PAGE 1
Prospectus for the T. Rowe Price Capital Opportunity Fund, Inc.,
dated May 1, 1996, should be inserted here.
- --------------------------------------------------------------------------------
T. Rowe Price
Capital Opportunity Fund
Prospectus
- --------------------------------------------------------------------------------
T. Rowe Price
Capital Opportunity Fund
May 1, 1996
Invest With Confidence
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.
An aggressively managed stock fund for investors seeking superior capital
appreciation through a flexible investment strategy.
To Open an Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields and Prices
Tele*Access [Registration Mark]
1-800-638-2587
1-410-625-7676
24 hours, 7 days
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
<PAGE>
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
PROSCOF 5/1/96
COF
================================================================================
Investment Goal
To provide superior capital appreciation by investing primarily in the
common stocks of small, medium, and large companies. As with any mutual fund,
there is no guarantee the fund will achieve its goal.
Strategy
To establish a portfolio of a relatively limited number of stocks,
primarily of U.S. companies believed by T. Rowe Price to offer the best
opportunities for capital appreciation. The fund will use a flexible approach to
stock selection, not limited by investment style, industry, or company's size.
Risk/Reward
Higher risk of loss is assumed in pursuit of superior capital appreciation.
Concentrating assets in a limited number of companies involves greater risk than
investing in a more broadly diversified portfolio, but holds the potential for
greater rewards. The fund's share price may decline, causing a loss.
Investor Profile
Individuals seeking significant capital appreciation, who can accept the
higher risk of loss of an aggressively managed portfolio of stocks. Appropriate
for both regular and tax-deferred accounts, such as IRAs.
<PAGE>
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 managed over $75 billion
for over three and a half million individual and institutional investor accounts
as of December 31, 1995.
================================================================================
Contents
- --------------------------------------------------------------------------------
1 About the Fund
- --------------------------------------------------------------------------------
Transaction and Fund Expenses
Financial Highlights
Fund, Market, and Risk
Characteristics
2 About Your Account
- --------------------------------------------------------------------------------
Pricing Shares and Receiving
Sale Proceeds
Distributions and Taxes
Transaction Procedures and
Special Requirements
3 More About the Fund
- --------------------------------------------------------------------------------
Organization and Management
Understanding Performance
Information
Investment Policies
and Practices
4 Investing With T. Rowe Price
- --------------------------------------------------------------------------------
Account Requirements and
Transaction Information
Opening a New Account
Purchasing Additional Shares
Exchanging and Redeeming
Shareholder Services
================================================================================
<PAGE>
This prospectus contains information you should know before investing.
Please keep it for future reference. A Statement of Additional Information about
the fund, dated May 1, 1996, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
================================================================================
1 About the Fund
Transaction and Fund Expenses
- ------------------------------
Like all T. Rowe Price funds,
this fund is 100% no load.
==============================
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
In Table 1 below, "Shareholder Transaction Expenses," shows that you pay no
sales charges. All the money you invest in the fund goes to work for you,
subject to the fees explained below. "Annual Fund Expenses" shows how much it
will cost to operate the fund for a year, based on 1995 fiscal year expenses.
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.
- ------------------------------
For the fiscal year ended
December 31, 1995, fees paid
by the fund included the
following: $132,000 to T. Rowe
Price Services, Inc. for
transfer and dividend
disbursing functions and
shareholder services; $0 to T.
Rowe Price Retirement Plan
Services, Inc. for
recordkeeping services for
certain retirement plans; and
$60,000 to T. Rowe Price for
accounting services.
==============================
<PAGE>
================================================================================
Annual Fund Expenses Percentage of Fiscal 1995
Shareholder Transaction Expenses (after reduction) Average Net Assets
================================================================================
Sales charge "load"
on purchases None Management fee 0.37% (a)
Sales charge "load"
on reinvested
dividends None Marketing fees (12b-1) None
Redemption fees None Total other (shareholder
servicing, custodial,
auditing, etc.) 0.98%
Exchange fees None
Total fund expenses 1.35% (a)
(a) In the interest of limiting the expenses of the fund during its initial
period of operations, T. Rowe Price agreed to waive fees and bear any expenses
through December 31, 1996, which would cause the fund's ratio of expenses to
average net assets to exceed 1.35%. Fees waived or expenses paid or assumed
under this agreement are subject to reimbursement to T. Rowe Price by the fund
whenever the fund's expense ratio is below 1.35%; however, no reimbursement will
be made after December 31, 1998, or if it would result in the expense ratio
exceeding 1.35%. Any amounts reimbursed will have the effect of increasing fees
otherwise paid by the fund. Without this expense limitation, it is estimated
that the fund's management fee, other expenses, and total expense ratio would
have been 0.78%, 0.98%, and 1.76%, respectively. Organizational expenses will be
charged to the fund over a period not to exceed 60 months.
NOTE: A $5 fee is charged for wire redemptions under $5,000, subject to
change without notice, and a $10 fee is charged for small accounts when
applicable (see "Small Account Fee" under "Transaction Procedures and Special
Requirements".)
- --------------------------------------------------------------------------------
TABLE 1
================================================================================
The main types of expenses, which all mutual funds may charge against fund
assets, are:
* A management fee: the percent of fund assets paid to the fund's
investment manager. The fund's fee comprises a group fee, 0.34% as of Decemeber
31, 1995, and an individual fund fee of 0.45%.
<PAGE>
* "Other" administrative expenses: primarily the servicing of shareholder
accounts, such as providing statements, reports, disbursing dividends, as well
as custodial services.
* 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 "Organization and
Management."
* Hypothetical example: Assume you invest $1,000, the fund returns 5%
annually, expense ratios remain as listed previously, and you close your account
at the end of the time periods shown. Your expenses would be:
- ------------------------------
The table at right is just an
example; actual expenses can
be higher or lower than those
shown.
==============================
================================================================================
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
$14 $43 $74 $162
- --------------------------------------------------------------------------------
TABLE 2
================================================================================
Financial Highlights
The following table provides information about the fund's financial
history. It is based on a single share outstanding throughout each fiscal year.
The table is part of the fund's financial statements which are included in the
fund's annual report and incorporated by reference into the Statement of
Additional Information. This document is available to shareholders upon request.
The financial statements in the annual report have been audited by Coopers &
Lybrand L.L.P., independent accountants, whose unqualified report covers the
periods shown.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Activities Distributions
--------------------------------------------------- ----------------------------------------
Net Asset Net Net Realized and Total from Net Net
Year Ended Value, Beginning Investment Unrealized Gain Investment Investment Realized Total
December 31 of Period Income on Investments Activities Income (Loss) Gain (Loss) Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 (a) $10.00 $0.02b $0.41 $0.43 -- -- --
1995 10.43 0.01b 4.83 4.84 $(0.01) $(1.13) $(1.14)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
End of Period
---------------------------------------------------------------------------------------------------------------------
Net Asset Total Return Ratio of Ratio of Net Portfolio
Year Ended Value, (Includes Reinvested Net Assets Expenses to Average Investment Income to Turnover
December 31 End of Period Dividends) ($ Thousands) Net Assets Average Net Assets Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 (a) $10.43 4.3% (b) $ 2,437 1.35% (bc) 2.71% (bc) 134.5% (c)
1995 14.13 46.5% (b) 61,923 1.35% (b) 0.08% (b) 136.9%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) From November 30,1994 (commencement of operations) to December 31, 1994.
(b) Excludes expenses in excess of a 1.35% voluntary expense limitation in effect through December 31, 1996.
(c) Annualized.
</FN>
====================================================================================================================================
</TABLE>
TABLE 3
================================================================================
<PAGE>
Fund, Market, and Risk Characteristics: What to Expect
- --------------------------------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
- ------------------------------
The fund should not represent
your complete investment
program, nor be used for
short-term trading purposes.
==============================
What is the fund's objective?
The fund's investment objective is to provide superior capital appreciation
over time by investing primarily in U.S. common stocks of small, medium, and
large companies. Income is not an objective and, therefore, is not a
consideration in the selection of securities.
What is the fund's investment program?
The fund's primary focus will be on the common stocks of U.S. companies
appearing to offer the best opportunities for capital appreciation at any given
time, based on the proprietary research of T. Rowe Price. The fund manager will
pursue a flexible investment strategy in the selection of stocks, not limited by
any particular investment style, industry, or company size. Therefore, this fund
has much broader latitude in its selection of securities than a typical equity
mutual fund. When attractive investments are identified, the fund manager
expects to establish relatively large positions, sometimes representing 5% or
more of total fund assets. From time to time, it would not be unusual for the
fund to emphasize the stocks of small and medium-sized companies.
In addition to U.S. common stocks, the fund may also purchase other types
of securities, for example, foreign securities, junk bonds, private placements,
and warrants, when considered consistent with the fund's investment objective.
The fund is limited with respect to the percentage of assets it can place in
such securities; please refer to "Investment Policies and Practices" for a
further discussion of these securities and the limitations imposed on the fund.
The fund may also engage in a variety of investment management practices, such
as buying and selling futures and options.
- ------------------------------
The fund's portfolio will tend
to be less diversified than
that of the average stock
fund.
==============================
<PAGE>
How are securities for the portfolio identified?
Drawing on its research, T. Rowe Price will generally seek to invest in
companies:
* Expected to achieve accelerating earnings growth, perhaps due to strong
demand for their products or services;
* Whose securities appear undervalued, based on various measures such as
price/earnings and price/book value ratios, etc.;
* Undergoing financial restructuring;
* Involved in takeover or arbitrage situations;
* Expected to benefit from evolving market cycles or changing economic
conditions; or
* Representing special situations, such as changes in management or
favorable regulatory developments, which are expected to lead to higher earnings
and share prices.
What distinguishes the fund from many other stock funds?
Many stock funds follow a particular investment approach or look for
opportunities in particular market sectors. For example, some take a "growth"
approach based on the premise that, when a company's earnings grow faster than
inflation and the economy in general, eventually the market should reward it
with a higher stock price. Others pursue a "value" approach, seeking to buy a
stock when its price is low in relation to what they believe to be its intrinsic
worth. Some limit their search to large- or small-cap stocks, or to stocks in a
particular sector such as natural resources, health care, or technology.
The fund will not be limited to any single approach. Rather, its flexible
strategy will allow it to pursue growth, value, or any other opportunities
across the universe of common stocks. This opportunistic approach may result in
an above-average level of trading activity, buying and selling securities more
frequently than other funds do.
Will the fund attempt to time swings in the market?
The fund will not make explicit calls on the future direction of the
general market. The fund generally intends to be fully invested. However, if the
fund manager is unable to find attractive situations offering the potential for
significant capital appreciation or for temporary defense purposes, the fund may
hold above-average levels of cash reserves.
<PAGE>
- ------------------------------
The fund's share price will
fluctuate; when you sell your
shares, you may lose money.
==============================
What are some of the fund's potential risks?
The fund's risks fall into several categories, including:
* Less diversification. The fund will concentrate on fewer issues (perhaps
30 to 50) than is typical of most mutual funds, and may establish relatively
large positions in them. Because of this approach, the fund is registered as a
nondiversified fund. Potential losses could be greater than for funds investing
in a broader variety of issues. See the fundamental policy under "Types of
Portfolio Securities" for further information.
* Flexible strategy. By having the flexibility to invest heavily in
particular securities or industries, the fund may underperform the market when
these sectors are declining faster than the general stock market. Also, there is
no guarantee the fund's flexible approach will succeed.
* Small stocks. At times, a substantial portion of the portfolio may be in
securities of small companies. The very nature of investing in small companies
involves greater risk than is customarily associated with larger established
companies. Small companies often have limited product lines, markets, or
financial resources, and they may be dependent upon a small group of
inexperienced managers. The securities of small companies may be subject to more
abrupt or erratic market declines than securities of larger companies or the
market averages in general.
- ------------------------------
Equity investors should have a
long-term investment horizon
and be willing to wait out
bear markets.
==============================
What are some of the fund's potential rewards?
The fund offers the possibility of returns exceeding those of the S&P 500
through concentration in a relatively limited number of stocks. An opportunistic
approach to stock selection, without limitations on the types of issues that can
be bought, may provide superior returns over time.
<PAGE>
What are some potential risks and rewards of investing in the stock market?
Common stocks in general offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Economic growth has been punctuated by periodic
declines. Share prices of even the best managed, most profitable corporations
are subject to market risk, which means their stock prices can decline. In
addition, swings in investor psychology or significant trading by large
institutional investors can result in price fluctuations.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance level for risk. If you can accept the greater risk of investing
in an aggressively managed, non-diversified fund in an effort to achieve
superior capital appreciation, the fund may be an appropriate part of your
overall investment strategy.
Is there other information I need to review before making a decision?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (common and preferred
stocks, convertible securities and warrants, foreign securities, fixed income
securities, high-yield/high-risk investing, hybrid instruments, investment
funds, and private placements); and Types of Management Practices (cash
position, borrowing money and transferring assets, futures and options, managing
foreign currency risk, lending of portfolio securities, and portfolio turnover.)
- --------------------------------------------------------------------------------
2 About Your Account
- --------------------------------------------------------------------------------
Pricing Shares and Receiving Sale Proceeds
- ------------------------------
The various ways you can buy,
sell, and exchange shares are
explained at the end of this
prospectus and on the New
Account Form. These procedures
may differ for institutional
and employer-sponsored
retirement accounts.
==============================
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
<PAGE>
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the
fund is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued 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 by 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 and shares are priced and the time
until which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
- ------------------------------
When filling out the New
Account Form, you may wish to
give yourself the widest range
of options for receiving
proceeds from a sale.
==============================
How you can receive the proceeds from a 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 ACH transfer
should be credited the second day after the sale. ACH (Automated Clearing House)
is an automated method of initiating payments from and receiving payments in
your financial institution account. ACH is a payment system supported by over
20,000 banks, savings banks, and credit unions, which electronically exchanges
the transactions primarily through the Federal Reserve Banks. Proceeds sent by
bank wire should be credited to your account the next business day.
