretary of such meeting, may adjourn the meeting sine die or from time to
time. Any business that might have been transacted at the meeting originally
PAGE 4
called may be transacted at any such adjourned meeting at which a quorum is
present.
Section 2.10.Stock Ledger and List of Shareholders: It shall be the
duty of the Secretary or Assistant Secretary of the Corporation to cause an
original or duplicate stock ledger to be maintained at the office of the
Corporation's transfer agent, containing the names and addresses of all
shareholders and the number of shares of each class held by each shareholder.
Such stock ledger may be in written form, or any other form capable of being
converted into written form within a reasonable time for visual inspection.
Any one or more persons, who together are and for at least six (6) months have
been shareholders of record of at least five percent (5%) of the outstanding
capital stock of the Corporation, may submit (unless the Corporation at the
time of the request maintains a duplicate stock ledger at its principal
office) a written request to any officer of the Corporation or its resident
agent in Maryland for a list of the shareholders of the Corporation. Within
twenty (20) days after such a request, there shall be prepared and filed at
the Corporation's principal office a list, verified under oath by an officer
of the Corporation or by its stock transfer agent or registrar, which sets
forth the name and address of each shareholder and the number of shares of
each class which the shareholder holds. [MGCL, Sections 2-209, 2-513]
Section 2.11.Informal Action By Shareholders: Any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the following are filed with the records of shareholders' meetings:
(a) A unanimous written consent which sets forth the action and
is signed by each shareholder entitled to vote on the
matter; and
(b) A written waiver of any right to dissent signed by each
shareholder entitled to notice of the meeting, but not
entitled to vote at it.
[MGCL, Section 2-505]
ARTICLE III
BOARD OF DIRECTORS
Section 3.01.Number and Term of Office: The Board of Directors shall
consist of one (1) Director, which number may be increased by a resolution of
a majority of the entire Board of Directors, provided that the number of
Directors shall not be more than fifteen (15) nor less than the lesser of (i)
three (3) or (ii) the number of shareholders of the Corporation. Each
Director (whenever elected) shall hold office until the next annual meeting of
shareholders and until his successor is elected and qualifies or until his
earlier death, resignation, or removal. [MGCL, Sections 2-402, 2-404, 2-405]
Section 3.02.Qualification of Directors: No member of the Board of
Directors need be a shareholder of the Corporation, but at least one member of
the Board of Directors shall be a person who is not an interested person (as
such term is defined in the Investment Company Act) of the investment adviser
of the Corporation, nor an officer or employee of the Corporation. [MGCL,
Section 2-403; Investment Company Act, Section 10(d)]
Section 3.03.Election of Directors: Until the first annual meeting of
shareholders, or until successors are duly elected and qualified, the Board of
Directors shall consist of the persons named as such in the Articles of
Incorporation. Thereafter, except as otherwise provided in Sections 3.04 and
PAGE 5
3.05 hereof, at each annual meeting, the shareholders shall elect Directors to
hold office until the next annual meeting and/or until their successors are
elected and qualify. In the event that Directors are not elected at an annual
shareholders' meeting, then Directors may be elected at a special
shareholders' meeting. Directors shall be elected by vote of the holders of a
plurality of the shares present in person or by proxy and entitled to vote.
[MGCL, Section 2-404]
Section 3.04.Removal of Directors: At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any Director or Directors from office, either with or without
cause, and may elect a successor or successors to fill any resulting vacancies
for the unexpired terms of removed Directors. [MGCL, Sections 2-406, 2-407]
Section 3.05.Vacancies and Newly Created Directorships: If any
vacancies occur in the Board of Directors by reason of resignation, removal or
otherwise, or if the authorized number of Directors is increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the shareholders) may be filled by a majority of the
Directors then in office, whether or not sufficient to constitute a quorum,
provided that, immediately after filling such vacancy, at least two-thirds of
the Directors then holding office shall have been elected to such office by
the shareholders of the Corporation. In the event that at any time, other
than the time preceding the first meeting of shareholders, less than a
majority of the Directors of the Corporation holding office at that time were
so elected by the shareholders, a meeting of the shareholders shall be held
promptly and in any event within sixty (60) days for the purpose of electing
Directors to fill any existing vacancies in the Board of Directors unless the
Securities and Exchange Commission shall by order extend such period. Except
as provided in Section 3.04 hereof, a Director elected by the Board of
Directors to fill a vacancy shall be elected to hold office until the next
annual meeting of shareholders or until his successor is elected and
qualifies. [MGCL, Section 2-407; Investment Company Act, Section 16(a)]
Section 3.06.General Powers:
(a) The property, business, and affairs of the Corporation
shall be managed under the direction of the Board of Directors which may
exercise all the powers of the Corporation except such as are by law, by the
Articles of Incorporation, or by these By-Laws conferred upon or reserved to
the shareholders of the Corporation. [MGCL, Section 2-401]
(b) All acts done by any meeting of the Directors or by any
person acting as a Director, so long as his successor shall not have been duly
elected or appointed, shall, notwithstanding that it be afterwards discovered
that there was some defect in the election of the Directors or such person
acting as a Director or that they or any of them were disqualified, be as
valid as if the Directors or such person, as the case may be, had been duly
elected and were or was qualified to be Directors or a Director of the
Corporation.
