Semiannual Report
Corporate Income Fund
November 30, 1998
T. Rowe Price
Report Highlights
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Corporate Income Fund
o Many types of foreign and U.S.corporate bonds suffered in the wake of
financial turmoil overseas.
o The fund trailed the Lehman Aggregate Bond Index and the average for
similar funds for the 6- and 12-month periods ended November 30, 1998.
o Relative results primarily reflected exposure to Yankee, high-yield, and
split-rated bonds, all of which lagged the high-grade sector.
o We replaced many financial services and Yankee bonds with more defensive
investment-grade and high-yield securities.
o We expect economic and earnings growth to slow in the months ahead and
believe the fund will provide relatively attractive returns through 1999.
Fellow Shareholders
Economic difficulties in Russia, Japan, and Latin America-coupled with a vacuum
in global leadership-created an unfavorable environment for many types of
corporate bonds and for the fund. U.S. Treasury securities and high-grade
corporate bonds benefited from an investor flight to safety, and the higher-risk
bonds in which your fund usually invests suffered accordingly.
MARKET ENVIRONMENT
The U.S. economy continued on its path of high employment, strong economic
growth, and low inflation over the past six months. However, threats to
continued global economic expansion stemming from recent volatility and lack of
liquidity in credit markets, and from signs of a slowdown in the manufacturing
sector, resulted in the Federal Reserve lowering the key fed funds rate
three-quarters of a percentage point between September 29 and November 17.
Interest Rate Levels
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BBB Rated 10-Year
Corporate Treasury
Bonds Note
11/30/97 7.43 5.86
7.36 5.74
7.31 5.63
2/98 7.31 5.63
7.31 5.63
7.29 5.75
5/98 7.24 5.57
7.24 5.44
7.28 5.50
8/98 7.33 5.20
7.14 4.46
7.32 4.63
11/30/98 7.17 4.83
In July, the election of a new Prime Minister in Japan, and uncertainty over the
severity of the country's recession and banking crisis, continued to put
downward pressure on the currencies of many Asian countries. This, in turn,
challenged previous assumptions about economic stability in Hong Kong and China.
In August, the major market event was the change of government in Russia and the
country's subsequent devaluation and debt restructuring. Widespread fears of
contagion resulted in severe price depreciation throughout the emerging market
bond sector. On September 25, financial markets were further roiled as details
emerged about the bailout effort for hedge fund Long-Term Capital Management.
The ongoing international deterioration took its toll on the largest economies
in South America and eventually had a severe impact on U.S. financial markets.
Total Return By Credit Quality
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Period Ended 11/30/98
6-Month 12-Month
Return Return
AAA/AA/A 5.21 9.95
BBB 3.21 8.11
BBB/BB 0.16 5.63
BB 3.00 8.42
B -2.60 3.61
Source: Salomon Smith Barney Holding, Inc.
On September 29, the Federal Reserve initiated a series of cuts in short-term
interest rates in an effort to restore stability and liquidity to the bond
markets. Fed Chairman Alan Greenspan noted that growing caution by lenders and
unsettled conditions in financial markets could restrain U.S. economic growth in
coming months. Initially, investors panicked and flocked to the safety of the
U.S. Treasury market, and the 30-year bond yield briefly fell to around 4.8%.
Following the Fed's surprise rate cut on October 15, risk premiums on many
corporate bonds (the higher yields investors demand for assuming greater risk)
began to narrow the gap with Treasury yields, as corporate bonds outperformed
Treasury securities. While these premiums have continued to decline over the
past six weeks, current yields remain attractive compared with historical
averages in some sectors.
During the past six months, single-B and split-rated (BBB/BB) corporate bonds
significantly underperformed high-grade (AAA and AA) corporate bonds. Yankee
bonds (non-U.S. issuers of U.S. dollar-denominated bonds), specifically those
issued by companies with exposure to Latin America and Asia, also lagged
high-grade corporate bonds by a wide margin.
Preparing For The Year 2000
The Year 2000 draws closer every day, and it holds special meaning beyond the
arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations. T. Rowe Price has been taking steps to assure that its
computer systems and processes are capable of functioning in the Year 2000.
Detailed plans for remediation efforts have been developed and are currently
being executed.
