-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GLynYtFQ63MGmUOazZ7QZaV2GuF2UWpLiYG6z/CqizVToPvIEUnyvfOsSqtGt593 4e4nY7AMH4sZvkGMjJlc7Q== 0000871839-98-000081.txt : 19980514 0000871839-98-000081.hdr.sgml : 19980514 ACCESSION NUMBER: 0000871839-98-000081 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980513 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC CENTRAL INDEX KEY: 0000080249 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 520980581 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 002-48848 FILM NUMBER: 98618089 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC ET AL DATE OF NAME CHANGE: 19920703 497 1 PROSPECTUS October 1, 1997, revised to May 13, 1998 New Income Fund A bond fund for investors willing to assume principal risk to achieve an attractive level of income. RAM LOGO T. Rowe Price FACTS AT A GLANCE New Income Fund Investment Goal The highest level of income consistent with the preservation of capital over time through investments primarily in marketable debt securities. As with all mutual funds, there is no guarantee this fund will achieve its goal. Strategy Invests at least 80% of assets in income-producing investment-grade debt securities. No maturity restrictions, but the fund's average portfolio maturity is expected to be from four to 15 years. Risk/Reward Potential for moderate to high income with commensurate share price fluctuation. Investor Profile Investors willing to accept principal risk to achieve a higher level of income than is offered by money market or short-term bond funds. Appropriate for regular and tax-deferred accounts, such as IRAs. Fees and Charges 100% no load. No fees or charges to buy or sell shares or to reinvest dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price funds. Investment Manager Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates, Inc. ("T. Rowe Price") and its affiliates managed approximately $117 billion for more than five million individual and institutional investor accounts as of June 30, 1997. T. Rowe Price New Income Fund, Inc. Prospectus October 1, 1997, revised to May 13, 1998 This prospectus contains information you should know before investing. Please keep it for future reference. A Statement of Additional Information about the fund, dated October 1, 1997, 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. Mutual fund shares are not deposits or obligations of, or guaranteed by, any depository institution. Shares are not insured by the FDIC, Federal Reserve, or any other agency, and are subject to investment risks, including possible loss of the principal amount invested. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS
1 ABOUT THE FUND Transaction and Fund Expenses 2 --------------------------------------------- Financial Highlights 3 --------------------------------------------- Fund, Market, and Risk Characteristics 4 --------------------------------------------- 2 ABOUT YOUR ACCOUNT Pricing Shares and Receiving 10 Sale Proceeds --------------------------------------------- Distributions and Taxes 11 --------------------------------------------- Transaction Procedures and 13 Special Requirements --------------------------------------------- 3 MORE ABOUT THE FUND Organization and Management 16 --------------------------------------------- Understanding Performance Information 18 --------------------------------------------- Investment Policies and Practices 19 --------------------------------------------- 4 INVESTING WITH T. ROWE PRICE Account Requirements 28 and Transaction Information --------------------------------------------- Opening a New Account 28 --------------------------------------------- Purchasing Additional Shares 30 --------------------------------------------- Exchanging and Redeeming 30 --------------------------------------------- Rights Reserved by the Fund 32 --------------------------------------------- Shareholder Services 32 --------------------------------------------- Discount Brokerage 34 --------------------------------------------- Investment Information 35 ---------------------------------------------
ABOUT THE FUND 1 TRANSACTION AND FUND EXPENSES ---------------------------------------------------------- o 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. Shareholder Transaction Expenses in Table 1 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 provides an estimate of how much it will cost to operate the fund for a year, based on 1997 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. Table 1
Shareholder Transaction Percentage of Fiscal 1997 Expenses Annual Fund Expenses Average Net Assets Sales charge "load" on purchases None Management fee 0.48% ------------------------------------------------------------------- Sales charge "load" on reinvested None Marketing fees (12b-1) None distributions ------------------------------------------------------------------- Redemption fees None Total other (shareholder servic 0.26% ing, custodial, auditing, etc.) ------------------------------------------------------------------- Exchange fees None Total fund expenses 0.74% - -------------------------------------------------------------------------------------------------------------