Exception:
- ------------------------------
If for some reason we cannot
accept your request to sell
shares, we will contact you.
==============================
<PAGE>
* 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
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding; that
is, you receive income dividends and capital gain distributions on a rising
number of shares.
- ------------------------------
All net investment income and
realized capital gains are
distributed to shareholders. 8
==============================
Distributions 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, the 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
* The fund declares and pays dividends (if any) annually.
* All or part of the fund's dividends will be eligible for the 70%
deduction for dividends received by corporations.
Capital gains
* A capital gain or loss is the difference between the purchase and sale
price of a security.
* 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. If a second distribution is necessary,
it is usually declared and paid during the first quarter of the following year.
<PAGE>
- ------------------------------
You will be sent timely
information for your tax
filing needs.
==============================
Tax Information
You need to be aware of the possible tax consequences when:
* You sell fund shares, including an exchange from one fund to another.
* The fund makes a distribution to your account.
Taxes on fund redemptions. When you sell shares in any fund, you may
realize a gain or loss. An exchange from one fund to another is still a sale for
tax purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will also
be reported to the IRS. For accounts opened new or by exchange in 1983 or later,
we will provide you with the gain or loss of the shares you sold during the
year, based on the "average cost" method. This 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 (except for systematic purchases and
redemptions) you make and a year-end statement detailing all your transactions
in each fund account during the year.
- ------------------------------
Distributions are taxable
whether reinvested in
additional shares or received
in cash.
==============================
Taxes on fund distributions. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until you withdraw
money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distribution made to you. This information will also
be reported to the IRS. All distributions made by the fund 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. You will be sent 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.
<PAGE>
Short-term capital gain distributions are taxable as ordinary income and
long-term gain distributions 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. If you realize a loss on
the sale or exchange of fund shares held six months or less, your short-term
loss recognized is reclassified to long-term to the extent of any long-term
capital gain distribution received.
Gains and losses from the sale of foreign currencies and the foreign
currency gain or loss resulting from the sale of a foreign debt security can
increase or decrease the fund's ordinary income dividend. Net foreign currency
losses may result in the fund's dividend being classified as a return of
capital.
If the fund pays nonrefundable taxes to foreign governments during the
year, the taxes will reduce the fund's dividends, but will still be included in
your taxable income. However, you may be able to claim an offsetting credit or
deduction on your tax return for your portion of foreign taxes paid by the fund.
Tax effect of buying shares before a capital gain or dividend distribution.
If you buy shares shortly before 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 also wish to find out the fund's record date before
investing. Of course, the fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation. When these
amounts are eventually distributed, they are taxable.
- --------------------------------------------------------------------------------
Transaction Procedures and Special Requirements
- --------------------------------------------------------------------------------
Purchase Conditions
- ------------------------------
Following these procedures
helps assure timely and
accurate transactions.
==============================
Nonpayment. If your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be canceled. You will be
responsible for any 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.
<PAGE>
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 process your redemption but will generally
delay sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following receipt
unless the check or ACH transfer has not cleared. (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's, certified,
or treasurer's checks; or automatic purchases through your paycheck.)
Telephone, Tele*Access [Registration Mark], and PC*Access [Registration
Mark] transactions. These exchange and redemption services 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 and is not liable for acting on these instructions. If
these procedures are not followed, it is the opinion of certain regulatory
agencies that the fund may be liable for any losses that may result from acting
on the instructions given. A confirmation is sent promptly after the telephone
transaction. All conversations are recorded.
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.
- ------------------------------
T. Rowe Price may bar
excessive traders from
purchasing shares.
==============================
Excessive Trading
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts 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.
<PAGE>
For example, you are in fund A. You can move substantial assets from fund 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 to the fund 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, we have the right to close your account
after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer agent,
will automatically be deducted from nonretirement accounts with balances falling
below a minimum level. The valuation of accounts and the deduction are expected
to take place during the last five business days of September. The fee will be
deducted from accounts with balances below $2,000, except for UGMA/UTMA
accounts, for which the limit is $500. The fee will be waived for any investor
whose aggregate T. Rowe Price mutual fund investments total $25,000 or more.
Accounts employing automatic investing (e.g., payroll deduction, automatic
purchase from a bank account, etc.) are also exempt from the charge. The fee
will not apply to IRAs and other retirement plan accounts. (A separate custodial
fee may apply to IRAs and other retirement plan accounts.)
- ------------------------------
A signature guarantee is
designed to protect you and
the T. Rowe Price funds from
fraud by verifying your
signature.
==============================
<PAGE>
Signature Guarantees
You may need to have your signature guaranteed in certain situations, such
as:
* Written requests 1) to redeem over $50,000, or 2) to wire redemption
proceeds.
* Remitting redemption proceeds to any person, address, or bank account not
on record.
* Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name/ownership) from yours.
* 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 Fund
================================================================================
Organization and Management
- --------------------------------------------------------------------------------
- ------------------------------
Shareholders benefit from T.
Rowe Price's 59 years of
investment management
experience.
==============================
How is the fund organized?
The fund was incorporated in Maryland in 1994, and is a "nondiversified,
open-end investment company," or mutual fund. Mutual funds pool money received
from shareholders and invest it to try and achieve specific objectives.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in
a fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
<PAGE>
Each share and fractional share entitles the shareholder to:
* Receive a proportional interest in the fund's income and capital gain
distributions.
* 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.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and do not intend to do
so except 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 or trustee. If a meeting is held and
you cannot attend, you can vote by proxy. 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.
- ------------------------------
All decisions regarding the
purchase and sale of fund
investments are made by T.
Rowe Price--specifically by
the fund's portfolio managers.
==============================
Who runs the fund?
General Oversight. The fund is governed by a Board of Directors that meets
regularly to review the fund's investments, performance, expenses, and other
business affairs. The Board elects the fund's officers. The policy of the fund
is that the majority of Board members will be independent of T. Rowe Price.
Portfolio Management. The fund has an Investment Advisory Committee
composed of the following members: John F. Wakeman, Chairman, Brian W. H.
Berghuis, John H. Laporte, Larry J. Puglia, and Brian D. Stansky. The 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. Mr.
Wakeman has been chairman of the fund's committee since 1994. Mr. Wakeman joined
T. Rowe Price in 1989 and has been managing investments since 1992.
Marketing. T. Rowe Price Investment Services, Inc., a wholly owned
subsidiary of T. Rowe Price, distributes (sells) shares of these and all other
T. Rowe Price funds.
<PAGE>
Shareholder Services. T. Rowe Price Services, Inc., another wholly owned
subsidiary, acts as the fund's 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 under "Transaction and Fund Expenses"), which reflects a fund's
particular investment management costs, and a "group fee." The group fee, which
is designed to reflect the benefits of the shared resources of the T. Rowe Price
investment management complex, is calculated daily based on the combined net
assets of all T. Rowe Price funds (except Equity Index and the Spectrum Funds
and any institutional or private label mutual funds.) The group 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 0.370% Next $1 billion 0.330% Next $10 billion
0.450% Next $1 billion 0.360% Next $2 billion 0.320% Next $10 billion
0.420% Next $1 billion 0.350% Next $2 billion 0.310% Next $16 billion
0.390% Next $1 billion 0.340% Next $5 billion 0.305% Thereafter
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the Price funds described previously.
Based on combined Price funds' assets of approximately $48.6 billion at December
31, 1995, the group fee was 0.34%.
Understanding Performance Information
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive from
us, in our newsletter, The Price Report, in Insights articles, in T. Rowe Price
advertisements, and in the media.
<PAGE>
- ------------------------------
Total return is the most
widely used performance
measure. Detailed performance
information is included in the
fund's annual and semiannual
shareholder reports, and in
the quarterly Performance
Update, which are all
available without charge.
==============================
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the period
were reinvested in additional shares. Including reinvested 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 a 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 Policies and Practices
This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The fund's investment
program is subject to further restrictions and risks described in the Statement
of Additional Information.
<PAGE>
Shareholder approval is required to substantively change the 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. The fund adheres to applicable
investment restrictions and policies at the time it makes an investment. A later
change in circumstances will not require the sale of an investment if it was
proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth herein. For instance, this fund
is not permitted to invest more than 10% of total assets in hybrid instruments.
While these restrictions provide a useful level of detail about the fund's
investment program, investors should not view them as an accurate gauge of the
potential risk of such investments. For example, in a given period, a 5%
investment in hybrid instruments could have significantly more than a 5% impact
on the fund's share price. The net effect of a particular investment depends on
its volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the
contribution of various investments are discussed in the shareholder reports
sent to you.
- ------------------------------
Fund managers have
considerable leeway in
choosing investment strategies
and selecting securities they
believe will help the fund
achieve its objective.
==============================
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any
type of security or instrument (including certain potentially high-risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
<PAGE>
Fundamental policy: The fund is registered as a nondiversified mutual fund.
This means that the fund may invest a greater portion of its assets in, and own
a greater amount of the voting securities of, a single company than a
diversified fund which may subject the fund to greater risk with respect to its
portfolio securities. However, because the fund intends to qualify as a
"regulated investment company" under the Internal Revenue Code, it must invest
so that, at the end of each quarter, with respect to 50% of its total assets,
not more than 5% of its assets are invested in the securities of a single
issuer, and with respect to the remaining 50%, no more than 25% of fund assets
is invested in a single issuer.
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 fund 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 nonconvertible
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 anytime during the
life of the warrants (generally, two or more years).
Foreign Securities. The fund may invest in foreign securities. These
include nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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.) These risks are heightened for investments in developing countries and
there is no limit on the amount of the fund's foreign investments which may be
made in such countries.
<PAGE>
Operating policy: The fund may invest up to 20% of its total assets
(excluding reserves) in foreign securities.
Fixed Income Securities. The fund may invest in debt securities of any type
without regard to quality or rating. Such securities would be purchased in
companies which meet the investment criteria for the fund. The price of a bond
fluctuates with changes in interest rates, rising when interest rates fall and
falling when interest rates rise.
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, but not as much as common stocks. Junk bonds (those rated
below BBB or in default) are regarded as predominantly speculative with respect
to the issuer's continuing ability to meet principal and interest payments.
Operating policy: The fund will not purchase a noninvestment-grade debt
security (or junk bond) if immediately after such purchase the fund would have
more than 10% of its total assets invested in such securities.
- ------------------------------
Hybrids can have volatile
prices and limited liquidity
and their use by a fund may
not be successful.
==============================
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) 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.
Operating policy: The fund may invest up to 10% of its total assets in
hybrid instruments.
Private Placements. 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, others may be illiquid and their sale may
involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets
in illiquid securities. As part of this limit, the fund will not invest more
than 10% in certain restricted securities.
<PAGE>
Types of Management Practices
- ------------------------------
Cash reserves provide
flexibility and serve as a
short-term defense during
periods of unusual market
volatility.
==============================
Cash Position. The fund will hold a certain portion of its assets in U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or less.
For temporary, defensive purposes, the 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 fund 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 objective
and program. Such borrowings may be collateralized with fund assets, subject to
restrictions.
Fundamental policy: Borrowings may not exceed 33 1\3% of total fund assets.
Operating policies: The 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 331\3% of the fund's total
assets. The fund may not purchase additional securities when borrowings exceed
5% of total assets.
- ------------------------------
Futures are used to manage
risk; options give the
investor the option to buy or
sell an asset at a
predetermined price in the
future.
==============================
Futures and Options. Futures (a type of potentially high-risk derivative)
are often used to manage or hedge risk, because they enable the investor to buy
or sell an asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future. The
fund may buy and sell futures and options contracts for any number of reasons,
including: to manage its exposure to changes in securities prices and foreign
currencies; as an efficient means of adjusting its overall exposure to certain
markets; in an effort to enhance income; and to protect the value of portfolio
securities. The fund may purchase, sell, or write call and put options on
securities, financial indices, and foreign currencies.
<PAGE>
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 the fund's
net asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of its
total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
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 the fund's foreign securities from adverse currency movements
relative to the dollar, they involve the risk that anticipated currency
movements will not occur and the fund's total return could be reduced.
Lending of Portfolio Securities. Like other mutual funds, the fund 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 fund could experience delays
in recovering its securities and possibly capital losses. Fundamental policy:
The value of loaned securities may not exceed 33 1\3% of the fund's total
assets.
Portfolio Turnover. The fund 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.
A high turnover rate may increase transaction costs and result in additional
taxable gains. The fund's portfolio turnover rates for the periods ending
December 31, 1995 and 1994 were 136.9% and 134.5%.
<PAGE>
================================================================================
4 Investing With T. Rowe Price
- --------------------------------------------------------------------------------
Account Requirements and Transaction Information
- ------------------------------
Always verify your
transactions by carefully
reviewing the confirmation we
send you. Please report any
discrepancies to Shareholder
Services promptly.
==============================
Tax Identification Number
We must have your correct Social Security or corporate tax identification
number on a signed New Account Form or W-9 Form. Otherwise, federal law requires
the funds to withhold a percentage (currently 31%) of your dividends, capital
gain distributions, and redemptions, and may subject you to an IRS fine. 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 shareholders who have requested that their account be combined with
someone else's for financial reporting.
- ------------------------------
T. Rowe Price
Trust Company
1-800-492-7670
1-410-625-6585
==============================
Employer-Sponsored Retirement Plans and Institutional Accounts
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
- --------------------------------------------------------------------------------
Opening a New Account: $2,500 minimum initial investment; $1,000 for
retirement or gifts or transfers to minors (UGMA/UTMA) accounts
- --------------------------------------------------------------------------------
<PAGE>
- ------------------------------
Regular Mail
T. Rowe Price
Account Services
P.O. Box 17300
Baltimore, MD
21298-9353
Mailgram, Express,
Registered, or Certified Mail
T. Rowe Price
Account Services
10090 Red Run Blvd.
Owings Mills, MD 21117
==============================
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
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check together with the New Account Form to the address
at left. We do not accept third party checks, except for IRA Rollover checks
that are properly endorsed, to open new accounts.