OUR PLAN OF ACTION
We began to address these issues several years ago by requiring that all new
systems process and store four-digit years. We will complete all reprogramming
efforts for the major application systems, including business applications
required to service our customers and processing infrastructure necessary to
ensure the integrity of customer data and investments, by December 31, 1998,
leaving a full 12 months for system testing. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be able
to modify their interface files prior to December 31, 1999. Our goal is to
identify any noncompliant files so that we can implement alternative solutions.
In addition, we are scheduling tests for critical vendors and companies that
claim Year 2000 compliance to ensure that time-related data and calculations
function properly as we move into the next century.
SMOOTH TRANSITION PLANNED
We believe our programs and initiatives will provide a smooth transition into
the next millennium. We are assessing all systems providing products or services
to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we are taking steps to modify them where necessary for the
Year 2000. Our plan provides time to develop solutions for all noncompliant
systems and data files from customers or vendors.
The Securities Industry Association (SIA) is coordinating Year 2000 testing to
assure that securities markets, clearing corporations, depositories, and third
party service providers can send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta test of Year 2000
readiness. The test was considered successful in terms of transactions completed
and will serve as the basis for the SIA's industry-wide approach. During October
1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA
and is ready for the industry-wide test that is scheduled for March and April
1999.
For a more detailed discussion of our Year 2000 effort, as well as continuing
updates on our progress, please check our Web site (www.troweprice.com).
PERFORMANCE REVIEW
As you know, this fund's program focuses on higher-risk areas of the corporate
bond market to achieve attractive income and long-term returns. However, this
makes the fund vulnerable to volatility during periods such as we recently
experienced. The fund posted weak results for the six and 12 months ended
November 30, 1998, underperforming the Lehman Aggregate Bond Index, which was
buoyed by its significant Treasury bond component, and the average for the
Lipper peer group. Six-month results reflected a decline in the share price from
$10.39 last May to $9.84 at the end of November, which was only partly offset by
dividend income of $0.37 per share. During the 12-month period, the share price
declined $0.48 per share, but dividend income put the return in positive
territory.
Performance Comparison
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Periods Ended 11/30/98 6 Months 12 Months
Corporate Income Fund - 1.73% 2.55%
Lehman Aggregate Bond Index 5.15 9.45
Lipper Corporate Debt
BBB Funds Average 3.02 6.95
Quality Diversification
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A-Rated BBB-Rated BB-Rated B-Rated
and Above
28 47 15 10
The fund's lagging return can be attributed in part to holdings that were hit
particularly hard by the global market turmoil: split-rated bonds within the
investment grade sector (AAA through BBB), high-yield securities (below BBB),
and Yankee bonds from emerging markets. When the period began on May 31, Yankee
bonds constituted over one-third of the portfolio, of which a significant
portion consisted of Latin American and Asian corporate debt. The fund's largest
industry concentration globally at the end of November was in the bonds of
financial services companies, which accounted for 21% of portfolio assets. This
sector typically underperforms the overall corporate bond market during periods
of financial market turmoil.
STRATEGY
As always, our investment strategy focuses on fundamental credit analysis of the
companies and sectors in which we invest. Our in-house research enables us to
buy higher-yielding bonds with stable-to-improving credit outlooks that we
expect to perform well over a period of time. Following the recent sell-off in
the corporate bond market, we believe the current risk/reward relationship
presents an attractive opportunity for fixed income investors. With liquidity
returning to the credit markets, prices have improved in certain corporate
segments.
Our in-house research enables us to buy higher-yielding bonds with
stable-to-improving credit outlooks. . .
Given our outlook for some slowing in economic and corporate profit growth over
the next six months, we have been using this period of market improvement to
selectively reposition portions of the portfolio. We replaced some holdings in
financial services and Yankee bonds with more defensive investment-grade bonds
as well as high-yield securities. Taking advantage of a rally in Asian bonds in
late November and early December, we sold most of those holdings. Our Yankee
bond position at this writing (about one-quarter of assets) consists mostly of
Latin American companies we believe have good prospects. While financial
services bonds constituted a sizable portion of the portfolio at the end of
November, this sector is broadly diversified, and we have upgraded the credit
quality in certain cases.
OUTLOOK
We believe a period of slower economic and corporate earnings growth lies ahead
and corporations may reduce their capital spending plans. We are already seeing
signs of a slowdown in the manufacturing sector in the U.S. In addition, the
relatively strong dollar and weakening economic conditions in Latin America and
Asia should continue to restrain U.S. exports. Finally, with consumer credit at
record levels, the likelihood of a slowdown in consumer spending has increased.