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). 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, 0.33% as of May 31, 1997, and an individual fund fee of 0.15%. . "Other" administrative expenses Primarily the servicing of shareholder accounts, such as providing statements and reports, disbursing dividends, and providing 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: Table 2
Hypothetical Fund Expenses 1 year 3 years 5 years 10 years $8 $24 $41 $92 - ----------------------------------------------------------
o Table 2 is just an example; actual expenses can be higher or lower than those shown. FINANCIAL HIGHLIGHTS ---------------------------------------------------------- Table 3, which provides information about the fund's financial history, 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 its annual report and are incorporated by reference into the Statement of Additional Information (available upon request). The financial statements in the annual report were audited by Price Waterhouse LLP, the fund's independent accountants. Table 3 Financial Highlights
Income From Investment Activities Less Distributions Net Asset Value Period Net Asset Net Net Realized Total From Net Net Realized Total Net Asset Ended Value, Investment & Unrealized Investment Investment Gain (Loss) Distributions Value, Beginning Income Gain (Loss) on Activities Income (Loss) End of Period of Period Investments - --------------------------------------------------------------------------------------------------------------------------- 1988/b/ $9.17 $0.76 $(0.41) $ 0.35 $(0.76) - $(0.76) $8.76 ---------------------------------------------------------------------------------------------------------------- 1989 8.76 0.81 (0.50) 0.31 (0.81) - (0.81) 8.26 ---------------------------------------------------------------------------------------------------------------- 1990 8.26 0.75 0.12 0.87 (0.75) $(0.01) (0.76) 8.37 ---------------------------------------------------------------------------------------------------------------- 1991 8.37 0.70 0.24 0.94 (0.70) (0.01) (0.71) 8.60 ---------------------------------------------------------------------------------------------------------------- 1992/b/ 8.60 0.67 0.36 1.03 (0.67) (0.02) (0.69) 8.94 ---------------------------------------------------------------------------------------------------------------- 1993 8.94 0.57 0.30 0.87 (0.57) - (0.57) 9.24 ---------------------------------------------------------------------------------------------------------------- 1994 9.24 0.54 (0.05) 0.49 (0.54) (0.07) (0.61) 9.12 ---------------------------------------------------------------------------------------------------------------- 1994/c/ 9.12 0.14 (0.40) (0.26) (0.14) (0.07) (0.21) 8.65 ---------------------------------------------------------------------------------------------------------------- 1995 8.65 0.58 0.34 0.92 (0.58) (0.02) (0.60) 8.97 ---------------------------------------------------------------------------------------------------------------- 1996 8.97 0.60 (0.27) 0.33 (0.60) - (0.60) 8.70 ---------------------------------------------------------------------------------------------------------------- 1997 8.70 0.58 0.07 0.65 (0.58) - (0.58) 8.77 - ---------------------------------------------------------------------------------------------------------------------------
Footnotes appear on next page. (continued on next page) Table 3 Financial Highlights (continued)
Returns, Ratios, and Supplemental Data Period Total Return Ratio of Ratio of Net Portfolio Ended (Includes Net Assets Expenses to Investment Turnover Reinvested ($ Thousands) Average Net Income to Rate Distributions)/a/ Assets Average Net Assets - ----------------------------------------------------------------------------------- 1988/b/ 4.27% $ 834,487 0.80% 8.77% 157.9% ------------------------------------------------------------------------ 1989 3.67 860,231 0.91 9.50 91.8 ------------------------------------------------------------------------ 1990 10.73 992,566 0.86 8.85 51.1 ------------------------------------------------------------------------ 1991 11.77 1,130,857 0.88 8.33 20.7 ------------------------------------------------------------------------ 1992/b/ 12.40 1,306,674 0.87 7.64 49.7 ------------------------------------------------------------------------ 1993 10.12 1,527,299 0.84 6.36 85.8 ------------------------------------------------------------------------ 1994 5.36 1,457,959 0.82 5.77 58.3 ------------------------------------------------------------------------ 1994/c/ 2.84 1,375,056 0.80/c/ 6.43/c/ 91.5/c/ ------------------------------------------------------------------------ 1995 11.13 1,565,903 0.78 6.95 54.1 ------------------------------------------------------------------------ 1996 3.70 1,634,362 0.75 6.66 35.5 ------------------------------------------------------------------------ 1997 7.70 1,710,730 0.74 6.65 87.1 - -----------------------------------------------------------------------------------