By Wire
Morgan Guaranty Trust Co. of New York
ABA# 021000238
T. Rowe Price [fund name]
AC-00153938
account name(s) and account number
* Call Investor Services for an account number and give the following wire
address to your bank:
* Complete a New Account Form and mail it to one of the appropriate
addresses listed on the previous page.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
<PAGE>
By Exchange
Call Shareholder Services or use Tele*Access or PC*Access (see "Automated
Services" under "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 cover
and obtain a receipt.
- --------------------------------------------------------------------------------
Purchasing Additional Shares: $100 minimum purchase;
$50 minimum for retirement plans and Automatic Asset Builder
- --------------------------------------------------------------------------------
By ACH Transfer
Use Tele*Access, PC*Access, 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."
- ------------------------------
Regular Mail
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD
21289-1500
(For Mailgrams, Express,
Registered, or Certified mail,
see previous section.)
==============================
By Mail
* Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
<PAGE>
* Mail the check to us at the address shown at left with either a fund
reinvestment slip or a note indicating the fund you want to buy and
your fund account number.
* Remember to provide your account number and the fund name on your check.
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or
Shareholder Services Form.
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, PC*Access
(if you have previously authorized telephone services), mailgram, or by express
mail. For exchange policies, please see "Transaction Procedures and Special
RequirementsoExcessive Trading."
Redemption proceeds can be mailed to your account address, sent by ACH
transfer, or wired to your bank (provided your bank information is already on
file). For charges, see "Electronic TransfersoBy Wire" under "Shareholder
Services."
- ------------------------------
For Mailgram, Express,
Registered, or Certified mail,
see addresses under "Opening a
New Account."
==============================
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below or as indicated at left. T. Rowe Price requires
the signatures of all owners exactly as registered, and possibly a signature
guarantee (see "Transaction Procedures and Special RequirementsoSignature
Guarantees").
Regular Mail
<PAGE>
For nonretirement and IRA accounts:
T. Rowe Price Account Services
P.O. Box 89000
Baltimore, MD 21289-0220
For employer-sponsored retirement accounts:
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
Rights Reserved By the Fund
The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; to cancel or
rescind any purchase or exchange (for example, if an account has been restricted
due to excessive trading or fraud) upon notice to the shareholder within five
business days of the trade or if the written confirmation has not been received
by the shareholder, whichever is sooner; to freeze any account and suspend
account services when notice has been received of a dispute between the
registered or beneficial account owners or there is reason to believe a
fraudulent transaction may occur; to otherwise modify the conditions of purchase
and any services at any time; or to act on instructions believed to be genuine.
Shareholder Services
- ------------------------------
Shareholder Services
1-800-225-5132
1-410-625-6500
==============================
Many services are available to you as a T. Rowe Price shareholder; some you
receive 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.
<PAGE>
If you are a new T. Rowe Price investor, you will receive a Services Guide
with our Welcome Kit.
- ------------------------------
Investor Services
1-800-638-5660
1-410-547-2308
==============================
Note: Corporate and other entity accounts require an original or certified
resolution to establish services and to redeem by mail. For more information,
call Investor Services.
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% to 2%, payable to
such funds, on shares held for less than one year, or in some funds, six months.
Automated Services
- ------------------------------
Tele*Access
1-800-638-2587
1-410-625-7676
==============================
Tele*Access. 24-hour service via a toll-free number provides information on
fund yields and prices, dividends, account balances, and your latest transaction
as well as the ability to request prospectuses, account and tax forms, duplicate
statements, checks, and to initiate purchase, redemption, and exchange orders in
your accounts (see "Electronic Transfers" below).
PC*Access. 24-hour service via a dial-up modem provides the same
information as Tele*Access, but on a personal computer. Please call Investor
Services for an information guide.
<PAGE>
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives
or by visiting one of our investor center locations whose addresses are listed
on the cover.
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 incoming or outgoing wire transfers regardless of size.
Checkwriting (Not available for equity funds, or the High Yield Fund or
Emerging Markets Bond Fund)
You may write an unlimited number of free checks on any money market fund,
and most bond funds, with a minimum of $500 per check. Keep in mind, however,
that a check results in a redemption; a check written on a bond fund will create
a taxable event which you and we must report to the IRS.
Automatic Investing ($50 minimum)
You can invest automatically in several different ways, including:
* Automatic Asset Builder. You instruct us to move $50 or more 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.
Note: If you are moving money from your bank account, and if the date you
select for your transactions falls on a Sunday or a Monday which is a holiday,
your order will be priced on the second business day following this date.
* Automatic Exchange. You can set up systematic investments from one fund
account into another, such as from a money fund into a stock fund.
- ------------------------------
Discount Brokerage is a
division of T. Rowe Price
Investment Services, Inc.
==============================
<PAGE>
Discount Brokerage
You can trade stocks, bonds, options, precious metals, and other securities
at a 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.
PAGE 2
The Statement of Additional Information for the T. Rowe Price
Capital Opportunity Fund, Inc., dated May 1, 1996, should be
inserted here.
PAGE 1
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE VALUE FUND, INC.
(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 prospectus dated May 1, 1996, 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 May
1, 1996.
PAGE 2
TABLE OF CONTENTS
Page Page
Asset-Backed Securities . . Lending of Portfolio
Capital Stock . . . . . . . Securities . . . . . . .
Custodian . . . . . . . . . Management of Fund . . .
Code of Ethics . . . . . . Mortgage-Related
Distributor for Fund . . . Securities . . . . . . .
Dividends and Net Asset Value Per
Distributions . . . . . . Share . . . . . . . . .
Federal and State Options . . . . . . . . .
Registration of Shares . . Organization of the Fund
Foreign Currency Portfolio Management
Transactions . . . . . . . Practices . . . . . . .
Foreign Futures and Portfolio Transactions .
Options . . . . . . . . . Pricing of Securities . .
Foreign Securities . . . . Principal Holders of
Futures Contracts . . . . . Securities . . . . . . .
Hybrid Instruments . . . . Ratings of Corporate
Independent Accountants . . Debt Securities . . . .
Illiquid or Restricted Repurchase Agreements . .
Securities . . . . . . . . Risk Factors . . . . . .
Investment Management Tax Status . . . . . . .
Services . . . . . . . . . Taxation of Foreign
Investment Objectives Shareholders . . . . . .
and Policies . . . . . . . Warrants . . . . . . . .
Investment Performance . . When-Issued Securities and
Investment Program . . . . Forward Commitment
Investment Restrictions . . 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
PAGE 3
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.
RISK FACTORS
General
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 Fund will
normally have substantially all (for the Balanced Fund 50-70% and
for the Capital Appreciation Fund at least 50%) of its assets in
equity securities (e.g., common stocks). This portion of the
Fund's assets will be subject to all of the risks of investing in
the stock market. There is risk in all investment. 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. 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.
Foreign Securities (All Funds other than Equity Index Fund)
The Fund may invest in U.S. dollar-denominated and non U.S.
dollar-denominated securities of foreign issuers.
Risk Factors of Foreign Investing
There are special risks in foreign investing. 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.
PAGE 4
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.
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 Fund may 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,
PAGE 5
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. It is contemplated that most
foreign securities, other than Latin American securities, will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Currently, it is anticipated
that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock 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
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 Fund 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. If the Fund invest in such investment
funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including
operating expenses and the fees of the investment manager), but
PAGE 6
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
Fund's foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders.
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
PAGE 7
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of the 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.
Latin America
Inflation. Most Latin American countries have experienced,
at one time or another, severe and persistent levels of
inflation, including, in some cases, hyperinflation. This has,
in turn, led to high interest rates, extreme measures by
governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in
many countries has lessened, there is no guarantee it will remain
at lower levels.
Political Instability. The political history of certain
Latin American countries has been characterized by political
uncertainty, intervention by the military in civilian and
economic spheres, and political corruption. Such developments,
if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade
barriers and result in significant disruption in securities
markets.
Foreign Currency. Certain Latin American countries may have
managed currencies which are maintained at artificial levels to
the U.S. dollar rather than at levels determined by the market.
This type of system can lead to sudden and large adjustments in
the currency which, in turn, can have a disruptive and negative
effect on foreign investors. For example, in late 1994 the value
of the Mexican peso lost more than one-third of its value
relative to the dollar. Certain Latin American countries also
may restrict the free conversion of their currency into foreign
currencies, including the U.S. dollar. There is no significant
PAGE 8
foreign exchange market for certain currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency
transactions designed to protect the value of the Fund's
interests in securities denominated in such currencies.
Sovereign Debt. A number of Latin American countries are
among the largest debtors of developing countries. There have
been moratoria on, and reschedulings of, repayment with respect
to these debts. Such events can restrict the flexibility of
these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
INVESTMENT PROGRAM
Types of Securities
Set forth below is additional information about certain of
the investments described in the Fund's prospectus.
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
PAGE 9
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% 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% of its net
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.
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk
derivative) have been developed and combine the elements of
futures contracts or options with those of debt, preferred equity
or a depository instrument (hereinafter "Hybrid Instruments").
Generally, a Hybrid Instrument will be a debt security, preferred
stock, depository share, trust certificate, certificate of
deposit or other evidence of indebtedness on which a portion of
or all interest payments, and/or the principal or stated amount
payable at maturity, redemption or retirement, is determined by
reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles
or commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as
interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, 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
PAGE 10
currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating
exposure to a particular market, or segment of a market, with the
objective of enhancing total return. For example, a Fund may
wish to take advantage of expected declines in interest rates in
several European countries, but avoid the transactions costs
associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar-
denominated Hybrid Instrument whose redemption price is linked to
the average three year interest rate in a designated group of
countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was
lower than a specified level, and payoffs of less than par if
rates were above the specified level. Furthermore, the Fund
could limit the downside risk of the security by establishing a
minimum redemption price so that the principal paid at maturity
could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an embedded put
option, would be to give the Fund the desired European bond
exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Fund could
lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the
Hybrid.
The risks of investing in Hybrid Instruments reflect a
combination of the risks of investing in securities, options,
futures and currencies. Thus, an investment in a Hybrid
Instrument may entail significant risks that are not associated
with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars or
bears interest either at a fixed rate or a floating rate
determined by reference to a common, nationally published
Benchmark. The risks of a particular Hybrid Instrument will, of
course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the
instrument is linked. Such risks generally depend upon factors
which are unrelated to the operations or credit quality of the
issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events,
the supply and demand for the Underlying Assets and interest rate
movements. In recent years, various Benchmarks and prices for
PAGE 11
Underlying Assets have been highly volatile, and such volatility
may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for
a discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry
greater market risks than traditional debt instruments.
Depending on the structure of the particular Hybrid Instrument,
changes in a Benchmark may be magnified by the terms of the
Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices
of the Hybrid Instrument and the Benchmark or Underlying Asset
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). The latter scenario may result if "leverage" is used to
structure the Hybrid Instrument. Leverage risk occurs when the
Hybrid Instrument is structured so that a given change in a
Benchmark or Underlying Asset is multiplied to produce a greater
value change in the Hybrid Instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs of
a particular investor, and therefore, the number of investors
that are willing and able to buy such instruments in the
secondary market may be smaller than that for more traditional
debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market
without the guarantee of a central clearing organization or in a
transaction between the Fund and the issuer of the Hybrid
Instrument, the creditworthiness of the counter party or issuer
of the Hybrid Instrument would be an additional risk factor which
the Fund would have to consider and monitor. 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.
The various risks discussed above, particularly the market
risk of such instruments, may in turn cause significant
fluctuations in the net asset value of the Fund. Accordingly,
the Fund will limit its investments in Hybrid Instruments to 10%
PAGE 12
of net assets. However, because of their volatility, it is
possible that the Fund's investment in Hybrid Instruments will
account for more than 10% of the Fund's return (positive or
negative).
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.
Debt Securities
Balanced, Blue Chip Growth, Capital Appreciation, Capital
Opportunity, Dividend Growth, Equity Income, Growth & Income, New
Era, OTC, Small-Cap Value and Value Funds
Debt Obligations
Although a majority of the Fund's assets are invested in
common stocks, the Fund may invest in convertible securities,
corporate debt securities and preferred stocks which hold the
prospect of contributing to the achievement of the Fund's
objectives. 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 investments, and a
decline in interest rates will generally increase the value of
portfolio investments. 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
PAGE 13
to meet their obligations for the payment of interest and
principal when due. The Fund's investment program permits it to
purchase below investment grade securities. Since investors
generally perceive that there are greater risks associated with
investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality
securities. However, the principal value of lower-rated
securities generally will fluctuate more widely than higher
quality securities. Lower quality investments entail a higher
risk of default--that is, the nonpayment of interest and
principal by the issuer than higher quality investments. Such
securities are also subject to special risks, discussed below.
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. 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.
Special Risks of High Yield Investing
The Fund may invest in low quality bonds commonly referred
to as "junk bonds." Junk bonds are regarded as predominantly
speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low
and lower-medium quality bonds involves greater investment risk,
to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on T. Rowe Price's
credit analysis than would be the case if the Fund was investing
in higher quality bonds. High yield bonds may be more
susceptible to real or perceived adverse economic conditions than
investment grade bonds. A projection of an economic downturn, or
higher interest rates, for example, could cause a decline in high
yield bond prices because the advent of such events could lessen
the ability of highly leverage issuers to make principal and
interest payments on their debt securities. In addition, the
secondary trading market for high yield bonds may be less liquid
PAGE 14
than the market for higher grade bonds, which can adversely
affect the ability of a Fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be
more difficult to value inasmuch as objective pricing data may be
less available and judgment may play a greater role in the
valuation process.