In this scenario, we expect interest rates to continue to move in a narrow
range. Global equity markets have reacted favorably to recent rate cuts, and
there are some encouraging signs that Japan and Brazil are serious about
addressing their economic problems. Corporate bond markets typically respond
well to a significant rise in equity prices. Barring a recession in the U.S., or
another round of turmoil in financial markets, the environment for corporate
bonds should be favorable. Against this backdrop, we believe your fund will
provide attractive returns during the coming year.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Peter Van Dyke
President
December 18, 1998
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Change in Management
Peter Van Dyke, a managing director of T. Rowe Price Associates and director of
the taxable bond department, is retiring at the end of 1998. Mr. Van Dyke joined
the company in 1985 and had managed the Corporate Income Fund since its
inception in 1995. We are grateful for his contributions and wish him the best
for the future.
Robert M. Rubino has been appointed chairman of the Corporate Income Fund's
Investment Advisory Committee, responsible for day-to-day management of the
portfolio. Mr. Rubino joined T. Rowe Price in 1987 and the Fixed Income Division
in 1989, where he has served as a credit analyst and assistant portfolio manager
for the Corporate Income and New Income Funds. Other members of the fund's
Investment Advisory Committee include Steven G. Brooks, Heather R. Landon, Alan
D. Levenson, William T. Reynolds, and Mark J. Vaselkiv.
The preceding updates the Corporate Income Fund prospectus of October 1, 1998.
T. Rowe Price Corporate Income Fund
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Portfolio Highlights
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KEY STATISTICS
5/31/98 11/30/98
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Price Per Share $ 10.39 $ 9.84
Dividends Per Share
For 6 months 0.37 0.37
For 12 months 0.76 0.74
Dividend Yield *
For 6 months 7.32% 7.48%
For 12 months 7.63 7.53
30-Day Standardized Yield 7.66 7.76
Weighted Average Maturity (years) 16.8 15.3
Weighted Average Effective
Duration (years) 6.3 6.9
Weighted Average Quality ** BBB - BBB +
* Dividends earned and reinvested for the periods indicated are
annualized and divided by the average daily net asset values per
share for the same period.
** Based on T. Rowe Price research.
T. Rowe Price Corporate Income Fund
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Portfolio Highlights
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SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
5/31/98 11/30/98
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Banking 22% 14%
Health Care 5 7
Industrials 13 7
Finance and Credit 17 7
Broadcasting 2 4
Media and Communications 5 4
Savings and Loan -- 4
Electric Utilities -- 4
Container 6 4
Insurance -- 4
Specialty Chemicals 4 4
Drugs -- 4
U.S. Treasury Obligations -- 4
Automobiles and Related -- 4
Food and Tobacco 1 4
Aerospace and Defense 1 3
Telecommunications 1 3
All Other 23 13
Other Assets Less Liabilities -- 2
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Total 100% 100%
T. Rowe Price Corporate Income Fund
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Performance Comparison
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Corporate Income Fund
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This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
Lipper Corporate
Lehman Aggregate Debt BBB Funds Corporate Income
Bond Index Average Fund
10/31/95 10,000 10,000 10,000
11/95 10,150 10,172 10,163
11/96 10,766 10,900 10,941
11/97 11,579 11,785 12,062
11/98 12,674 12,576 12,369
Average Annual Compound Total Return
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This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 11/30/98 1 Year 3 Years Inception Date
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Corporate Income Fund 2.55% 6.77% 7.14% 10/31/95
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
T. Rowe Price Corporate Income Fund
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Unaudited
Financial Highlights
For a share outstanding throughout each period
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6 Months Year 10/31/95
Ended Ended Through
11/30/98 5/31/98 5/31/97 5/31/96
NET ASSET VALUE
Beginning of period $ 10.39 $ 9.81 $ 9.58 $ 10.00
Investment activities
Net investment income 0.37* 0.75* 0.73* 0.44*
Net realized and
unrealized gain (loss) (0.55) 0.59 0.23 (0.42)
Total from
investment activities (0.18) 1.34 0.96 0.02
Distributions
Net investment income (0.37) (0.76) (0.73) (0.44)
NET ASSET VALUE
End of period $ 9.84 $ 10.39 $ 9.81 $ 9.58
---------------------------------------------------
Ratios/Supplemental Data
Total return+ (1.73)%* 13.96%* 10.35%* 0.09%*
Ratio of expenses to
average net assets 0.80%*! 0.80%* 0.80%* 0.80%*!