Section 3.07.Power to Issue and Sell Stock: The Board of Directors may
from time to time authorize by resolution the issuance and sale of any of the
Corporation's authorized shares to such persons as the Board of Directors
shall deem advisable and such resolution shall set the minimum price or value
of consideration for the stock or a formula for its determination, and shall
include a fair description of any consideration other than money and a
statement of the actual value of such consideration as determined by the Board
of Directors or a statement that the Board of Directors has determined that
the actual value is or will be not less than a certain sum. [MGCL, Section 2-
203]
PAGE 6
Section 3.08.Power to Declare Dividends:
(a) The Board of Directors, from time to time as it may deem
advisable, may declare and the Corporation pay dividends, in cash, property,
or shares of the Corporation available for dividends out of any source
available for dividends, to the shareholders according to their respective
rights and interests. [MGCL, Section 2-309]
(b) The Board of Directors shall cause to be accompanied by a
written statement any dividend payment wholly or partly from any source other
than the Corporation's accumulated undistributed net income (determined in
accordance with good accounting practice and the rules and regulations of the
Securities and Exchange Commission then in effect) not including profits or
losses realized upon the sale of securities or other properties. Such
statement shall adequately disclose the source or sources of such payment and
the basis of calculation and shall be otherwise in such form as the Securities
and Exchange Commission may prescribe. [Investment Company Act, Section 19;
SEC Rule 19a-1; MGCL, Section 2-309(c)]
(c) Notwithstanding the above provisions of this Section 3.08,
the Board of Directors may at any time declare and distribute pro rata among
the shareholders a stock dividend out of the Corporation's authorized but
unissued shares of stock, including any shares previously purchased by the
Corporation, provided that such dividend shall not be distributed in shares of
any class with respect to any shares of a different class. The shares so
distributed shall be issued at the par value thereof, and there shall be
transferred to stated capital, at the time such dividend is paid, an amount of
surplus equal to the aggregate par value of the shares issued as a dividend
and there may be transferred from earned surplus to capital surplus such
additional amount as the Board of Directors may determine. [MGCL, Section 2-
309]
Section 3.09.Annual and Regular Meetings: The annual meeting of the
Board of Directors for choosing officers and transacting other proper business
shall be held after the annual shareholders' meeting at such time and place as
may be specified in the notice of such meeting of the Board of Directors or,
in the absence of such annual shareholders' meeting, at such time and place as
the Board of Directors may provide. The Board of Directors from time to time
may provide by resolution for the holding of regular meetings and fix their
time and place (within or outside the State of Maryland). [MGCL, Section 2-
409(a)]
Section 3.10.Special Meetings: Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, the
President (or, in the absence or disability of the President, by any Vice
President), the Treasurer, or two or more Directors, at the time and place
(within or outside the State of Maryland) specified in the respective notices
or waivers of notice of such meetings.
Section 3.11.Notice: Notice of annual, regular, and special meetings
shall be in writing, stating the time and place, and shall be mailed to each
Director at his residence or regular place of business or caused to be
delivered to him personally or to be transmitted to him by telegraph, cable,
or wireless at least two (2) days before the day on which the meeting is to be
held. Except as otherwise required by the By-Laws or the Investment Company
Act, such notice need not include a statement of the business to be transacted
at, or the purpose of, the meeting. [MGCL, Section 2-409(b)]
Section 3.12.Waiver of Notice: No notice of any meeting need be given
to any Director who is present at the meeting or to any Director who signs a
waiver of the notice of the meeting (which waiver shall be filed with the
PAGE 7
records of the meeting), whether before or after the meeting. [MGCL, Section
2-409(c)]
Section 3.13.Quorum and Voting: At all meetings of the Board of
Directors the presence of one-third of the total number of Directors
authorized, but not less than two (2) Directors if there are at least two
directors, shall constitute a quorum. In the absence of a quorum, a majority
of the Directors present may adjourn the meeting, from time to time, until a
quorum shall be present. The action of a majority of the Directors present at
a meeting at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion is required for such
action by law, by the Articles of Incorporation or by these By-Laws. [MGCL,
Section 2-408]
Section 3.14.Conference Telephone: Members of the Board of Directors or
of any committee designated by the Board, may participate in a meeting of the
Board or of such committee by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time, and participation by such means shall constitute
presence in person at such meeting. [MGCL, Section 2-409(d)]
Section 3.15.Compensation: Each Director may receive such remuneration
for his services as shall be fixed from time to time by resolution of the
Board of Directors.