Fixed income securities in which the Fund may invest
include, but are not limited to, those described below.
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.
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.
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.
Short-Term Corporate Debt Securities. Outstanding
nonconvertible corporate debt securities (e.g., bonds and
debentures) which have one year or less remaining to maturity.
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.
PAGE 15
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.
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 or 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 16
Balanced Fund
Mortgage-Related Securities
Mortgage-related securities in which the Fund may invest
include, but are not limited to, those described below.
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") the Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"), and the Federal Agricultural Mortgage
Corporation ("Farmer Mac" or "FAMC"). FNMA, FHLMC, and FAMC
obligations are not backed by the full faith and credit of the
U.S. government as GNMA certificates are, but they are supported
by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed 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, FHLMC, and
FAMC guarantees timely distributions of interest to certificate
PAGE 17
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 18
Farmer Mac Certificates. The Federal Agricultural Mortgage
Corporation ("Farmer Mac") is a federally chartered
instrumentality of the United States established by Title VIII of
the Farm Credit Act of 1971, as amended ("Charter Act"). Farmer
Mac was chartered primarily to attract new capital for financing
of agricultural real estate by making a secondary market in
certain qualified agricultural real estate loans. Farmer Mac
provides guarantees of timely payment of principal and interest
on securities representing interests in, or obligations backed
by, pools of mortgages secured by first liens on agricultural
real estate ("Farmer Mac Certificates"). Similar to Fannie Mae
and Freddie Mac, Farmer Mac's Certificates are not supported by
the full faith and credit of the U.S. Government; rather, Farmer
Mac may borrow up from the U.S. Treasury to meet its guaranty
obligations.
As discussed above, prepayments on the underlying mortgages
and their effect upon the rate of return of a Mortgage-Backed
Security, is the principal investment risk for a purchaser of
such securities, like the Fund. Over time, any pool of mortgages
will experience prepayments due to a variety of factors,
including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and
(3) increased amortization by the mortgagee. These factors, in
turn, depend upon general economic factors, such as level of
interest rates and economic growth. Thus, investors normally
expect prepayment rates to increase during periods of strong
economic growth or declining interest rates, and to decrease in
recessions and rising interest rate environments. 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.
PAGE 19
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.
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.
PAGE 20
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 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.
PAGE 21
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 above 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 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
PAGE 22
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.
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
PAGE 23
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
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.
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
PAGE 24
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. ("Price-Fleming") (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 and
have a credit rating with respect to its short-term debt of at
least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe
Price. 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) 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
PAGE 25
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 26
All Funds, Except Equity Index Fund
Options
Options are a type of potentially high-risk derivative.
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 27
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.
PAGE 28
Closing transactions will be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
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.
PAGE 29
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
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
PAGE 30
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.
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
PAGE 31
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
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
PAGE 32
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
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.
PAGE 33
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
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.
Equity Index Fund
The only option activity the Fund currently may engage in is
the purchase of S&P 500 call options. Such activity is subject
PAGE 34
to the same risks described above under "Purchasing Call
Options". The Fund reserves the right to engage in other options
activity, however.
All Funds
Futures Contracts
Futures contracts are a type of potentially high-risk
derivative.
Transactions in Futures
The Fund may enter into futures contracts including stock
index, interest rate and currency futures ("futures or futures
contracts"). The New Era Fund may also enter into futures on
commodities related to the types of companies in which it
invests, such as oil and gold futures. The Equity Index Fund may
only enter into stock index futures, such as the S&P 500 stock
index, to provide an efficient means of maintaining liquidity
while being invested in the market, to facilitate trading or to
reduce transaction costs. It will not use futures for hedging
purposes. Otherwise the nature of such futures and the
regulatory limitations and risks to which they are subject are
the same as those described below.
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
PAGE 35
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 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.
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.
PAGE 36
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 stock index) 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
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
PAGE 37
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.
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.
For example, the Standard & Poor's 500 Stock Index is
composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. 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
PAGE 38
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
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
PAGE 39
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
PAGE 40
be unsuccessful to some degree because of unexpected market
behavior, market or interest rate trends. There are several
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
PAGE 41
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
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 (another type of potentially high-risk derivative)
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 stock index futures, the Fund may write or purchase
call and put options on stock 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
PAGE 42
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
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
PAGE 43
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
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.
All Funds, Except Equity Index Fund
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:
PAGE 44
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
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.
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
PAGE 45
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
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
PAGE 46
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.
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.
PAGE 47
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
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.
PAGE 48
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 it may enter into futures
contracts and options thereon;
(3) (a) Industry Concentration (All Funds, except
Health Sciences 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;
(b) Industry Concentration (Health Sciences
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
may invest more than 25% of its total assets
in the health sciences industry as defined in
the Fund's prospectus.
(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an
interfund lending program with other Price Funds
PAGE 49
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
(All Funds, except Capital Opportunity). 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
(All Funds, except Capital Opportunity). 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
including limited partnership interests therein,
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 in
securities of companies engaged in the real estate
business);
(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.
PAGE 50
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 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 (2), the Fund
does not consider currency contracts or hybrid
investments 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.
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;
PAGE 51
(3) 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 options would exceed 5% of
the Fund's net asset value;
(4) Illiquid Securities. Purchase illiquid
securities and securities of unseasoned
issuers if, as a result, more than 15% of its
net assets would be invested in such
securities, provided that the Fund will not
invest more than 10% of its total assets in
restricted securities;
(5) 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;
(6) 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;
(7) 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;
(8) Oil and Gas Programs. Purchase
participations or other direct interests in
or enter into leases with respect to, oil,
gas, or other mineral exploration or
development programs;
PAGE 52
(9) 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;
(10) Ownership of Portfolio Securities by Officers
and Directors/Trustees. Purchase or retain
the securities of any issuer if those
officers and directors of the Fund, and of
its investment manager, who each owns
beneficially more than .5% of the outstanding
securities of such issuer, together own
beneficially more than 5% of such securities;
(11) Short Sales. Effect short sales of
securities;
(12) 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 of
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;
(13) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net
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 net 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
PAGE 53
attached to securities may be deemed to be
without value; or
(14) Percent Limit on Share Ownership of Any One
Issuer. (Capital Opportunity Fund) Purchase
a security if, as a result, 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).
Blue Chip Growth, Capital Opportunity, Health Sciences and Value
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. In the event that the Fund exercises its right to
convert to a Master Fund/Feeder Fund structure, it will do so in
compliance with the Guidelines for Registration of a Master
Fund/Feeder Fund as established by the North American Securities
Administrators Association, Inc. ("NASAA").
MANAGEMENT OF FUND
The officers and directors 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 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 are referred to as inside
directors by virtue of their officership, directorship, and/or
employment with T. Rowe Price.
PAGE 54
All Funds
Independent Directors/Trustees
DONALD W. DICK, JR., Principal, Overseas Partners, Inc., a
financial investment firm; formerly (6/65-3/89) Director and Vice
President-Consumer Products Division, McCormick & Company, Inc.,
international food processors; Director, Waverly, Inc.,
Baltimore, Maryland; Address: 111 Pavonia Avenue, Suite 334,
Jersey City, New Jersey 07310
DAVID K. FAGIN, Chairman, Chief Executive Officer and Director,
Golden Star Resources, Ltd.; formerly (1986-7/91) President,
Chief Operating Officer and Director, Homestake Mining Company;
Address: One Norwest Center, 1700 Lincoln Street, Suite 1950,
Denver, Colorado 80203
HANNE M. MERRIMAN, Retail business consultant; formerly President
and Chief Operating Officer (1991-92), Nan Duskin, Inc., a
women's specialty store, Director (1984-1990) and Chairman (1989-
90) Federal Reserve Bank of Richmond, and President and Chief
Executive Officer (1988-89), Honeybee, Inc., a division of
Spiegel, Inc.; Director, Central Illinois Public Service Company,
CIPSCO Incorporated, The Rouse Company, State Farm Mutual
Automobile Insurance Company and USAir Group, Inc.
HUBERT D. VOS, President, Stonington Capital Corporation, a
private investment company; Address: 1231 State Street, Suite
247, Santa Barbara, California 93190-0409
PAUL M. WYTHES, Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership, providing equity capital to
young high technology companies throughout the United States;
Director, Teltone Corporation, Interventional Technologies Inc.
and Stuart Medical, Inc.; Address: 755 Page Mill Road, Suite
A200, Palo Alto, California 94304
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
PAGE 55
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
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
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
PAGE 56
Balanced Fund
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T.
Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc.,
and T. Rowe Price Retirement Plan Services, Inc.; President and
Director, T. Rowe Price Investment Services, Inc; President and
Trust Officer, T. Rowe Price Trust Company; Director, Rowe Price-
Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
RICHARD T. WHITNEY, President--Vice President of T. Rowe Price
and T. Rowe Price Trust Company
STEPHEN W. BOESEL, Vice President--Managing Director, T. Rowe
Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
JAMES A. C. KENNEDY, III, Vice President--Managing Director of T.
Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price;
Vice President of Rowe Price-Fleming International, Inc. and T.
Rowe Price Trust Company
MARK J. VASELKIV, Vice President--Vice President, T. Rowe
Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Blue Chip Growth Fund
LARRY J. PUGLIA, President--Vice President, T. Rowe Price
*THOMAS H. BROADUS, JR., Executive Vice President--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
PAGE 57
BRIAN W. H. BERGHUIS, Vice President--Vice President, T. Rowe
Price
STEPHANIE C. CLANCY, Vice President--Assistant Vice President, T.
Rowe Price
JOHN D. GILLSEPIE, Vice President--Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President--Employee, T. Rowe Price
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Capital Appreciation Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Chief
Executive Officer and Managing Director, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Retirement
Plan Services, Inc. and T. Rowe Price Trust Company; Chartered
Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*GEORGE A. ROCHE, Director--Managing Director and Chief Financial
Officer, T. Rowe Price; Vice President and Director, Rowe
Price-Fleming International, Inc.
RICHARD P. HOWARD, President--Vice President of T. Rowe Price;
Chartered Financial Analyst
ARTHUR B. CECIL, III, Vice President--Vice President of T. Rowe
Price
CHARLES A. MORRIS, Vice President--Vice President of T. Rowe
Price
CHARLES M. OBER, Vice President--Vice President, T. Rowe Price,
Chartered Financial Analyst
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Capital Opportunity Fund
*JOHN H. LAPORTE, JR., President and Director--Managing Director,
T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
PAGE 58
JOHN F. WAKEMAN, Executive Vice President--Vice President, T.
Rowe Price
MARC L. BAYLIN, Vice President--Assistant Vice President, T.
Rowe Price; formerly financial analyst, Rausher Pierce
Refsnes
BRIAN W. H. BERGHUIS, Vice President--Vice President, T. Rowe
Price
STEPHANIE C. CLANCY, Vice President--Assistant Vice President,
T. Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe
Price
JOSEPH A. CRUMBLING, Assistant Vice President--Employee, T. Rowe
Price
Dividend Growth Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
WILLIAM J. STROMBERG, President--Vice President, T. Rowe Price
BRIAN C. ROGERS, Executive Vice President--Managing Director, T.
Rowe Price
ARTHUR B. CECIL, III, Vice President--Vice President, T. Rowe
Price
STEPHANIE C. CLANCY, Assistant Vice President--Assistant Vice
President, T. Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price;
formerly (9/89-7/90) attended Carnegie Mellon Graduate School of
Industrial Administration
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Equity Income Fund
PAGE 59
*THOMAS H. BROADUS, JR., Vice President and Trustee--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Trustee--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price
DANIEL THERIAULT, Vice President--Vice President, T. Rowe Price,
Chartered Financial Analyst; formerly Securities Analyst, John A.
Levin & Co.
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Growth & Income Fund
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T.
Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc.,
and T. Rowe Price Retirement Plan Services, Inc., President and
Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer,
Inc.
*STEPHEN W. BOESEL, President and Director--Vice President, T.
Rowe Price
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
ARTHUR B. CECIL, III, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe
Price
PAGE 60
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
DAVID J. WALLACK, Vice President--Vice President, T. Rowe
Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Growth Stock Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Chairman of the Board--Chairman of the Board,
Price-Fleming; Managing Director, T. Rowe Price; Vice President
and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst; Chartered Investment Counselor
JOHN D. GILLESPIE, President--Vice President, T. Rowe Price
JAMES A. C. KENNEDY, Vice President--Managing Director, T. Rowe
Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe
Price;Chartered Financial Analyst
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
JAMES D. PREY, III, Vice President--
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc.; Boston, Massachusetts
DANIEL THERIAULT, Vice President--Vice President, T. Rowe Price,
Chartered Financial Analyst; formerly Securities Analyst, John A.
Levin & Co.
CAROL G. BARTHA, Assistant Vice President--Employee, T. Rowe
Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
RANDI E. KITT, Assistant Vice President--Employee, T. Rowe Price
Equity Index Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
PAGE 61
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
RICHARD T. WHITNEY, President--Vice President, T. Rowe Price
KRISTEN D. FARROW, Executive Vice President--Assistant Vice
President, T. Rowe Price; formerly (9/84-6/89) Teacher at
Wilbraham & Monson Academy, Springfield, Massachusetts and The
Bryn Mawr School, Baltimore, Maryland
DONALD J. PETERS, Vice President--Vice President, T. Rowe
Price
WENDY R. DIFFENBAUGH, Assistant Vice President--
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Health Sciences Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
M. DAVID TESTA, Chairman of the Board, Price-Fleming; Managing
Director, T. Rowe Price; Vice President and Director, T. Rowe
Price Trust Company; Chartered Financial Analyst, Chartered
Investment Counselor
*JOHN H. LAPORTE, JR., Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst
JOSEPH KLEIN III, Executive Vice President--Vice President, T.
Rowe Price; Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
CHARLES PEPIN, Vice President--Employee, T. Rowe Price; formerly
(1990-1992) Corporate Finance Analyst, Piper Jaffray Inc.