Ratio of net investment
income to average
net assets 7.32%*! 7.33%* 7.55%* 7.56%*!
Portfolio turnover rate 121.1%! 146.0% 119.5% 70.5%!
Net assets, end of period
(in thousands) $ 54,021 $ 42,829 $ 20,732 $ 12,461
+ Total return reflects the rate that an investor would have earned
on an investment in the fund during each period, assuming reinvestment
of all distributions.
* Excludes expenses in excess of a 0.80% voluntary expense limitation in
effect through 5/31/99.
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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Unaudited November 30, 1998
Statement of Net Assets
Par/Shares Value
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In thousands
CORPORATE BONDS AND NOTES 93.2%
Aerospace and Defense 3.1%
Coltec, Sr. Notes, (144a),
7.50%, 4/15/08 $ 250 $ 259
Newport News Shipbuilding,
Sr. Notes, 8.625%, 12/1/06 400 422
Raytheon, 5.70%, 11/1/03 1,000 1,010
1,691
Automobiles and Related 3.7%
Federal-Mogul, 7.875%, 7/1/10 2,000 1,983
1,983
Banking 14.2%
Banco Generale, Sr. Sub. Notes,
(144a), 7.70%, 8/1/02 1,500 1,435
Banco Santiago, Sub. Notes,
7.00%, 7/18/07 2,000 1,636
Bank United, 8.875%, 5/1/07 1,500 1,562
Chase Capital I, 7.67%, 12/1/26 1,000 1,078
SB Treasury, (144a), 9.40%, 12/29/49 2,000 1,959
7,670
Broadcasting 3.7%
Chancellor Radio Broadcasting
Sr. Sub. Notes, (144a), 8.125%, 12/15/07 250 248
Muzak, Gtd. Sr. Notes, 10.00%, 10/1/03 265 276
Sinclair Broadcast Group, Sr. Sub. Notes,
8.75%, 12/15/07 250 253
TV Azteca, Gtd. Sr. Notes,
10.50%, 2/15/07 250 223
USA Networks, Sr. Notes, (144a),
6.75%, 11/15/05 1,000 998
1,998
Building Products 0.4%
Building Materials Corporation of America
Sr. Notes, 8.625%, 12/15/06 200 208
208
Cable Operators 2.5%
Adelphia Communications,
Sr. Notes, 9.875%, 3/1/07 250 276
CSC Holdings, Sr. Notes,
7.875%, 12/15/07 200 209
Fundy Cable, Sr. Secured 2nd Priority Notes,
11.00%, 11/15/05 150 161
Lenfest Communications, Sr. Sub. Notes,
10.50%, 6/15/06 250 285
Marcus Cable, Sr. Disc. Notes,
STEP, 0%, 12/15/05 250 236
Rogers Cablesystems, Sr. Sub. Deb.,
11.00%, 12/1/15 150 174
1,341
Consumer Products 2.0%
American Safety Razor, Sr. Notes,
9.875%, 8/1/05 $ 150 $ 149
Doane Products, Sr. Sub. Notes, (144a),
9.75%, 5/15/07 165 169
Herff Jones, Sr. Sub. Notes,
11.00%, 8/15/05 250 272
Holmes Products, Gtd. Notes,
9.875%, 11/15/07 200 192
Purina Mills, Sr. Sub. Notes, (144a),
9.00%, 3/15/10 100 103
Revlon Consumer Products, Sr. Sub. Notes,
8.625%, 2/1/08 200 198
1,083
Container 4.2%
Owens Illinois, Sr. Deb.,
7.80%, 5/15/18 2,000 1,890
Plastic Containers, Sr. Secured Notes,
10.00%, 12/15/06 150 158
Silgan Holdings, Sr. Sub. Deb.,
9.00%, 6/1/09 200 206
2,254
Drugs 4.0%
Merck, 6.40%, 3/1/28 2,000 2,145
2,145
Electric Utilities 4.2%
Alabama Power, 5.35%, 11/15/03 2,000 2,028
Niagara Mohawk, Sr. Notes,
7.75%, 10/1/08 250 270
2,298
Energy 1.1%
Amerigas Partners, Sr. Notes,
10.125%, 4/15/07 200 202
Energy Corporation of America, Sr. Sub. Notes,
9.50%, 5/15/07 100 96
Offshore Logistics, (144a),
7.875%, 1/15/08 100 95
Pride Petroleum Services, Sr. Notes,
9.375%, 5/1/07 200 198
591
Entertainment and Leisure 0.2%
Six Flags Theme Parks, Sr. Sub. Disc. Notes,
12.25%, 6/15/05 100 111
111
Finance and Credit 6.6%
Fairfax Financial Holdings,
8.25%, 10/1/15 1,500 1,503