a Total return reflects the following capital gain distributions: long-term gain of $0.07 on 12/31/93; short-term gains of $0.01 and $0.02 on 12/31/90 and 12/31/91, respectively. b Year ended February 29. c For the three months ended May 31, 1994. Fiscal year-end changed from February 28 to May 31. All ratios are annualized. 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. o 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 objective is to provide the highest level of income consistent with the preservation of capital over time through investment primarily in marketable debt securities. What is the fund's investment program? At least 80% of the fund's total assets will be invested in income-producing, investment-grade instruments, including (but not limited to) U.S. government and agency obligations, mortgage-backed securities, corporate debt securities, asset-backed securities, bank obligations, collateralized mortgage obligations (CMOs), commercial paper, foreign securities, and others. There are no maturity restrictions on securities purchased by the fund, but the fund's dollar-weighted average maturity is generally expected to be between four and 15 years. o For further details on the fund's investment program and practices, please see the section entitled Investment Policies and Practices. What is the credit quality of the fund's investments? Securities purchased by the fund must be rated within the four highest credit categories (AAA, AA, A, BBB) by at least one established public rating agency (or, if unrated, must have a T. Rowe Price equivalent). The fund will not purchase any security rated below investment grade (i.e., below BBB) by Standard & Poor's, Moody's, or Fitch Investor Services, except that with respect to 15% of its total assets the fund may invest in "split-rated securities," which are securities that are rated within the four highest credit categories by at least one rating agency and below investment grade by another rating agency. Investment-grade securities include a range from the highest rated to medium quality. Securities in the BBB category may be more susceptible to adverse economic conditions or changing circumstances, and securities at the lower end of the BBB category have certain speculative characteristics. o The fund may retain a security that is downgraded to a noninvestment-grade level after purchase. Is the fund a substitute for a money market fund? No. Money market funds, which have an average maturity substantially under one year, ordinarily generate lower income in return for stability of net asset value. The fund is designed to provide higher income than these funds with commensurately greater price fluctuation. As such, it should be viewed as a longer-term investment. What are the most important influences on fund performance? Performance (total return) is determined by the change in the fund's share price and by the income level over a given period. Both components are affected by changes in interest rates. The fund's share price will generally move in the opposite direction of interest rates. For example, as interest rates rise, share price will likely decline. Rising rates provide the opportunity for the fund's income to increase, but it is unlikely that the higher income by itself will entirely offset the fall in price. The maturity and type of securities in the fund's portfolio determine just how much the share price rises or falls when rates change. Generally, when rates fall, long-term securities rise more in price than short-term securities, and vice versa. Mortgage-backed securities usually follow this pattern but, because of prepayments, would not be expected to rise as much in price as Treasury or corporate bonds. You will find more information about the types of securities the fund may own and how they may perform further on in this section and in Section 3. What are the main risks of investing in the fund? . Interest rate or market risk The decline in bond prices that may accompany a rise in the overall level of interest rates (please see Table 4). . Credit risk The chance that any of a fund's holdings will have its credit rating downgraded or will default (fail to make scheduled interest or principal payments), potentially reducing the fund's income level and share price. . Currency risk The possibility that a fund's foreign holdings will be adversely affected by fluctuations in currency markets. o The fund's share price will fluctuate; when you sell your shares, you may lose money. How does the portfolio manager try to reduce risk? Consistent with the fund's objective, the portfolio manager actively seeks to reduce risk and increase total return. Risk management tools include: . Diversification of