JAMES D. PREY, III, Vice President--
ANDREW BHAK, Assistant Vice President--Employee,T. Rowe Price;
formerly (1990-1995) Senior Healthcare Analyst, United States
General Accounting Office
JEFFREY LANG, Assistant Vice President--Assistant Vice President,
T. Rowe Price
Mid-Cap Growth Fund
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T.
Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc.,
PAGE 62
and T. Rowe Price Retirement Plan Services, Inc., President and
Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer,
Inc.
*JAMES A. C. KENNEDY, III, Director--Managing Director, T. Rowe
Price
*JOHN H. LAPORTE, JR., Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst
BRIAN W. H. BERGHUIS, President--Vice President, T. Rowe Price
MARC L. BAYLIN, Vice President--Assistant Vice President, T.
Rowe Price; formerly financial analyst, Rausher Pierce Refsnes
THOMAS J. HUBER, Vice President--Employee, T. Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe
Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, Vice President--Employee, T. Rowe
Price
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe
Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
New America Growth Fund
*JOHN H. LAPORTE, JR., President and Trustee--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
BRIAN W. H. BERGHUIS, Executive Vice President--Vice President,
T. Rowe Price
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe
Price
CHARLES PEPIN, Vice President--Employee, T. Rowe Price
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe Price
PAGE 63
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe
Price
JOHN WAKEMAN, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
New Era Fund
*GEORGE J. COLLINS, 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, 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., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*GEORGE A. ROCHE, President and Director--Managing Director and
Chief Financial Officer, T. Rowe Price; Vice President and
Director, Rowe Price-Fleming International, Inc.
CHARLES M. OBER, Executive Vice President--Vice President, T.
Rowe Price; Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
HUGH M. EVANS, III, Vice President--Employee, T. Rowe Price;
formerly (7/1/88-7/1/90) Analyst, Morgan Stanley & Co., Inc.
(Mergers and Acquisitions Department), New York, New York
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
JAMES A. C. KENNEDY, III, Vice President--Managing Director, T.
Rowe Price
DAVID M. LEE, Vice President--Employee, T. Rowe Price
ROBERT J. MARCOTTE, Vice President--
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price;
formerly (9/89-7/90) attended Carnegie Mellon Graduate School of
Industrial Administration
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
New Horizons Fund
*JOHN H. LAPORTE, President and Director--Managing Director of T.
Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
PAGE 64
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
PRESTON G. ATHEY, Vice President--Vice President of T. Rowe Price
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
BRIAN W. H. BERGHUIS, Vice President--Vice President of T. Rowe
Price
LISE J. BUYER, Vice President--Vice President, T. Rowe Price;
formerly (4/91-4/92) PC Analyst, Cowen & Co., (2/90-4/92) PC
Analyst, Needham & Co., and (2/87-1/90) Analyst, Prudential Bache
Securities
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe
Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President--Employee, T. Rowe Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe
Price;Chartered Financial Analyst
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
CHARLES PEPIN, Vice President--Employee, T. Rowe Price
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe
Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
FRANCIES W. HAWKS, Assistant Vice President of T. Rowe Price
OTC Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
GREGORY A. McCRICKARD, President--Vice President, T. Rowe Price
LISE J. BUYER, Vice President--Vice President, T. Rowe Price
PAGE 65
HUGH M. EVANS, III, Vice President--Employee, T. Rowe
Price
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
JAMES A. C. KENNEDY, III, Vice President--Managing Director of T.
Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Science & Technology Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director,
T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
CHARLES A. MORRIS, President--Vice President, T. Rowe Price
MARC L. BAYLIN, Vice President--Assistant Vice President, T.
Rowe Price; formerly financial analyst, Rausher Pierce
Refsnes
LISE J. BUYER, Vice President--Vice President, T. Rowe Price;
formerly (4/91-4/92) PC Analyst, Cowen & Co., (2/90-4/92) PC
Analyst Needham & Co., and (2/87-1/90) Analyst, Prudential Bache
Securities
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe
Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe
Price;Chartered Financial Analyst
JAMES D. PREY, III, Vice President--Vice President, T. Rowe
Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
Small-Cap Value Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director
of T. Rowe Price; Chartered Financial Analyst
PAGE 66
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*GEORGE A. ROCHE, Director--Managing Director and Chief Financial
Officer, T. Rowe Price; Vice President and Director, Rowe
Price-Fleming International, Inc.
PRESTON G. ATHEY, President--Vice President, T. Rowe Price
HUGH M. EVANS, III, Vice President--Employee, T. Rowe Price;
formerly (7/1/88-7/1/90) Analyst, Morgan Stanley & Co., Inc.
(Mergers and Acquisitions Department), New York, New York
ROBERT J. MARCOTTE, Vice President--Employee, T. Rowe
Price
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe
Price
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
FRANCIES W. HAWKS, Assistant Vice President of T. Rowe Price
Value Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc.; President
and Director, T. Rowe Price Investment Services, Inc; President
and Trust Officer, T. Rowe Price Trust Company; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
STEPHANIE C. CLANCY, Vice President--Assistant Vice President,
T. Rowe Price
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
NATHANIEL S. LEVY, Vice President--Vice President, T. Rowe Price
PAGE 67
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc., Boston, Massachusetts
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price;
formerly (9/89-7/90) attended Carnegie Mellon Graduate School of
Industrial Administration
JOSEPH A. CRUMBLING, Assistant Vice President--Employee, T. Rowe
Price
COMPENSATION TABLE
The Funds do not pay pension or retirement benefits to
its officers or directors/trustees. Also, any director/trustee
of a Fund who is an officer or employee of T. Rowe Price does not
receive any remuneration from a Fund.
_________________________________________________________________
Total Compensation
Aggregate from Fund and
Name of Compensation Fund Group
Person, from Paid to
Position Fund(a) Directors(b)
_________________________________________________________________
Balanced Fund
Donald W. Dick, Jr., 1,677 70,083
Director
David K. Fagin, 1,677 57,833
Director
Hanne M. Merriman, 1,677 57,833
Director
Hubert D. Vos, 1,677 57,833
Director
Paul M. Wythes, 1,677 57,833
Director
_________________________________________________________________
Blue Chip Growth Fund
Donald W. Dick, Jr., 790 70,083
Director
PAGE 68
David K. Fagin, 790 57,833
Director
Hanne M. Merriman, 790 57,833
Director
Hubert D. Vos, 790 57,833
Director
Paul M. Wythes, 790 57,833
Director
_________________________________________________________________
Capital Appreciation Fund
Donald W. Dick, Jr., 2,256 70,083
Director
David K. Fagin, 2,256 57,833
Director
Hanne M. Merriman, 2,256 57,833
Director
Hubert D. Vos, 2,256 57,833
Director
Paul M. Wythes, 2,256 57,833
Director
_________________________________________________________________
Capital Opportunity Fund (c)
Donald W. Dick, Jr., 692 70,083
Director
David K. Fagin, 692 57,833
Director
Hanne M. Merriman, 692 57,833
Director
Hubert D. Vos, 692 57,833
Director
Paul M. Wythes, 692 57,833
Director
_________________________________________________________________
Dividend Growth Fund
PAGE 69
Donald W. Dick, Jr., 762 70,083
Director
David K. Fagin, 762 57,833
Director
Hanne M. Merriman, 762 57,833
Director
Hubert D. Vos, 762 57,833
Director
Paul M. Wythes, 762 57,833
Director
_________________________________________________________________
Equity Income Fund
Donald W. Dick, Jr., 5,644 70,083
Trustee
David K. Fagin, 5,644 57,833
Trustee
Hanne M. Merriman, 5,644 57,833
Trustee
Hubert D. Vos, 5,644 57,833
Trustee
Paul M. Wythes, 5,644 57,833
Trustee
_________________________________________________________________
Growth & Income Fund
Donald W. Dick, Jr., 3,575 70,083
Director
David K. Fagin, 3,575 57,833
Director
Hanne M. Merriman, 3,575 57,833
Director
Hubert D. Vos, 3,575 57,833
Director
Paul M. Wythes, 3,575 57,833
PAGE 70
Director
_________________________________________________________________
Growth Stock Fund
Donald W. Dick, Jr., 5,215 70,083
Director
David K. Fagin, 5,215 57,833
Director
Hanne M. Merriman, 5,215 57,833
Director
Hubert D. Vos, 5,215 57,833
Director
Paul M. Wythes, 5,215 57,833
Director
_________________________________________________________________
Equity Index Fund
Donald W. Dick, Jr., 1,344 70,083
Director
David K. Fagin, 1,344 57,833
Director
Hanne M. Merriman, 1,344 57,833
Director
Hubert D. Vos, 1,344 57,833
Director
Paul M. Wythes, 1,344 57,833
Director
_________________________________________________________________
Mid-Cap Growth Fund
Donald W. Dick, Jr., 933 70,083
Director
David K. Fagin, 933 57,833
Director
Hanne M. Merriman, 933 57,833
Director
PAGE 71
Hubert D. Vos, 933 57,833
Director
Paul M. Wythes, 933 57,833
Director
_________________________________________________________________
New America Growth Fund
Donald W. Dick, Jr., 2,288 70,083
Trustee
David K. Fagin, 2,288 57,833
Trustee
Hanne M. Merriman, 2,288 57,833
Trustee
Hubert D. Vos, 2,288 57,833
Trustee
Paul M. Wythes, 2,288 57,833
Trustee
_________________________________________________________________
New Era Fund
Donald W. Dick, Jr., 2,840 70,083
Director
David K. Fagin, 2,840 57,833
Director
Hanne M. Merriman, 2,840 57,833
Director
Hubert D. Vos, 2,840 57,833
Director
Paul M. Wythes, 2,840 57,833
Director
_________________________________________________________________
New Horizons Fund
Donald W. Dick, Jr., 4,685 70,083
Director
David K. Fagin, 4,685 57,833
Director
PAGE 72
Hanne M. Merriman, 4,685 57,833
Director
Hubert D. Vos, 4,685 57,833
Director
Paul M. Wythes, 4,685 57,833
Director
_________________________________________________________________
OTC Fund
Donald W. Dick, Jr., 1,208 70,083
Director
David K. Fagin, 1,208 57,833
Director
Hanne M. Merriman, 1,208 57,833
Director
Hubert D. Vos, 1,208 57,833
Director
Paul M. Wythes, 1,208 57,833
Director
_________________________________________________________________
Science & Technology Fund
Donald W. Dick, Jr., 3,639 70,083
Director
David K. Fagin, 3,639 57,833
Director
Hanne M. Merriman, 3,639 57,833
Director
Hubert D. Vos, 3,639 57,833
Director
Paul M. Wythes, 3,639 57,833
Director
_________________________________________________________________
Small-Cap Value Fund
Donald W. Dick, Jr., 1,893 70,083
Director
PAGE 73
David K. Fagin, 1,893 57,833
Director
Hanne M. Merriman, 1,893 57,833
Director
Hubert D. Vos, 1,893 57,833
Director
Paul M. Wythes, 1,893 57,833
Director
_________________________________________________________________
Value Fund
Donald W. Dick, Jr., 726 70,083
Director
David K. Fagin, 726 57,833
Director
Hanne M. Merriman, 726 57,833
Director
Hubert D. Vos, 726 57,833
Director
Paul M. Wythes, 726 57,833
Director
_________________________________________________________________
(a) Amounts in this Column are for the period January 1, 1995
through December 31, 1995.
(b) Amounts in this column are for calendar year 1995. The T.
Rowe Pirce complex included 72 funds as of December 31, 1995.
(c) Includes estimated future payments.
All Funds
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
PAGE 74
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 March 31, 1996, the following shareholders
beneficially owned more than 5% of the outstanding shares of the
Growth Stock, New Era, New Horizons and Growth & Income Funds,
respectively: Pirateline & Co., FBO Spectrum Growth Fund Acct.,
Attn.: Mark White, State Street Bank & Trust Co., 1776 Heritage
Drive - 4W, North Quincy, Massachusetts 02171-2197; Mid-Cap
Growth, New Era, Small-Cap Value and Science & Technology Funds,
respectively: Charles Schwab & Co. Inc., Reinvest. Account,
Attn.: Mutual Fund Dept., 101 Montgomery Street, San Francisco,
California 94104-4122; OTC Fund: Sigler & Co. of Smithsonian
Inst., Wellington Trust Co., RD7 9866-77, Attn.: Jasmine Felix, 4
New York Plaza, 4th Floor, New York, New York 10004-2413.
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:
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
PAGE 75
the Fund for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
All Funds, Except Equity Index Fund
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% Next $16 billion
0.305% Thereafter
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 Equity Index
Fund and T. Rowe Price Spectrum Fund, Inc. and any institutional
PAGE 76
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
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%*
Capital Opportunity Fund 0.45%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
Growth & Income Fund 0.25%
Growth Stock Fund 0.25%
Equity Index Fund 0.20%
Health Sciences Fund 0.35%
Mid-Cap Growth Fund 0.35%
New America Growth Fund 0.35%
New Era Fund 0.25%
New Horizons Fund 0.35%
OTC Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
Value Fund 0.35%
*Subject to Performance Adjustment (please see p. __).
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 1995 1994 1993
Balanced $2,778,000 $1,969,227 $ 1,169,038
Blue Chip Growth 534,000 76,000 **
PAGE 77
Capital Appreciation 4,940,000 4,161,612 2,740,545
Capital Opportunity 134,000 ** *
Dividend Growth 357,000 107,000 **
Equity Income 24,358,000 17,847,000 15,155,000
Equity Index 498,000 156,349 **
Growth & Income 8,195,000 5,984,000 5,209,000
Growth Stock 14,222,000 11,981,872 11,117,706
Health Sciences * * *
Mid-Cap Growth 1,234,000 545,000 153,000
New America Growth 5,554,000 4,395,000 3,989,000
New Era 6,218,000 5,272,000 4,366,000
New Horizons 15,035,000 11,402,554 10,367,727
OTC 1,897,000 1,534,235 1,547,061
Science & Technology 11,393,000 4,467,208 2,841,791
Small-Cap Value 4,262,000 3,047,508 2,963,580
Value 19,000 ** *
* Prior to commencement of operations.