Hutchison Whampoa Finance, (144a),
7.50%, 8/1/27 1,050 864
Ocwen Capital Trust I, 10.875%, 8/1/27 250 189
Paine Webber Group, 6.45%, 12/1/03 1,000 1,006
3,562
Food and Tobacco 3.7%
Archibald Candy, Sr. Secured Notes,
10.25%, 7/1/04 225 229
Aurora Foods, Sr. Sub. Notes,
9.875%, 2/15/07 100 109
Mrs. Fields, Gtd. Sr. Sub. Notes, (144a),
10.125%, 12/1/04 $ 150 $ 137
Philip Morris, 7.75%, 1/15/27 1,300 1,485
Smithfield Foods, Sr. Sub. Notes, (144a),
7.625%, 2/15/08 50 50
2,010
Gaming 1.1%
Boyd Gaming, Sr. Sub. Notes,
9.50%, 7/15/07 25 25
Grand Casinos, 1st Mtg. Notes,
10.125%, 12/1/03 300 328
Rio Hotel & Casino, Sr. Sub. Notes,
10.625%, 7/15/05 200 217
570
Health Care 6.6%
Beckman Instruments, Sr. Notes, (144a),
7.45%, 3/4/08 2,000 2,015
Columbia/HCA Healthcare,
8.05%, 8/25/06 1,000 1,004
Quest Diagnostics, Gtd. Sr. Sub. Notes,
10.75%, 12/15/06 100 111
Tenet Healthcare, Sr. Sub. Notes
8.625%, 1/15/07 200 211
(144a), 8.125%, 12/1/08 200 207
3,548
Industrials 6.5%
Celulosa Arauco Y Constitucion, (144a),
7.50%, 9/15/17 2,000 1,469
YPF Sociedad Anonima,
10.00%, 11/2/28 2,000 2,060
3,529
Insurance 4.2%
Zurich Capital Trust, (144a),
8.376%, 6/1/37 2,000 2,254
2,254
Lodging 0.4%
Courtyard by Marriott II,
Sr. Secured Notes, 10.75%, 2/1/08 50 52
Red Roof Inns, Sr. Notes,
9.625%, 12/15/03 150 154
206
Manufacturing 0.3%
Grove Worldwide, Sr. Sub. Notes,
(144a), 9.25%, 5/1/08 200 190
190
Media and Communications 3.8%
News America, (144a),
6.75%, 1/9/38 2,000 2,050
2,050
Metals and Mining 1.1%
AEI Holding, Sr. Notes, (144a),
10.00%, 11/15/07 300 309
P&L Coal Holdings, Sr. Notes, (144a),
8.875%, 5/15/08 300 309
618
Paper and Paper Products 0.5%
Repap New Brunswick,
Sr. Secured 1st Priority Notes
9.00%, 6/1/04 $ 250 $ 247
247
Printing and Publishing 0.5%
Hollinger International
Publishing, Gtd. Notes,
9.25%, 3/15/07 250 266
266
Retail 0.6%
Safelite Glass, Sr. Sub. Notes,
(144a), 9.875%, 12/15/06 125 122
Specialty Retailers, Sr. Notes,
8.50%, 7/15/05 250 230
352
Savings and Loan 3.9%
GS Escrow, Sr. Notes, (144a),
7.125%, 8/1/05 2,000 1,934
ML Capital Trust, Gtd. Notes,
9.875%, 3/1/27 150 185
2,119
Service 1.2%
Coinmach, Sr. Sub. Notes,
11.75%, 11/15/05 250 274
Host Marriott Travel, Sr. Notes,
9.50%, 5/15/05 150 157
Intertek Finance, Sr. Sub. Notes,
10.25%, 11/1/06 75 75
Rural/Metro, Sr. Notes, (144a),
7.875%, 3/15/08 175 163
669
Specialty Chemicals 4.0%
American Pacific, Sr. Notes,
(144a), 9.25%, 3/1/05 250 247
ISP Holdings, Sr. Notes,
9.75%, 2/15/02 200 213
Sociedad Quimira Y Minera,
(144a), 7.70%, 9/15/06 2,000 1,685
2,145
Telecommunications 2.2%
Intermedia Communications,
Sr. Notes, 8.50%, 1/15/08 250 247
Mastec, Sr. Sub. Notes,
(144a), 7.75%, 2/1/08 250 241
PSINet, Sr. Notes,
(144a) 10.00%, 2/15/05 300 304
Qwest Communications, Sr. Notes,
(144a), 7.50%, 11/1/08 400 409
1,201
Telephone 0.5%
Flag Ltd., Sr. Notes,
(144a), 8.25%, 1/30/08 250 255
255
Textiles and Apparel 0.8%
Westpoint Stevens, Sr. Notes,
7.875%, 6/15/08 400 412
412
Transportation 1.4%
Allied Holdings, Gtd. Sr. Sub. Notes,
8.625%, 10/1/07 $ 250 $ 257
International Shipholding, Sr. Notes,
7.75%, 10/15/07 250 238
Stena, Sr. Notes,
10.50%, 12/15/05 250 260
755
Total Corporate Bonds and Notes (Cost $51,272) 50,331
U.S. GOVERNMENT OBLIGATIONS 3.9%
U.S. Treasury Bonds, 5.50%, 8/15/28 2,000 2,113