Section 3.16.Action Without a Meeting: Except as otherwise provided
under the Investment Company Act, any action required or permitted to be taken
at any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if a unanimous written consent which sets forth the action
is signed by all members of the Board or of such committee and such written
consent is filed with the minutes of proceedings of the Board or committee.
[MGCL, Section 2-408(c)]
Section 3.17.Director Emeritus: Upon the retirement of a Director of
the Corporation, the Board of Directors may designate such retired Director as
a Director Emeritus. The position of Director Emeritus shall be honorary only
and shall not confer upon such Director Emeritus any responsibility, or voting
authority, whatsoever with respect to the Corporation. A Director Emeritus
may, but shall not be required to, attend the meetings of the Board of
Directors and receive materials normally provided Directors relating to the
Corporation. The Board of Directors may establish such compensation as it may
deem appropriate under the circumstances to be paid by the Corporation to a
Director Emeritus.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
Section 4.01.How Constituted: By resolution adopted by the Board of
Directors, the Board may appoint from among its members one or more
committees, including an Executive Committee, each consisting of at least two
(2) Directors. Each member of a committee shall hold office during the
pleasure of the Board. [MGCL, Section 2-411]
Section 4.02.Powers of the Executive Committee: Unless otherwise
provided by resolution of the Board of Directors, the Executive Committee, in
the intervals between meetings of the Board of Directors, shall have and may
PAGE 8
exercise all of the powers of the Board of Directors to manage the business
and affairs of the Corporation except the power to:
(a) Declare dividends or distributions on stock;
(b) Issue stock other than as provided in Section 2-411(b) of
Corporations and Associations Article of the Annotated Code
of Maryland;
(c) Recommend to the shareholders any action which requires
shareholder approval;
(d) Amend the By-Laws; or
(e) Approve any merger or share exchange which does not require
shareholder approval.
[MGCL, Section 2-411(a)]
Section 4.03.Other Committees of the Board of Directors: To the extent
provided by resolution of the Board, other committees shall have and may
exercise any of the powers that may lawfully be granted to the Executive
Committee. [MGCL, Section 2-411(a)]
Section 4.04.Proceedings, Quorum, and Manner of Acting: In the absence
of appropriate resolution of the Board of Directors, each committee may adopt
such rules and regulations governing its proceedings, quorum and manner of
acting as it shall deem proper and desirable, provided that the quorum shall
not be less than two (2) Directors. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member. [MGCL, Section 2-411(c)]
Section 4.05.Other Committees: The Board of Directors may appoint other
committees, each consisting of one or more persons who need not be Directors.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Board of Directors, but shall not
exercise any power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
ARTICLE V
OFFICERS
Section 5.01.General: The officers of the Corporation shall be a
President, one or more Vice Presidents (one or more of whom may be designated
Executive Vice President), a Secretary, and a Treasurer, and may include one
or more Assistant Vice Presidents, one or more Assistant Secretaries, one or
more Assistant Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.11 hereof. The Board of Directors
may elect, but shall not be required to elect, a Chairman of the Board.
[MGCL, Section 2-412]
Section 5.02.Election, Term of Office and Qualifications: The officers
of the Corporation (except those appointed pursuant to Section 5.11 hereof)
shall be elected by the Board of Directors at its first meeting and thereafter
at each annual meeting of the Board. If any officer or officers are not
elected at any such meeting, such officer or officers may be elected at any
subsequent regular or special meeting of the Board. Except as provided in
PAGE 9
Sections 5.03, 5.04, and 5.05 hereof, each officer elected by the Board of
Directors shall hold office until the next annual meeting of the Board of
Directors and until his successor shall have been chosen and qualified. Any
person may hold two or more offices of the Corporation, except that neither
the Chairman of the Board, nor the President, may hold the office of Vice
President, but no person shall execute, acknowledge, or verify any instrument
in more than one capacity if such instrument is required by law, the Articles
of Incorporation, or these By-Laws to be executed, acknowledged, or verified
by two or more officers. The Chairman of the Board shall be selected from
among the Directors of the Corporation and may hold such office only so long
as he continues to be a Director. No other officer need be a Director.
[MGCL, Sections 2-412, 2-413 and 2-415]
Section 5.03.Resignation: Any officer may resign his office at any time
by delivering a written resignation to the Board of Directors, the President,
the Secretary, or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 5.04.Removal: Any officer may be removed from office by the
Board of Directors whenever in the judgment of the Board of Directors the best
interests of the Corporation will be served thereby. [MGCL, Section 2-413(c)]
Section 5.05Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Board of Directors at any meeting or, in
the case of any office created pursuant to Section 5.11 hereof, by any officer
upon whom such power shall have been conferred by the Board of Directors.