** Due to each Fund's expense limitation in effect at that time,
no management fees were paid by the Funds to T. Rowe Price.
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.
Balanced, Blue Chip Growth, Capital Appreciation, Capital
Opportunity, Dividend Growth, Equity Index, Health Sciences, Mid-
Cap Growth, New America Growth, Science & Technology, Small-Cap
Value, Value Fund
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
PAGE 78
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
Balanced January 1, 1993- 1.00% December 31, 1996
December 31, 1994
Blue Chip
Growth(a) January 1, 1995- 1.25% December 31, 1998
December 31, 1996
Capital
Appreciation January 1, 1990- 1.25% December 31, 1995
December 31, 1993
Capital
Opportunity November 29, 1994- 1.35% December 31, 1998
December 31, 1996
Dividend
Growth(b) January 1, 1995- 1.10% December 31, 1998
December 31, 1996
Equity Index(c) January 1, 1996- 0.40% December 31, 1999
December 31, 1997
Health Sciences
December 28, 1995- 1.35% December 31, 1999
December 31, 1997
Mid-Cap Growth January 1, 1994- 1.25% December 31, 1997
December 31, 1995
New America
Growth January 1, 1990- 1.25% December 31, 1995
December 31, 1993
Science &
Technology January 1, 1992- 1.25% December 31, 1995
December 31, 1993
Small-Cap
Value January 1, 1992- 1.25% December 31, 1995
December 31, 1993
Value September 29,1994- 1.10% December 31, 1998
December 31, 1996
(a) The Blue Chip Growth Fund previously operated under a 1.25%
limitation that expired December 31, 1994. The reimbursement
period for this limitation extends through December 31, 1996.
PAGE 79
(b) The Dividend Growth Fund previously operated under a 1.00%
limitation that expired December 31, 1994. The reimbursement
period for this limitation extends through December 31, 1996.
(c) The Equity Index Fund previously operated under a 0.45%
limitation that expired December 31, 1995. The reimbursement
period for this limitation extends through December 31,
1997.
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
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 Balanced Fund's past expense limitation,
$280,000 of unaccrued 1993 management fees were repaid by the
Fund for the year ended December 31, 1995.
Pursuant to the Blue Chip Growth Fund's current expense
limitation, $1,000 of management fees for the year ended December
31, 1995. Pursuant to the previous expense limitation $213,000 of
management fees and expenses remains subject to reimbursement
thorugh December 31, 1996.
Pursuant to the Dividend Growth Fund's current expense
limitation, $5,000 of management fees were not accrued by the
Fund for the period ended December 31, 1994. Pursuant to the
previous expense limitation $380,000 of management fees and
expenses remains subject to reimbursement through December 31,
1996.
Pursuant to the Equity Index Fund's current expense
limitation, $181,000 of management fees for the year ended
December 31, 1995 and $264,000 of 1994 management fees were not
accrued by the fund. Additionally, $651,000 of unaccrued fees
and expenses related to a previous expense limitation are subject
to reimbursement through December 31, 1995.
Pursuant to Mid-Cap Growth Fund's current and past expense
limitation, $235,000 of management fees and expense were repaid
by the Fund for the year ended December 31, 1995. Additionally,
PAGE 80
$58,000 of unaccrued fees and expenses are subject to
reimbursement through December 31, 1997.
Pursuant to Capital Opportunity Fund's current expense
limitation, $149,000 of management fees were not accrued by the
fund for the year ended December 31, 1995. Additionally, $8,000
of unaccrued 1994 fees and expenses are subject to reimbursement
through December 31, 1998.
Pursuant to the Value Fund's current expense limitation,
$157,000 of management fees were not accrued by the fund for the
year ended December 31, 1995. Additionally, $45,000 of unaccrued
194 fees and expenses are subject to reimbursement through
December 31, 1998.
Capital Appreciation Fund
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of
three components: a Group Management Fee ("Group Fee"), an
Individual Fund Fee ("Fund Fee") and a performance fee adjustment
("Performance Fee Adjustment") based on the performance of the
Fund relative to the Standard & Poor's 500 Stock Index (the
"Index"). 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 performance adjustment for
the year ended December 31, 1995, decreased management fees by
$20,000.
The Monthly Group Fee and Monthly Fund Fee are combined (the
"Combined Fee") and are subject to a Performance Fee Adjustment,
depending on the total return investment performance of the Fund
relative to the total return performance of the Standard & Poor's
500 Stock Composite Index (the "Index") during the previous
thirty-six (36) months. The Performance Fee Adjustment is
computed as of the end of each month and if an adjustment
results, is added to, or subtracted from the Combined Fee. No
Performance Fee Adjustment is made to the Combined Fee unless the
investment performance ("Investment Performance") of the Fund
(stated as a percent) exceeds, or is exceeded by, the investment
record ("Investment Record") of the Index (stated as a percent)
by at least one full point. (The difference between the
Investment Performance and Investment Record will be referred to
PAGE 81
as the Investment Performance Differential.) The Performance Fee
Adjustment for any month is calculated by multiplying the rate of
the Performance Fee Adjustment ("Performance Fee Adjustment") (as
determined below) achieved for the 36-month period, times the
average daily net assets of the Fund for such 36-month period and
dividing the product by 12. The Performance Fee Adjustment Rate
is calculated by multiplying the Investment Performance
Differential (rounded downward to the nearest full point) times a
factor of .02%. Regardless of the Investment Performance
Differential, the Performance Fee Adjustment Rate shall not
exceed .30%. the same period.
Example
For example, if the Investment Performance Differential
was 11.6, it would be rounded to 11. The Investment
Performance Differential of 11 would be multiplied by
.02% to arrive at the Performance Fee Adjustment Rate of
.22%. The .22% Performance Fee Adjustment Rate would be
multiplied by the fraction of 1/12 and that product would
be multiplied by the Fund's average daily net assets for
the 36-month period to arrive at the Performance Fee
Adjustment.
The computation of the Investment Performance of the Fund and
the Investment Record of the Index will be made in accordance
with Rule 205-1 under the Investment Advisers Act of 1940 or any
other applicable rule as, from time to time, may be adopted or
amended. These terms are currently defined as follows:
The Investment Performance of the Fund is the sum of: (i) the
change in the Fund's net asset value per share during the period;
(ii) the value of the Fund's cash distributions per share having
an exdividend date occurring within the period; and (iii) the per
share amount of any capital gains taxes paid or accrued during
such period by the Fund for undistributed, realized long-term
capital gains.
The Investment Record of the Index is the sum of: (i) the
change in the level of the Index during the period; and (ii) the
value, computed consistently with the Index, of cash
distributions having an exdividend date occurring within the
period made by companies whose securities comprise the Index.
Equity Index Fund
Management Fee
PAGE 82
The Fund pays T. Rowe Price an annual investment management
fee in monthly installments of .20% of the average daily net
asset value of the Fund. Due to the effect of the Fund's expense
limitation, for the year ended December 31, 1993, the Fund did
not pay T. Rowe Price an investment management fee.
Equity Income, Growth & Income, Growth Stock, New Era, and New
Horizons 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.
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.
PAGE 83
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.
All Funds
CUSTODIAN
State Street Bank and Trust Company is the custodian for the
Fund's 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 Corporation.
The Fund (other than Equity Index Fund) 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
PAGE 84
Directors/Trustees in accordance with regulations under the
Investment Company Act of 1940. State Street 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.
CODE OF ETHICS
The Fund's investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities transactions
within three business days of their execution. In addition, all
employees must report their personal securities transactions
within ten days of their execution. Employees will not be
permitted to effect transactions in a security: If there are
pending client orders in the security; the security has been
purchased or sold by a client within seven calendar days; the
security is being considered for purchase for a client; a change
has occurred in T. Rowe Price's rating of the security within
five days; or the security is subject to internal trading
restrictions. In addition, employees are prohibited from
profiting from short-term trading (e.g., purchases and sales
involving the same security within 60 days). Any material
violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of
Ethics on an annual basis.
PAGE 85
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.
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
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.
PAGE 86
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.
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
PAGE 87
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.
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
PAGE 88
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
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
PAGE 89
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.
Trade Allocation Policies
T. Rowe Price has developed written trade allocation
guidelines for its Equity, Municipal, and Taxable Fixed Income
Trading Desks. Generally, when the amount of securities
PAGE 90
available in a public offering or the seconday market is
insufficient to satisfy the volume or price requirements for the
participating client portfolios, the guidelines require a pro
rata allocation based upon the amounts initially requested by
each portfolio manager. In allocating trades made on combined
basis, the Trading Desks seek to achieve the same net unit price
of the securities for each participating client. Because a pro
rata allocation may not always adequately accommodate all facts
and circumstances, the guidelines provide for exceptions to
allocate trades on an adjusted, pro rata basis. Examples of
where adjustments may be made include: (i) reallocations to
recognize the efforts of a portfolio managerin negotiating a
transaction or a private placement; (ii) reallocations to
eliminate deminimis positions; (iii) priority for accounts with
specialized investment policies and objectives; and (iv)
reallocations in light of a participating portfolio's
characteristics (e.g., industry or issuer concentration,
duration, and credit exposure).
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.
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
PAGE 91
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
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
For the years 1995, 1994, and 1993, the total brokerage
commissions paid by each Fund, including the discounts received
by securities dealers in connection with underwritings, and the
percentage of these commissions paid to firms which provided
research, statistical, or other services to T. Rowe Price in
connection with the management of each Fund, or, in some cases,
to each Fund, was as shown below.
1995 1994 1993
Fund Commissions % Commissions % Commissions %
Balanced $392,293.25 14.8% $258,006 18.1% $91,678 46.1%
Blue Chip
Growth 420,930.75 10.3% 219,539 11.9% 177,317 10%
Capital
PAGE 92
Apprec-
iation 1,922,697.14 32.4% 828,822 67.4% 1,141,732 45.28%
Capital
Oppor-
tunity 528,726.58 24.6% 7,857 7.2% * *
Dividend
Growth 373,297.65 9.6% 294,479 15.9% 282,409 22%
Equity
Income 4,193,326.16 43.2%4,511,187 48.4% 4,660,406 42.12%
Growth &
Income 1,431,193.83 44.7%2,550,364 23.7% 2,814,544 26.9%
Growth
Stock 4,769,565.10 42.6%4,002,616 51.6% 3,983,572 40.4%
Equity
Index 98,198.06 0.1% 21,198 3.27% 20,978 8.6%
Mid-Cap
Growth 924,702.44 16.5% 349,991 30.8% 441,166 18.9%
New America
Growth 3,605,674.73 16.1%1,646,550 23.7% 2,345,540 17.6%
New Era 1,259,196.48 42.7%1,863,739 35.8% 1,758,270 28.03%
New
Horizons 8,729,848.09 9.1%5,246,463 10.0% 7,336,582 8.2%
OTC 873,954.17 7.5% 584,525 4.6% 776,333 6.68%
Science &
Tech-
nology 4,766,170.90 18.5%1,272,479 45.4% 2,186,853 23.97%
Small-Cap
Value 1,321,168.10 14.4% 512,452 26.28% 995,993 11.4%
Value 270,118.81 32.3% 30,478 14.9% * *
* Prior to commencement of operations.
On December 31, 1995, the Equity Index Fund held common stock
of the following regular brokers or dealers of the Fund: Bankers
Trust New York, Citicorp, Merrill Lynch, J.P. Morgan, Chemical
Bank, and Household International respectively, with a value of
$493,000, $2,722,000, $860,000, $1,438,000, $1,413,000, and
549,000 respectively. The fund also held commerical paper of
Chemical Bank with a value of $4,922,000. In 1995, Bankers Trust
New York, Citicorp, Merrill Lynch, J.P. Morgan, Chemical Bank,
and Household International were among the Fund's regular brokers
or dealers as defined in Rule 10b-1 under the Investment Company
Act of 1940.
PAGE 93
On December 31, 1995, the Growth & Income Fund held common
stocks of the following regular broker dealers of the Fund: Bear
Stearns and Household International, respectively, with a value
of $11,092,000, and $19,551,000 respectively. The Fund also held
commercial paper of Morgan Stanley with a value of $10,003,000.
In 1995, Bear Stearns, Household International, and Morgan
Stanley were among the Fund's regular brokers or dealers as
defined in Rule 10b-1 under the Investment Company Act of
1940.
On December 31, 1995, the Small-Cap Value Fund held
held commercial paper of Morgan Stanley Group with a value of
$7,002,000. In 1995, the Morgan Stanely Group was among the
Fund's regular brokers or dealers as defined in Rule 10b-1 under
the Investment Company Act of 1940.
On December 31, 1995, the Dividend Growth Fund held commercial
paper of Morgan Stanley Group with a value of $2,001,000. In
1995, the Morgan Stanley Group was among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the Investment
Company Act of 1940.
On December 31, 1995, the Capital Appreciation Fund held
commerical paper of Morgan Stanley Group with a value of
$10,003,000. In 1995, the Morgan Stanley Group was among the
Fund's regular brokers or dealers as defined in Rule 10b-1 under
the Investment Company Act of 1940.
On December 31, 1995, the OTC Fund held commercial paper of
Morgan Stanley Group with a value of $2,001,000. In 1995, the
Morgan Stanley Group was among the Fund's regular brokers or
dealers as defined in Rule 10b-1 under the Investment Company Act
of 1940.
On December 31, 1995, the Equity Income Fund held common stock
of the following regular broker dealers of the Fund: Bankers
Trust, Chemical Bank, and J.P. Morgan, respectively, with a value
of $26,600,000, $35,250,000, and $60,187,000, respectively. The
Fund also held commercial paper of GMAC and the Morgan Stanley
Group, with a value of $7,002,000 and $31,455,000. In 1995,
Bankers Trust, Chemical Bank, J.P. Morgan, GMAC, and Morgan
Stanley Group were among the Fund's regular brokers or dealers as
defined in Rule 10b-1 under the Investment Company Act of
1940.