Total U.S. Government Obligations (Cost $2,075) 2,113
Money Market Funds 1.0%
Reserve Investment Fund, 5.34% # 543 543
Total Money Market Funds (Cost $543) 543
Total Investments in Securities
98.1% of Net Assets (Cost $53,890) $ 52,987
Other Assets Less Liabilities 1,034
NET ASSETS $ 54,021
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 28
Accumulated net realized gain/loss -
net of distributions (576)
Net unrealized gain (loss) (903)
Paid-in-capital applicable to 5,490,649
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares authorized 55,472
NET ASSETS $ 54,021
----------
NET ASSET VALUE PER SHARE $ 9.84
----------
# Seven-day yield
STEP Stepped coupon note for which the interest rate will adjust on
specified future date(s).
144a Security was purchased pursuant to Rule 144a under the Securities
Act of 1933 and may not be resold subject to that rule except to
qualified institutional buyers-total of such securities at
period-end amounts to 37.9% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
11/30/98
Investment Income
Interest income $ 2,030
Expenses
Shareholder servicing 60
Custody and accounting 48
Organization 25
Registration 24
Investment management 18
Prospectus and shareholder reports 12
Legal and audit 7
Directors 3
Proxy and annual meeting 1
Miscellaneous 1
Total expenses 199
Net investment income 1,831
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (1,444)
Change in net unrealized gain or loss on securities (1,101)
Net realized and unrealized gain (loss) (2,545)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ (714)
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The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
11/30/98 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,831 $ 2,298
Net realized gain (loss) (1,444) 1,045
Change in net unrealized gain or loss (1,101) 325
Increase (decrease) in net assets
from operations (714) 3,668
Distributions to shareholders
Net investment income (1,831) (2,301)
Capital share transactions*
Shares sold 27,624 32,456
Distributions reinvested 1,183 1,448
Shares redeemed (15,070) (13,174)
Increase (decrease) in
net assets from capital
share transactions 13,737 20,730
Net Assets
Increase (decrease) during period 11,192 22,097
Beginning of period 42,829 20,732
End of period $ 54,021 $ 42,829
-----------------------------
*Share information
Shares sold 2,782 3,146
Distributions reinvested 120 141
Shares redeemed (1,533) (1,277)
Increase (decrease) in shares outstanding 1,369 2,010
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Corporate Income Fund
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Unaudited November 30, 1998
Notes to Financial Statements
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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Corporate Income Fund, Inc. (the fund) is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on October 31, 1995.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities with original maturities of one year or
more are stated at fair value as furnished by dealers who make markets in
such securities or by an independent pricing service, which considers yield
or price of bonds of comparable quality, coupon, maturity, and type, as
well as prices quoted by dealers who make markets in such securities.