[MGCL, Section 2-413(d)]
Section 5.06.Chairman of the Board: Unless otherwise provided by
resolution of the Board of Directors, the Chairman of the Board, if there be
such an officer, shall be the chief executive and operating officer of the
Corporation, shall preside at all shareholders' meetings, and at all meetings
of the Board of Directors. He shall be ex officio a member of all standing
committees of the Board of Directors. Subject to the supervision of the Board
of Directors, he shall have general charge of the business, affairs, property,
and operation of the Corporation and its officers, employees, and agents. He
may sign (unless the President or a Vice President shall have signed)
certificates representing stock of the Corporation authorized for issuance by
the Board of Directors and shall have such other powers and perform such other
duties as may be assigned to him from time to time by the Board of Directors.
Section 5.07.President: Unless otherwise provided by resolution of the
Board of Directors, the President shall, at the request of or in the absence
or disability of the Chairman of the Board, or if no Chairman of the Board has
been chosen, he shall preside at all shareholders' meetings and at all
meetings of the Board of Directors and shall in general exercise the powers
and perform the duties of the Chairman of the Board. He may sign (unless the
Chairman or a Vice President shall have signed) certificates representing
stock of the Corporation authorized for issuance by the Board of Directors.
Except as the Board of Directors may otherwise order, he may sign in the name
and on behalf of the Corporation all deeds, bonds, contracts, or agreements.
He shall exercise such other powers and perform such other duties as from time
to time may be assigned to him by the Board of Directors.
Section 5.08.Vice President: The Board of Directors shall, from time to
time, designate and elect one or more Vice Presidents (one or more of whom may
be designated Executive Vice President) who shall have such powers and perform
such duties as from time to time may be assigned to them by the Board of
Directors or the President. At the request or in the absence or disability of
the President, the Vice President (or, if there are two or more Vice
PAGE 10
Presidents, the Vice President in order of seniority of tenure in such office
or in such other order as the Board of Directors may determine) may perform
all the duties of the President and, when so acting, shall have all the powers
of and be subject to all the restrictions upon the President. Any Vice
President may sign (unless the Chairman, the President, or another Vice
President shall have signed) certificates representing stock of the
Corporation authorized for issuance by the Board of Directors.
Section 5.09.Treasurer and Assistant Treasurers: The Treasurer shall be
the principal financial and accounting officer of the Corporation and shall
have general charge of the finances and books of account of the Corporation.
Except as otherwise provided by the Board of Directors, he shall have general
supervision of the funds and property of the Corporation and of the
performance by the custodian of its duties with respect thereto. He may
countersign (unless an Assistant Treasurer or Secretary or Assistant Secretary
shall have countersigned) certificates representing stock of the Corporation
authorized for issuance by the Board of Directors. He shall render to the
Board of Directors, whenever directed by the Board, an account of the
financial condition of the Corporation and of all his transactions as
Treasurer; and as soon as possible after the close of each fiscal year he
shall make and submit to the Board of Directors a like report for such fiscal
year. He shall cause to be prepared annually a full and correct statement of
the affairs of the Corporation, including a balance sheet and a financial
statement of operations for the preceding fiscal year, which shall be
submitted at the annual meeting of shareholders and filed within twenty (20)
days thereafter at the principal office of the Corporation. He shall perform
all the acts incidental to the office of the Treasurer, subject to the control
of the Board of Directors. Any Assistant Treasurer may perform such duties of
the Treasurer as the Treasurer or the Board of Directors may assign, and, in
the absence of the Treasurer, he may perform all the duties of the Treasurer.
Section 5.10.Secretary and Assistant Secretaries: The Secretary shall
attend to the giving and serving of all notices of the Corporation and shall
record all proceedings of the meetings of the shareholders and Directors in
one or more books to be kept for that purpose. He shall keep in safe custody
the seal of the Corporation and shall have charge of the records of the
Corporation, including the stock books and such other books and papers as the
Board of Directors may direct and such books, reports, certificates and other
documents required by law to be kept, all of which shall at all reasonable
times be open to inspection by any Director. He shall countersign (unless the
Treasurer, an Assistant Treasurer or an Assistant Secretary shall have
countersigned) certificates representing stock of the Corporation authorized
for issuance by the Board of Directors. He shall perform such other duties as
appertain to his office or as may be required by the Board of Directors. Any
Assistant Secretary may perform such duties of the Secretary as the Secretary
or the Board of Directors may assign, and, in the absence of the Secretary, he
may perform all the duties of the Secretary.
Section 5.11.Subordinate Officers: The Board of Directors from time to
time may appoint such other officers or agents as it may deem advisable, each
of whom shall have such title, hold office for such period, have such
authority and perform such duties as the Board of Directors may determine.
The Board of Directors from time to time may delegate to one or more officers
or agents the power to appoint any such subordinate officers or agents and to
prescribe their respective rights, terms of office, authorities, and duties.
Any officer or agent appointed in accordance with the provisions of this
Section 5.11 may be removed, either with or without cause, by any officer upon
whom such power of removal shall have been conferred by the Board of
Directors. [MGCL, Section 2-412(b)]
Section 5.12.Remuneration: The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by resolution of
PAGE 11
the Board of Directors, except that the Board of Directors may by resolution
delegate to any person or group of persons the power to fix the salaries or
other compensation of any subordinate officers or agents appointed in
accordance with the provisions of Section 5.11 hereof.