PAGE 94
On December 31, 1994, the Balanced Fund held common stock of
J.P. Morgan with a value of $$1,605,000. The Fund also held bond
of Lehman Brothers Holding with a value of $1,679,000. The Fund
also held commercial paper of Morgan Stanley Group with a value
of $5,006,000. In 1995, J.P. Morgan, Lehman Brothers Holding,
and the Morgan Stanley Group were among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the Investment
Company Act of 1940.
The portfolio turnover rate for each Fund for the years
ended 1995, 1994, and 1993, was as follows:
Fund 1995 1994 1993
Balanced 12.6% 33.3% 8.7%
Blue Chip Growth 38.1% 75.0% 89.0%*
Capital Appreciation 47.0% 43.6% 39.4%
Capital Opportunity 136.9% 134.5% **
Dividend Growth 56.1% 71.4% 51.2%*
Equity Income 21.4% 36.3% 31.2%
Growth & Income 26.2% 25.6% 22.4%
Growth Stock 42.5% 54.0% 35.3%
Equity Index 1.3% 1.3% 0.8%
Mid-Cap Growth 57.5% 48.7% 62.4%
New America Growth 56.2% 31.0% 43.7%
New Era 22.7% 24.7% 24.7%
New Horizons 55.9% 44.3% 49.4%
OTC 57.8% 41.9% 40.8%
Science & Technology 130.3% 113.3% 163.4%
Small-Cap Value 18.1% 21.4% 11.8%
Value 89.7% 30.8% **
* Annualized.
** Prior to commencement of operations.
All Funds
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities
exchange 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. Listed
securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the
PAGE 95
mean of the latest bid and asked prices. Other equity securities
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.
Debt securities are generally traded in the over-the-counter
market and are valued at a price deemed best to reflect fair
value as quoted by dealers who make markets in these securities
or by an independent pricing service. Short-term debt securities
are valued at their cost in local currency which, when combined
with accrued interest, approximates fair value.
For 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 a 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 the officers of the Fund, as authorized
by the Board of Directors/Trustees.
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
PAGE 96
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
govern as to whether the conditions prescribed in (b), (c), or
(d) exist.
DIVIDENDS AND DISTRIBUTIONS
Unless you elect otherwise, the Fund's annual dividend and
capital gain distribution, if any, and final quarterly dividend
(Balanced, Dividend Growth, Equity Income, Equity Index, Growth &
Income and Value Funds) 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 by December
31 of each year 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 within 12 months 100%
of ordinary income and capital gains as of December 31 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. For federal income
tax purposes, the Fund is permitted to carry forward its net
PAGE 97
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 February
29, 1996, the books of each Fund indicated that each Fund's
aggregate net assets included undistributed net income, net
realized capital gains or losses, and unrealized appreciation or
depreciation which are listed below.
Net Realized
Undistributed Capital Gain Unrealized
Fund Net Income (Losses) Appreciation
Balanced $ 4,423,286 $1,013,554 $101,184,578
Blue Chip Growth 214,216 423,691 31,513,593
Capital Appreciation 5,401,174 11,897,290 122,908,598
Dividend Growth 366,155 990,611 16,086,698
Equity Income 35,755,498 58,416,685 1,154,426,666
Growth & Income 7,825,015 (8,768,222) 470,852,621
Growth Stock 2,309,286 99,917,236 960,192,536
Equity Index 1,792,520 2,273,081 110,920,325
Mid-Cap Growth (34,847) 5,594,212 62,318,505
New America Growth (909,579) 51,551,871 357,150,610
New Era 3,468,538 15,109,820 340,361,783
New Horizons (1,878,972) 136,794,697 1,053,351,110
OTC 294,671 6,506,267 70,548,454
Science & Technology (1,930,297) 140,189,323 429,481,598
Small-Cap Value 2,253,044 4,590,568 172,516,757
Value 132,621 2,262,008 4,499,270
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
PAGE 98
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.
All Funds, Except Equity Index Fund
To the extent the Fund invests in foreign securities, the
following would apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. Capital gains on the sale of such holdings will be
deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition to bearing their proportionate
share of the funds expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses
of such funds. In addition, the Fund may be subject to corporate
income tax and an interest charge on certain dividends and
capital gains earned from these investments, regardless of
whether such income and gains were distributed to shareholders.
In accordance with tax regulations, the Fund intends to
treat these securities as sold on the last day of the Fund's
fiscal year and recognize any gains for tax purposes at that
time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received
cash to pay such distributions.
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
ordinary income dividend paid by the Fund will be increased. If
the result is a loss, the income dividend paid by the Fund will
be decreased, or to the extent such dividend has already been
paid, it may be classified as a return of capital. Adjustments
to reflect these gains and losses will be made at the end of the
Fund's taxable year.
PAGE 99
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.
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/95 12/31/95 12/31/95 12/31/95
S&P 500 37.58% 115.45% 299.44%
Dow Jones
Industrial Avg. 36.89 124.35 360.22
CPI 2.54 14.72 40.44
Balanced Fund 24.88 82.15 205.43% 24,937.29%
(12/31/39)
Lipper Balanced
Fund Index 24.61 83.16 202.55 N/A
Lehman Brothers
Aggregate Index 18.47 57.27 150.80 N/A
Salomon Brothers Broad
Investment Grade Index 18.53 57.89 150.71 N/A
Blue Chip Growth Fund 37.90 N/A N/A 58.92
(6/30/93)
Capital Appreciation
Fund 22.57 95.66 N/A 226.24
(6/30/86)
Lipper Capital Appreciation
PAGE 100
Funds Average 30.34 45.73 245.70 172.65
Capital Opportunity
Fund 41.93 N/A N/A 69.46
Lipper Capital Appreciation
Average 28.65 N/A N/A 38.26
Lipper Capital Appreciation
Index 29.00 N/A N/A 39.25
Nasdaq Composite 34.78 N/A N/A 46.79
Dividend Growth Fund 31.75 N/A N/A 60.72
(12/30/92)
Equity Income Fund 33.35 128.89 306.48 347.12
(10/31/85)
Lipper Equity Income
Fund Average 30.17 45.15 210.81 239.34
Equity Index Fund 37.16 109.97 N/A 110.63
(3/30/90)
Lehman Brothers
Aggregate Index 18.47 57.27 150.80 72.74
Salomon Brothers Broad
Investment Grade Index 18.53 57.89 150.71 73.56
Growth & Income Fund 30.92 124.00 207.20 412.96
(12/21/82)
Lipper Growth and Income
Fund Index 31.00 108.65 246.88 471.04*
Growth Stock Fund 30.97 116.53 248.26 13,868.67
(4/11/50)
Mid-Cap Growth Fund 40.95 N/A N/A 122.24
(6/30/92)
Russell 2000 28.44 159.31 192.17 77.25
S&P 400 Mid-Cap Index 30.95 141.68 327.69 67.02
NASDAQ Composite 39.92 181.44 223.80 86.68
Lipper Growth
Fund Index 32.09 112.50 248.99 62.41
Lipper Growth Fund
Category Average 30.79 42.99 251.83 59.98
New America Growth Fund 44.31 179.21 316.34 393.36
(9/30/85)
Lipper Growth
Fund Index 32.09 112.50 248.99 303.65
PAGE 101
New Era Fund 20.76 71.56 193.36 1,348.54
(1/20/69)
Lipper Natural Resources
Funds Average 18.80 43.85 137.57 N/A
New Horizons Fund 55.44 220.37 285.89 5,649.07
(6/3/60)
OTC Fund 33.85 150.40 176.36 19,254.21
(6/1/56)
Science & Technology
Fund 55.53 325.59 N/A 439.33
(9/30/87)
Lipper Science and
Technology Index 36.84 189.98 N/A 181.19
Russell 2000 28.44 159.31 192.17 114.97
Small-Cap Value Fund 29.29 154.96 N/A 156.93
(6/30/88)
Russell 2000 28.44 159.31 192.17 138.76
NASDAQ Composite 39.92 181.44 223.80 166.59
Lipper Small Company
Growth Funds Average 31.54 52.31 271.46 188.53
Value Fund 35.39 N/A N/A 58.82
Lipper Growth & Income
Average 27.73 N/A N/A 36.00
S&P 500 Index 32.10 N/A N/A 44.94
*Since 12/31/82
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/95 12/31/95 12/31/95 12/31/95
S&P 500 37.58% 16.59 14.85%
Dow Jones
Industrial Avg. 36.89 17.54 16.49
CPI 2.54 2.79 3.45
Balanced Fund 24.88 12.74 11.81 10.37
(12/31/39)
Lipper Balanced
Fund Index 24.61 12.87 11.71 N/A
PAGE 102
Lehman Brothers
Aggregate Index 18.47 9.48 9.63 N/A
Salomon Brothers Broad
Investment Grade Index 18.53 9.56 9.71 N/A
Blue Chip Growth Fund 37.90 N/A N/A 20.33
(6/30/93)
Capital Appreciation
Fund 22.57 14.37 N/A 13.25
(6/30/86)
Lipper Capital Appreciation
Funds Average 30.34 16.97 12.31 10.34
Capital Opportunity
Fund 41.93 N/A N/A 48.65
Lipper Capital Appreciation
Average 28.65 N/A N/A 27.33
Lipper Capital Appreciation
Index 29.00 N/A N/A 28.19
Nasdaq Composite 34.78 N/A N/A 33.44
Dividend Growth Fund 31.75 N/A N/A 17.14
(12/30/92)
Equity Income Fund 33.35 18.01 15.05 15.87
(10/31/85)
Lipper Equity Income
Fund Average 30.17 15.04 11.67 12.42
Equity Index Fund 37.16 15.99 N/A 13.81
(3/30/90)
Lehman Brothers
Aggregate Index 18.47 9.48 9.63 9.97
Salomon Brothers Broad
Investment Grade Index 18.53 9.56 9.71 10.06
Growth & Income Fund 30.92 17.50 11.88 13.37
(12/21/82)
Lipper Growth and Income
Fund Index 31.00 15.85 13.24 14.34*
Growth Stock Fund 30.97 16.71 13.29 11.41
(4/11/50)
Mid-Cap Growth Fund 40.95 N/A N/A 25.61
(6/30/92)
Russell 2000 28.44 20.99 11.32 17.75
PAGE 103
S&P 400 Mid-Cap Index 30.95 19.30 15.64 15.77
NASDAQ 39.92 22.99 12.47 19.51
Lipper Growth
Fund Index 32.09 16.27 13.31 14.86
Lipper Growth Fund
Category Average 30.79 16.01 12.94 14.11
New America Growth Fund 44.31 22.80 15.33 16.85
(9/30/85)
Lipper Growth
Fund Index 32.09 16.27 13.31 14.58
New Era Fund 20.76 11.40 11.36 10.43
(1/20/69)
Lipper Natural Resources
Funds Average 18.80 8.41 8.74 N/A
New Horizons Fund 55.44 26.22 14.46 12.06
(6/3/60)
OTC Fund 33.85 20.15 10.70 14.23
(6/1/56)
Science & Technology
Fund 55.53 33.60 N/A 22.66
(9/30/87)
Lipper Science and
Technology Index 36.84 23.73 N/A 13.35
Russell 2000 28.44 20.99 11.32 9.72
Small-Cap Value Fund 29.29 20.59 N/A 13.40
(6/30/88)
Russell 2000 28.44 20.99 11.32 12.30
NASDAQ Composite 39.92 22.99 12.47 13.96
Lipper Small Company
Growth Funds Average 31.54 20.78 13.62 14.69
Value Fund 35.39 N/A N/A 36.20
Lipper Growth & Income
Average 27.73 N/A N/A 22.72
S&P 500 Index 32.10 N/A N/A 28.13
*Since 12/31/82
Outside Sources of Information
From time to time, in reports and promotions literature: (1)
the Fund's total return performance or P/E ratio may be compared
PAGE 104
to any one or combination of the following: (i) the Standard &
Poor's 500 Stock Index so that you may compare the Fund's results
with those of a group of unmanaged securities widely regarded by
investors as representative of the stock market in general; (ii)
other groups of mutual funds, including T. Rowe Price Funds,
tracked by: (A) Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets; (B) Morningstar,
Inc., another widely used independent research firm which rates
mutual funds by overall performance, investment objective and
assets; or (C) other financial or business publications, such as
Business Week, Money Magazine, Forbes and Barron's, which provide
similar information; (iii) indices of stocks comparable to those
in which the Fund invests; (2) the Consumer Price Index (measure
for inflation) may be used to assess the real rate of return from
an investment in the Fund; (3) other government statistics such
as GNP, and net import and export figures derived from
governmental publications, e.g., The Survey of Current Business,
may be used to illustrate investment attributes of the Fund or
the general economic, business, investment, or financial
environment in which the Fund operates; (4) various financial,
economic and market statistics developed by brokers, dealers and
other persons may be used to illustrate aspects of the Fund's
performance; (5) the effect of tax-deferred compounding on the
Fund's investment returns, or on returns in general, may be
illustrated by graphs, charts, etc. where such graphs or charts
would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred
basis (assuming reinvestment of capital gains and dividends and
assuming one or more tax rates) with the return on a taxable
basis; and (6) the sectors or industries in which the Fund
invests may be compared to relevant indices or surveys (e.g., S&P
Industry Surveys) in order to evaluate the Fund's historical
performance or current or potential value with respect to the
particular industry or sector. In connection with (5) above,
information derived from the following chart may be used:
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution
and 28% tax bracket.
Year Taxable Tax Deferred
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
PAGE 105
25 125,100 184,600
30 183,300 297,200
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.