Securities with original maturities of less than one year are stated at
fair value, which is determined by using a matrix system that establishes a
value for each security based on money market yields.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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.
Premiums and Discountso Premiums and discounts on debt securities, other
than mortgage-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are
recognized upon dispostion or principal repayment as gain or loss for
financial reporting purposes. For tax purposes, premiums and discounts on
MBS acquired on or before June 8, 1997, are recognized upon disposition or
principal repayments as ordinary income. For MBS acquired after June 8,
1997, premiums are recognized as gain or loss; discounts are recognized as
gain or loss, except to the extent of accrued market discount.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Distributions to shareholders
are recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with
generally accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Noninvestment-Grade Debt Securities At November 30, 1998, the fund held
investments in noninvestment-grade debt securities, commonly referred to as
"high-yield" or "junk" bonds. A real or perceived economic downturn or
higher interest rates could adversely affect the liquidity or value, or
both, of such securities because such events could lessen the ability of
issuers to make principal and interest payments.
Other Purchases and sales of portfolio securities, other than short-term
and U.S. government securities, aggregated $41,937,000 and $28,787,000,
respectively, for the six months ended November 30, 1998.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
At November 30, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$53,890,000. Net unrealized loss aggregated $903,000 at period end, of
which $884,000 related to appreciated investments and $1,787,000 to
depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $9,000 was payable at November 30, 1998. The fee is computed
daily and paid monthly, consisting of an individual fee equal to 0.15% of
average daily net assets and a group fee. The group fee is based on the
combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges
from 0.48% for the first $1 billion of assets to 0.30% for assets in excess
of $80 billion. At November 30, 1998, and for the six months then ended,
the effective annual group fee rate was 0.32%. The fund pays a pro-rata
share of the group fee based on the ratio of its net assets to those of the
group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through May 31, 1999, which would cause the
fund's ratio of expenses to average net assets to exceed 0.80%. Thereafter,
through May 31, 2001, the fund is required to reimburse the manager for
these expenses, provided that average net assets have grown or expenses
have declined sufficiently to allow reimbursement without causing the
fund's ratio of expenses to average net assets to exceed 0.80%. Pursuant to
this agreement, $99,000 of management fees were not accrued by the fund for
the six months ended November 30, 1998, and $149,000 of unaccrued 1997-1998
fees and expenses remain subject to reimbursement through May 31, 2001.
Additionally, $261,000 of unaccrued fees and expenses related to a previous
expense limitation are subject to reimbursement through May 31, 1999.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund
receives certain other services. The manager computes the daily share price
and maintains the financial records of the fund. T. Rowe Price Services,
Inc. is the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund. T. Rowe Price
Retirement Plan Services, Inc. provides subaccounting and recordkeeping
services for certain retirement accounts invested in the fund. The fund
incurred expenses pursuant to these related party agreements totaling
approximately $82,000 for the six months ended November 30, 1998, of which
$14,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the six months ended
November 30, 1998, totaled $31,000 and are reflected as interest income in
the accompanying Statement of Operations.
Annual Meeting Results
The Corporate Income Fund held an annual meeting on October 15, 1998, to elect
directors of the fund and to ratify the Board of Directors' selection of
PricewaterhouseCoopers L.L.P. as the fund's independent accountants.
The results of voting were as follows (by numbers of shares):
For nominees to the Board of
Directors for the Corporate
Income Fund:
Calvin W. Burnett
In favor: 2,874,848.825
Withheld: 69,591.655
Anthony W. Deering
In favor: 2,876,523.282
Withheld: 67,917.198
F. Pierce Linaweaver
In favor: 2,872,611.651
Withheld: 71,828.829
William T. Reynolds
In favor: 2,880,288.734
Withheld: 64,151.746
James S. Riepe
In favor: 2,879,775.698
Withheld: 64,664.782
John G. Schreiber
In favor: 2,880,211.007
Withheld: 64,229.473
M. David Testa
In favor: 2,880,731.927
Withheld: 63,708.553
For PricewaterhouseCoopers L.L.P.
as independent accountants:
In favor: 2,876,984.094
Withheld: 34,832.926
Abstained: 32,623.460
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registration mark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Corporate Income Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
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
T. Rowe Price (registration mark), Invest with Confidence
T. Rowe Price Investment Services, Inc., Distributor. F03-051 11/30/98