Section 5.13.Surety Bond: The Board of Directors may require any
officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act and the rules and
regulations of the Securities and Exchange Commission promulgated thereunder)
to the Corporation in such sum and with such surety or sureties as the Board
of Directors may determine, conditioned upon the faithful performance of his
or her duties to the Corporation, including responsibility for negligence and
for the accounting for any of the Corporation's property, funds or securities
that may come into his or her hands.
ARTICLE VI
CUSTODY OF SECURITIES AND CASH
Section 6.01.Employment of a Custodian: The Corporation shall place and
at all times maintain in the custody of a Custodian (including any sub-
custodian for the Custodian) all funds, securities, and similar investments
owned by the Corporation. The Custodian shall be a bank having an aggregate
capital, surplus, and undivided profits of not less than $10,000,000. Subject
to such rules, regulations, and orders as the Securities and Exchange
Commission may adopt as necessary or appropriate for the protection of
investors, the Corporation's Custodian may deposit all or a part of the
securities owned by the Corporation in a sub-custodian or sub-custodians
situated within or without the United States. The Custodian shall be
appointed and its remuneration fixed by the Board of Directors. [Investment
Company Act, Section 17(f)]
Section 6.02.Central Certificate Service: Subject to such rules,
regulations, and orders as the Securities and Exchange Commission may adopt as
necessary or appropriate for the protection of investors, the Corporation's
Custodian may deposit all or any part of the securities owned by the
Corporation in a system for the central handling of securities established by
a national securities exchange or national securities association registered
with the Commission under the Securities Exchange Act of 1934, or such other
person as may be permitted by the Commission, pursuant to which system all
securities of any particular class or series of any issuer deposited within
the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities. [Investment
Company Act, Section 17(f)]
Section 6.03.Cash Assets: The cash proceeds from the sale of securities
and similar investments and other cash assets of the Corporation shall be kept
in the custody of a bank or banks appointed pursuant to Section 6.01 hereof,
or in accordance with such rules and regulations or orders as the Securities
and Exchange Commission may from time to time prescribe for the protection of
investors, except that the Corporation may maintain a checking account or
accounts in a bank or banks, each having an aggregate capital, surplus, and
undivided profits of not less than $10,000,000, provided that the balance of
such account or the aggregate balances of such accounts shall at no time
exceed the amount of the fidelity bond, maintained pursuant to the
requirements of the Investment Company Act and rules and regulations
thereunder, covering the officers or employees authorized to draw on such
account or accounts. [Investment Company Act, Section 17(f)]
PAGE 12
Section 6.04.Free Cash Accounts: The Corporation may, upon resolution
of its Board of Directors, maintain a petty cash account free of the foregoing
requirements of this Article VI in an amount not to exceed $500, provided that
such account is operated under the imprest system and is maintained subject to
adequate controls approved by the Board of Directors over disbursements and
reimbursements including, but not limited to, fidelity bond coverage for
persons having access to such funds. [Investment Company Act, Rule 17f-3]
Section 6.05.Action Upon Termination of Custodian Agreement: Upon
resignation of a custodian of the Corporation or inability of a custodian to
continue to serve, the Board of Directors shall promptly appoint a successor
custodian, but in the event that no successor custodian can be found who has
the required qualifications and is willing to serve, the Board of Directors
shall call as promptly as possible a special meeting of the shareholders to
determine whether the Corporation shall function without a custodian or shall
be liquidated. If so directed by vote of the holders of a majority of the
outstanding shares of stock of the Corporation, the custodian shall deliver
and pay over all property of the Corporation held by it as specified in such
vote.
Section 6.06.Other Arrangements: The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VII
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
Section 7.01.Execution of Instruments: All deeds, documents, transfers,
contracts, agreements, requisitions or orders, promissory notes, assignments,
endorsements, checks and drafts for the payment of money by the Corporation,
and other instruments requiring execution by the Corporation shall be signed
by the Chairman, the President, a Vice President, or the Treasurer, or as the
Board of Directors may otherwise, from time to time, authorize. Any such
authorization may be general or confined to specific instances.
Section 7.02.Voting of Securities: Unless otherwise ordered by the
Board of Directors, the Chairman, the President, or any Vice President shall
have full power and authority on behalf of the Corporation to attend and to
act and to vote, or in the name of the Corporation to execute proxies to vote,
at any meeting of shareholders of any company in which the Corporation may
hold stock. At any such meeting such officer shall possess and may exercise
(in person or by proxy) any and all rights, powers, and privileges incident to
the ownership of such stock. The Board of Directors may by resolution from
time to time confer like powers upon any other person or persons. [MGCL,
Section 2-509]
ARTICLE VIII
CAPITAL STOCK
Section 8.01.Ownership of Shares:
(a) Certificates certifying the ownership of shares will not be
issued for shares purchased or otherwise acquired. The ownership of shares,
PAGE 13
full or fractional, shall be recorded on the books of the Corporation or its
agent. The record books of the Corporation as kept by the Corporation or its
agent, as the case may be, shall be conclusive as to the number of shares held
from time to time by each such shareholder.