The Balanced Fund may also compare its performance or yield
to a variety of fixed income investments (e.g., repos, CDs,
Treasury bills) and other measures of performance set forth in
financial publications maintained by persons such as the Donoghue
Organization, Merrill Lynch, Pierce Fenner & Smith, Inc., Salomon
Brothers, Inc. etc.
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
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; Tax
Considerations for Investors discusses the tax advantages of
annuities and municipal bonds and how to access whether they are
suitable for your portfolio, reviews pros and cons of placing
PAGE 106
assets in a gift to minors account and summarizes the benefits
and types of tax-deferred retirement plans currently available;
the Personal Strategy Planner simplifies investment decision
making by helping investors define personal financial goals,
established length of time the investor intends to invest,
determine risk "comfort zone" and select a diversified investment
mix; and the How to Choose a Bond Fund guide which discusses how
to choose an appropriate bond fund for your portfolio. 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 12/31/95
50 years 20 years 10 years 5 years
Small-Company Stocks 13.8% 19.6% 11.9% 24.5%
Large-Company Stocks 11.9 14.6 14.8 16.6
Foreign Stocks N/A 15.1 13.9 9.7
Long-Term Corporate Bonds 5.7 10.5 11.2 12.1
Intermediate-Term U.S.
Gov't. Bonds 5.9 9.7 9.1 8.8
Treasury Bills 4.8 7.3 5.5 4.3
U.S. Inflation 4.4 5.2 3.5 2.8
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
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
PAGE 107
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 12/31/95 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real BestWorst
Portfolio Growth IncomeSafety ReturnReturn** YearYear
I. Low
Risk 40% 40% 20% 11.8% 6.5% 24.9% 0.1% $ 92,675
II. Moderate
Risk 60% 30% 10% 13.1% 7.9% 29.1% -1.8%$116,826
III. High
Risk 80% 20% 0% 14.3% 9.1% 33.4% -5.2%$145,611
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1995 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far
East [EAFE] Index), bonds (Lehman Brothers Aggregate Bond
Index from 1976-95 and 30-day Treasury bills from January
1976 through December 1995. 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 5.2% for the 20-year period ended
12/31/95.
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.
Growing income from rising dividends
Chart 1
A line graph titled "Growing income from rising dividends" which
depicts hypothetical income and yield on a original investment of
$10,000 in a stock currently yielding 3% and whose dividends grow
8% a year. The chart shows a range of yields from 0% to 15% and
income from $0 to $1,500, for five year periods from zero to 20.
The yield and income for each of the periods are approximately as
listed below.
5 Years 10 Years 15 Years 20 Years
Yield 4% 6% 9% 14%
Income $400 $600 $900 $1,400
Chart depicts hypothetical income and yield on an original
investment of $10,000 in a stock currently yielding 3% and whose
dividends grow 8% a year.
Example is for illustrative purposes only and is not indicative
of an investment in any T. Rowe Price fund.
PAGE 109
New Horizons, OTC and Small-Cap Value Funds
PERFORMANCE OF LARGE VS. SMALL COMPANY
STOCKS FOLLOWING RECESSIONS
(Total Return For 12 Months After Recession)
Chart 2
Bar graph appears here comparing large and small company
stocks during eight post-recession periods.
Large Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
________________________________________________________________
36% 38% 13% 11% 28% 14% 26% 11%
_________________________________________________________________
Small Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
51% 53% 18% 12% 58% 45% 44% 28%
_________________________________________________________________
Source: T. Rowe Price Associates, Inc.
Data supplied by Ibbotson Associates
The average price-earnings (p/e) ratio of the T. Rowe Price
New Horizons Fund is a valuation measure widely used by the
investment community with respect to small company stocks, and,
in the opinion of T. Rowe Price, has been a good indicator of
future small-cap stock performance. The following chart is
intended to show the history of the average (unweighted) p/e
ratio of the New Horizons Fund's portfolio companies compared
with the p/e ratio of the Standard & Poor's 500 Index. Of
course, the portfolio of the OTC and Small-Cap Value Funds will
differ from the portfolio of the New Horizons Fund. Earnings per
share are estimated by T. Rowe Price for each quarter end.
PAGE 110
T. ROWE PRICE NEW HORIZONS FUND, INC.
P/E Ratio of Fund's Portfolio Securities
Relative To The S & P "500" P/E Ratio
(12 Months Forward) March 31, 1995
Chart 3
This is a one line chart that shows the p/e ratio of the New
Horizons Fund relative to the p/e ratio of the S&P 500 Stock
Index. The ratio between the two p/e's is depicted quarterly
from 3/61 to 3/31/96.
The horizontal axis is divided into two year periods. The
vertical axis indicates the relative p/e ratio with 0.5, 1,
1.5, 2 and 2.5 indicated by horizontal lines. The ratio at
3/61 is approximately 2, is at the lowest point in the
first quarter of 1977 at approximately 0.95, is at the
highest point near the end of 1983 at approximately 2.2,
and is at 1.48 on March 31, 1996.
Source: T. Rowe Price Associates, Inc.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge
sales fees to investors or use fund assets to finance
distribution activities. These fees are in addition to the
normal advisory fees and expenses charged by all mutual funds.
There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or
"load") can be charged at the time the fund is purchased
(front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested.
Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1
plans allow for the payment of marketing and sales expenses from
fund assets. These expenses are usually computed daily as a
fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges
or 12b-1 fees. No-load funds are generally sold directly to the
public without the use of commissioned sales representatives.
This means that 100% of your purchase is invested for you.
Redemptions in Kind
PAGE 111
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.
Balanced Fund
On August 31, 1992, the T. Rowe Price Balanced Fund acquired
substantially all of the assets of the Axe-Houghton Fund B, a
series of Axe-Houghton Funds, Inc. As a result of this
acquisition, the Securities & Exchange Commission requires that
the historical performance information of the Balanced Fund be
based on the performance of Fund B. Therefore, all performance
information of the Balanced Fund prior to September 1, 1992,
reflects the performance of Fund B and investment managers other
than T. Rowe Price. Performance information after August 31,
1992, reflects the combined assets of the Balanced Fund and Fund
B.
All Funds, Except Capital Appreciation, Equity Income and New
America Growth Funds
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
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,
PAGE 112
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
all the votes of the Fund entitled to be cast at such meeting.
PAGE 113
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.
Capital Appreciation, Equity Income and New America Growth Funds
ORGANIZATION OF THE FUND
For tax and business reasons, the Funds' were organized as
Massachusetts Business Trusts (1985 for the Equity Income and New
America Growth Funds and 1986 for the Capital Appreciation Fund),
and are registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 as diversified, open-end
investment companies, commonly known as "mutual funds."
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
PAGE 114
Declaration of Trust without the affirmative vote of a majority
of the outstanding shares of the Trust.
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's 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
PAGE 115
Shereff, Friedman, Hoffman, & Goodman, LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Fund.
INDEPENDENT ACCOUNTANTS
Blue Chip Growth, Dividend Growth, Equity Income, Growth &
Income, Mid-Cap Growth, New America Growth, and New Era Funds
Price Waterhouse LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the
Fund.
Balanced, Capital Appreciation, Capital Opportunity, Growth
Stock, Equity Index Fund, Health Sciences, New Horizons, OTC,
Science & Technology, and Small-Cap Value, and Value Funds
Coopers & Lybrand L.L.P., 217 East Redwood Street,
Baltimore, Maryland 21202, are independent accountants to the
Fund.
The financial statements of the Fund for the year ended
December 31, 1995, and the report of independent accountants are
included in the Fund's Annual Report for the year ended December
31, 1995. 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 December 31, 1995, are incorporated
into this Statement of Additional Information by reference:
ANNUAL REPORT REFERENCES:
CAPITAL EQUITY EQUITY GROWTH &
APPRECIATION INCOME INDEX INCOME
____________ ________ ______ ________
Report of Independent
Accountants 15 15 19 15
Statement of Net Assets,
December 31, 1995 7-10 6-10 8-13 6-9
Statement of Operations,
year ended
December 31, 1995 11 11 14 10
Statement of Changes in
Net Assets, years ended
December 31, 1995 and
PAGE 116
December 31, 1994 12 12 15 11
Notes to Financial
Statements,
December 31, 1995 13-14 13-14 16-17 12-13
Financial Highlights 14 14 18 14
NEW
GROWTH AMERICA NEW
STOCK GROWTH ERA OTC
__________ ____________ _______ ______
Report of Independent
Accountants 18 14 15 16
Statement of Net Assets,
December 31, 1995 8-12 7-8 7-9 7-10
Statement of Operations,
year ended
December 31, 1995 13 9 10 11
Statement of Changes in
Net Assets, years ended
December 31, 1995 and
December 31, 1994 14 10 11 12
Notes to Financial
Statements,
December 31, 1995 15-16 11-12 12-13 13-14
Financial Highlights 17 13 14 15
PAGE 117
MID-CAP
BALANCED GROWTH
_________ ________
Report of Independent
Accountants 21 15
Statement of Net Assets,
December 31, 1995 6-15 7-9
Statement of Operations,
year ended
December 31, 1995 16 10
Statement of Changes in
Net Assets, years ended
December 31, 1995 and
December 31, 1994 17 11
Notes to Financial
Statements,
December 31, 1995 18-19 12-13
Financial Highlights 20 14
SCIENCE
NEW & SMALL-CAP
HORIZONS TECHNOLOGY VALUE
__________ __________ ________
Report of Independent
Accountants 19 15 17
Portfolio of Investments,
December 31, 1995 8-12 8-9 6-10
Statement of Assets and
Liabilities,
December 31, 1995 13 9 11
Statement of Operations,
year ended
December 31, 1995 14 10 12
Statement of Changes
in Net Assets, years ended
December 31, 1995 and
December 31, 1994 15 11 13
Notes to Financial
Statements, December 31, 1995 16-17 12-13 14-15
Financial Highlights 18 14 16
PAGE 118
BLUE CHIP
GROWTH
___________
Report of Independent Accountants 15
Statement of Net Assets, December 31, 1995 7-9
Statement of Operations, year ended December 31, 1995 10
Statement of Changes in Net Assets, periods
ended December 31, 1995 and December 31, 1994 11
Notes to Financial Statements, December 31, 1995 12-13
Financial Highlights 14
DIVIDEND
GROWTH
____________
Report of Independent Accountants 15
Statement of Net Assets, December 31, 1995 6-9
Statement of Operations, year ended December 31, 1995 10
Statement of Changes in Net Assets, years
ended December 31, 1995 and December 31, 1994 11
Notes to Financial Statements, December 31, 1995 12-13
Financial Highlights 14
VALUE
_______
Report of Independent Accountants 13
Statement of Net Assets, December 31, 1995 5-7
Statement of Operations, year ended December 31, 1995 8
Statement of Changes in Net Assets, periods ended
December 31, 1995 and September 30, 1994
(Commencement of Operations) to December 31, 1994 9
Notes to Financial Statements, December 31, 1995 10-11
Financial Highlights 12
CAPITAL
OPPORTUNITY
_____________
Report of Independent Accountants 13
Statement of Net Assets, December 31, 1995 6-7
Statement of Operations, year ended December 30, 1995 8
Statement of Changes in Net Assets, periods ended
December 31, 1995 and November 30, 1994
(Commencement of Operations) to December 31, 1994 9
Notes to Financial Statements, December 31, 1995 10-11
PAGE 119
Financial Highlights 12
PAGE 120
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 18, 1995
Assets
Receivable for Fund shares sold $100,000
Deferred organizational expenses 50,995
________
Total assets 150,995
Liabilities
Amount due Manager 46,995
Accrued expenses 4,000
________
Total liabilities 50,995
________
Net Assets - offering and redemption
price of $10.00 per share; 1,000,000,000
shares of $0.0001 par value capital
stock authorized, 10,000 shares
outstanding $100,000
_________
_________
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price Health Sciences Fund, Inc. (the "Corporation")
was organized on October 20, 1995, as a Maryland corporation and
is registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The
Corporation has had no operations other than those matters
related to organization and registration as an investment
company, the registration of shares for sale under the Securities
Act of 1933, and the sale of 10,000 shares of the T. Rowe Price
Health Sciences Fund at $10.00 per share on December 18, 1995 to
T. Rowe Price Associates, Inc. via share exchange from a T. Rowe
Price money-market mutual fund. The exchange was settled in the
ordinary course of business on December 19, 1995 with the
transfer of $100,000 cash. The Corporation has entered into an
investment management agreement with T. Rowe Price Associates,
Inc. (the Manager) which is described in the Statement of
Additional Information under the heading "Investment Management
Services."
PAGE 121
Organizational expenses for the Corporation in the amount of
$50,995 have been accrued at December 18, 1995, and will be
amortized on a straight-line basis over a period not to exceed
sixty months. The Manager has agreed to advance certain
organizational expenses incurred by the Corporation and will be
reimbursed for such expenses approximately six months after the
commencement of the Corporation's operations.
The Manager has also agreed that in the event any of its
initial shares are redeemed during the 60-month amortization
period of the deferred organizational expenses, proceeds from a
redemption of the shares representing the initial capital will be
reduced by a pro rata portion of any unamortized organizational
expenses.
PAGE 122
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
T. Rowe Price Health Sciences Fund, Inc.
We have audited the accompanying statement of assets and
liabilities of the T. Rowe Price Health Sciences Fund, Inc. (the
"Fund")as of December 18, 1995. This financial statement is the
responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities
presents fairly, in all material respects, the financial position
of T. Rowe Price Health Sciences Fund, Inc. as of December 18,
1995, in conformity with generally accepted accounting
principles.
/s/Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
Baltimore, Maryland
December 19, 1995
PAGE 123
RATINGS OF CORPORATE DEBT SECURITIES
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 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.
C-Lowest-rated; extremely poor prospects of ever attaining
investment standing.
PAGE 124
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
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.
D-In default.
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.
PAGE 125
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.