Section 8.02.Transfer of Capital Stock:
(a) Shares of stock of the Corporation shall be transferable
only upon the books of the Corporation kept for such purpose.
(b) The Corporation shall be entitled to treat the holder of
record of any share of stock as the absolute owner thereof for all purposes,
and accordingly shall not be bound to recognize any legal, equitable, or other
claim or interest in such share on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise
expressly provided by the statutes of the State of Maryland.
Section 8.03.Transfer Agents and Registrars: The Board of Directors
may, from time to time, appoint or remove transfer agents and registrars of
transfers of shares of stock of the Corporation, and it may appoint the same
person as both transfer agent and registrar.
Section 8.04.Transfer Regulations: The shares of stock of the
Corporation may be freely transferred, and the Board of Directors may, from
time to time, adopt lawful rules and regulations with reference to the method
of transfer of the shares of stock of the Corporation.
Section 8.05.Fixing of Record Date: The Board of Directors may fix in
advance a date as a record date for the determination of the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or to receive payment of any dividend or other distribution
or allotment of any rights, or to exercise any rights in respect of any
change, conversion, or exchange of stock, or for any other proper purpose,
provided that such record date shall be a date not more than sixty (60) days
nor, in the case of a meeting of shareholders, less than ten (10) days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. In such case, only such shareholders as shall
be shareholders of record on the record date so fixed shall be entitled to
such notice of, and to vote at, such meeting or adjournment, or to give such
consent, or to receive payment of such dividend or other distribution, or to
receive such allotment of rights, or to exercise such rights, or to take other
action, as the case may be, notwithstanding any transfer of any shares on the
books of the Corporation after any such record date. A meeting of
shareholders convened on the date for which it was called may be adjourned
from time to time without notice to a date not more than one hundred twenty
(120) days after the original record date. [MGCL, Section 2-511]
ARTICLE IX
FISCAL YEAR, ACCOUNTANT
Section 9.01.Fiscal Year: The fiscal year of the Corporation shall be
the twelve (12) calendar months beginning on the 1st day of June in each year
and ending on the last day of the following May, or such other period of
twelve (12) calendar months as the Board of Directors may by resolution
prescribe.
Section 9.02.Accountant:
PAGE 14
(a) The Corporation shall employ an independent public
accountant or firm of independent public accountants for each series of the
Corporation to examine the accounts of the Corporation with respect to such
series and to sign and certify financial statements filed by the Corporation
with respect to such series. The certificates and reports of the
accountant(s) shall be addressed both to the Board of Directors and to the
shareholders. The Corporation may employ a different accountant with respect
to each series.
(b) A majority of the members of the Board of Directors who are
not interested persons (as such term is defined in the Investment Company Act)
of the Corporation shall select the accountant for each series, by vote cast
in person, at any meeting held within such period of time as may be allowed
under the Investment Company Act. Such selection shall be submitted for
ratification or rejection at the next succeeding annual shareholders' meeting
for such series. If such meeting shall reject such selection, the accountant
for such series shall be selected by majority vote of the Corporation's
outstanding voting securities of such series, either at the meeting at which
the rejection occurred or at a subsequent meeting of shareholders for such
series called for the purpose.
(c) Any vacancy occurring between annual meetings, due to the
death or resignation of the accountant of a series, may be filled by the vote
of a majority of those members of the Board of Directors who are not
interested persons (as so defined) of the Corporation, cast in person at a
meeting called for the purpose of voting on such action.
(d) The employment of the accountant of a series shall be
conditioned upon the right of such series of the Corporation by vote of a
majority of the outstanding voting securities of such series at any meeting
called for the purpose to terminate such employment forthwith without any
penalty. [Investment Company Act, Section 32(a)]
ARTICLE X
INDEMNIFICATION AND INSURANCE
Section 10.01.Indemnification and Payment of Expenses in Advance: The
Corporation shall indemnify any individual ("Indemnitee") who is a present or
former director, officer, employee, or agent of the Corporation, or who is or
has been serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, who, by reason of his position was, is, or is threatened to
be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any
judgments, penalties, fines, settlements, and reasonable expenses (including
attorneys' fees) incurred by such Indemnitee in connection with any
Proceeding, to the fullest extent that such indemnification may be lawful
under Maryland law. The Corporation shall pay any reasonable expenses so
incurred by such Indemnitee in defending a Proceeding in advance of the final
disposition thereof to the fullest extent that such advance payment may be
lawful under Maryland law. Subject to any applicable limitations and
requirements set forth in the Corporation's Articles of Incorporation and in
these By-Laws, any payment of indemnification or advance of expenses shall be
made in accordance with the procedures set forth in Maryland law.
PAGE 15
Notwithstanding the foregoing, nothing herein shall protect or purport
to protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office
("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other
body before whom the Proceeding was brought that the
Indemnitee was not liable by reason of Disabling Conduct;
or
(b) in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the
Indemnitee was not liable by reason of Disabling Conduct,
which determination shall be made by:
(i) the vote of a majority of a quorum of directors who are
neither "interested persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to
the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking; or
(b) the Corporation shall be insured against losses arising by
reason of any lawful advances; or
(c) there is a determination, based on a review of readily
available facts, that there is reason to believe that the
Indemnitee will ultimately be found entitled to
indemnification, which determination shall be made by:
(i) a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
To the fullest extent permitted by applicable Maryland law and by Section
17(h) of the Investment Company Act, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and incurred
by him in or arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability. [MGCL, Section 2-
418(k)]
PAGE 16
Section 10.03.Amendment: No amendment, alteration or repeal of this
Article or the adoption, alteration or amendment of any other provision of the
Articles of Incorporation or By-Laws inconsistent with this Article shall
adversely affect any right or protection of any person under this Article with
respect to any act or failure to act which occurred prior to such amendment,
alteration, repeal or adoption.
ARTICLE XI
AMENDMENTS
Section 11.01.General: Except as provided in Section 11.02 hereof, all
By-Laws of the Corporation, whether adopted by the Board of Directors or the
shareholders, shall be subject to amendment, alteration, or repeal, and new
By-Laws may be made, by the affirmative vote of a majority of either:
(a) the holders of record of the outstanding shares of stock of the
Corporation entitled to vote, at any annual or special meeting the
notice or waiver of notice of which shall have specified or summarized
the proposed amendment, alteration, repeal, or new By-Law; or
(b) the Directors present at any regular or special meeting at
which a quorum is present if the notice or waiver of notice thereof or
material sent to the Directors in connection therewith on or prior to
the last date for the giving of such notice under these By-Laws shall
have specified or summarized the proposed amendment, alteration, repeal,
or new By-Law.
Section 11.02.By Shareholders Only:
(a) No amendment of any section of these By-Laws shall be made
except by the shareholders of the Corporation if the shareholders shall have
provided in the By-Laws that such section may not be amended, altered, or
repealed except by the shareholders.
(b) From and after the issue of any shares of the Capital Stock
of the Corporation, no amendment of this Article XI shall be made except by
the shareholders of the Corporation.
ARTICLE XII
MISCELLANEOUS
Section 12.01. Use of the Term "Annual Meeting:" The use of the term
"annual meeting" in these By-Laws shall not be construed as implying a
requirement that a shareholder meeting be held annually.
JMJ/Agmts/ByLaws.PSF
<PAGE>
PAGE 17
BY-LAWS
OF
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
<PAGE>
PAGE 18
TABLE OF CONTENTS
Page
ARTICLE I. NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL . . . . 1
1.01. Name. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02. Principal Office. . . . . . . . . . . . . . . . . . . . . 1
1.03. Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . 1
2.01. Annual Meetings . . . . . . . . . . . . . . . . . . . . . 1
2.02. Special Meetings. . . . . . . . . . . . . . . . . . . . . 2
2.03. Place of Meetings . . . . . . . . . . . . . . . . . . . . 2
2.04. Notice of Meetings. . . . . . . . . . . . . . . . . . . . 2
2.05. Voting - in General . . . . . . . . . . . . . . . . . . . 2
2.06. Shareholders Entitled to Vote . . . . . . . . . . . . . . 3
2.07. Voting - Proxies. . . . . . . . . . . . . . . . . . . . . 3
2.08. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.09. Absence of Quorum . . . . . . . . . . . . . . . . . . . . 3
2.10. Stock Ledger and List of Shareholders . . . . . . . . . . 4
2.11. Informal Action by Shareholders . . . . . . . . . . . . . 4
ARTICLE III. BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . 4
3.01. Number and Term of Office . . . . . . . . . . . . . . . . 4
3.02. Qualification of Directors. . . . . . . . . . . . . . . . 4
3.03. Election of Directors . . . . . . . . . . . . . . . . . . 5
3.04. Removal of Directors. . . . . . . . . . . . . . . . . . . 5
3.05. Vacancies and Newly Created Directorships . . . . . . . . 5
3.06. General Powers. . . . . . . . . . . . . . . . . . . . . . 5
3.07. Power to Issue and Sell Stock . . . . . . . . . . . . . . 6
3.08. Power to Declare Dividends. . . . . . . . . . . . . . . . 6
3.09. Annual and Regular Meetings . . . . . . . . . . . . . . . 6
3.10. Special Meetings. . . . . . . . . . . . . . . . . . . . . 6
3.11. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.12. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . 7
3.13. Quorum and Voting . . . . . . . . . . . . . . . . . . . . 7
3.14. Conference Telephone. . . . . . . . . . . . . . . . . . . 7
3.15. Compensation. . . . . . . . . . . . . . . . . . . . . . . 7
3.16. Action without a Meeting. . . . . . . . . . . . . . . . . 7
3.17. Director Emeritus . . . . . . . . . . . . . . . . . . . . 7
<PAGE>
PAGE 19
ARTICLE IV. EXECUTIVE COMMITTEE AND OTHER COMMITTEES. . . . . . . . . 8
4.01. How Constituted . . . . . . . . . . . . . . . . . . . . . 8
4.02. Powers of the Executive Committee . . . . . . . . . . . . 8
4.03. Other Committees of the Board of Directors. . . . . . . . 8
4.04. Proceedings, Quorum and Manner of Acting. . . . . . . . . 8
4.05. Other Committees. . . . . . . . . . . . . . . . . . . . . 8
ARTICLE V. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . 9
5.01. General . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.02. Election, Term of Office and Qualifications . . . . . . . 9
5.03. Resignation . . . . . . . . . . . . . . . . . . . . . . . 9
5.04. Removal . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.05. Vacancies and Newly Created Offices . . . . . . . . . . . 9
5.06. Chairman of the Board . . . . . . . . . . . . . . . . . . 9
5.07. President . . . . . . . . . . . . . . . . . . . . . . . .10
5.08. Vice President. . . . . . . . . . . . . . . . . . . . . . 10
5.09. Treasurer and Assistant Treasurers. . . . . . . . . . . . 10
5.10. Secretary and Assistant Secretaries . . . . . . . . . . . 11
5.11. Subordinate Officers. . . . . . . . . . . . . . . . . . . 11
5.12. Remuneration. . . . . . . . . . . . . . . . . . . . . . . 11
5.13. Surety Bond . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VI. CUSTODY OF SECURITIES AND CASH. . . . . . . . . . . . . . 11
6.01. Employment of a Custodian . . . . . . . . . . . . . . . . 11
6.02. Central Certificate Service . . . . . . . . . . . . . . . 12
6.03. Cash Assets . . . . . . . . . . . . . . . . . . . . . . . 12
6.04. Free Cash Accounts. . . . . . . . . . . . . . . . . . . . 12
6.05. Action Upon Termination of Custodian Agreement. . . . . . 12
6.06. Other Arrangements. . . . . . . . . . . . . . . . . . . . 12
ARTICLE VII. EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES. . . . . . 13
7.01. Execution of Instruments. . . . . . . . . . . . . . . . . 13
7.02. Voting of Securities. . . . . . . . . . . . . . . . . . . 13
<PAGE>
PAGE 20
ARTICLE VIII.
CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.01. Ownership of Shares . . . . . . . . . . . . . . . . . . . 13
8.02. Transfer of Capital Stock . . . . . . . . . . . . . . . . 13
8.03. Transfer Agents and Registrars. . . . . . . . . . . . . . 14
8.04. Transfer Regulations. . . . . . . . . . . . . . . . . . . 14
8.05. Fixing of Record Date . . . . . . . . . . . . . . . . . . 14
ARTICLE IX. FISCAL YEAR, ACCOUNTANT . . . . . . . . . . . . . . . . . 14
9.01. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . 14
9.02. Accountant. . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE X. INDEMNIFICATION AND INSURANCE . . . . . . . . . . . . . . 15
10.01. Indemnification and Payment of Expenses in Advance. . . . 15
10.02. Insurance of Officers, Directors, Employees and Agents. . 16
10.03. Amendment . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE XI. AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . 17
11.01. General . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.02. By Shareholders Only. . . . . . . . . . . . . . . . . . . 17
ARTICLE XII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 17
12.01 Use of the Term "Annual Meeting". . . . . . . . . . . . . 17
JMJ/Agmts/ByLaws.PSF
<PAGE>
PAGE 1
May 17, 1994
T. Rowe Price Personal Strategy Funds, Inc.
100 East Pratt Street
Baltimore, MD 21202
Dear Sirs:
In connection with the proposed registration of an
indefinite number of shares of Capital Stock of your Company, I have examined
certified copies of your Company's Articles of Incorporation dated May 12,
1994, and the By-Laws of your Company as presently in effect.
I am of the opinion that:
(i) your Company is a corporation duly organized and
existing under the laws of Maryland; and
(ii) each of such authorized shares of Capital Stock of your
Company, upon payment in full of the price fixed by the Board of Directors of
your Company, will be legally and validly issued and will be fully paid and
non-assessable.
I hereby consent to the use of this opinion as an exhibit to
the Company's Registration Statement on Form N-1A to be filed with the
Securities and Exchange Commission for the registration under the Securities
Act of 1933 of an indefinite number of shares of Capital Stock of your
Company.
Sincerely,
/s/Henry H. Hopkins
Henry H. Hopkins
<PAGE>