assets to reduce the impact of a single holding on the fund's net asset value. . Thorough credit research by our own analysts. . Adjustment of fund duration to try to reduce the negative impact of rising interest rates or take advantage of the benefits of falling rates. (Duration is a more accurate measure than maturity of a fund's sensitivity to interest rate changes.) What are derivatives and can the fund invest in them? The term derivative is used to describe financial instruments whose value is derived from an underlying security (e.g., a stock or bond) or a market benchmark (e.g., an interest rate index). Many types of investments representing a wide range of potential risks and rewards fall under the "derivatives" umbrella - from conventional instruments, such as callable bonds, futures, and options, to more exotic investments, such as stripped mortgage securities and structured notes. While the term "derivative" only recently became widely known among the investing public, derivatives have in fact been employed by investment managers for many years. The fund will invest in derivatives only if the expected risks and rewards are consistent with its objective, policies, and overall risk profile as described in this prospectus. The fund limits its use of derivatives to situations in which they may enable the fund to accomplish the following: increase yield; hedge against a decline in principal value; invest in eligible asset classes with greater efficiency and lower cost than is possible through direct investment; or adjust fund duration. The fund will not invest in any high-risk, highly leveraged derivative instrument that is expected to cause the price volatility of the portfolio to be meaningfully different from that of a long-term investment-grade bond. You may want to review some fundamentals that apply to all fixed income investments. Is a fund's yield fixed or will it vary? It will vary. The yield is calculated every day by dividing a fund's net income per share, expressed at annual rates, by the share price. Since both income and share price will fluctuate, a fund's yield will also vary. Is a fund's "yield" the same as "total return"? Not for bond funds. The total return reported for a fund is the result of reinvested distributions (income and capital gains) and the change in share price for a given time period. Income is always a positive contributor to total return and can enhance a rise in share price or serve as an offset to a drop in share price. What is "credit quality" and how does it affect the fund's yield? Credit quality refers to a bond issuer's expected ability to make all required interest and principal payments in a timely manner. Because highly rated issuers represent less risk, they can borrow at lower interest rates than less creditworthy issuers. Therefore, a fund investing in high-quality securities should have a lower yield than an otherwise comparable fund investing in lower-credit-quality securities. What is meant by a bond fund's "maturity"? Every bond has a stated maturity date when the issuer must repay the bond's entire principal value to the investor. However, many bonds are "callable," meaning their principal can be repaid before their stated maturity dates on (or after) specified call dates. Bonds are most likely to be called when interest rates are falling because the issuer can refinance at a lower rate, just as a homeowner refinances a mortgage. In such an environment, a bond's "effective maturity" is calculated using its nearest call date. For example, the effective maturity of mortgage-backed bonds is determined by the rate at which homeowners pay down the principal on the underlying mortgages. A bond mutual fund has no maturity in the strict sense of the word, but it does have an average maturity and an average effective maturity. This number is an average of the stated or effective maturities of the underlying bonds, with each bond's maturity "weighted" by the percentage of fund assets it represents. Funds that target effective maturities would use the effective (rather than stated) maturities of the underlying instruments when computing the average. Targeting effective maturity provides additional flexibility in portfolio management but, all else being equal, could result in higher volatility than a fund targeting a stated maturity or maturity range. What is meant by a bond fund's "duration"? Duration is a calculation that seeks to measure the price sensitivity of a bond or a bond fund to changes in interest rates. It measures bond price sensitivity to interest rate changes more accurately than maturity because it takes into account the time value of cash flows generated over the bond's life. Future interest and principal payments are discounted to reflect their present value and then are multiplied by the number of years they will be received to produce a value that is expressed in years, i.e., the duration. Effective duration takes into account call features and sinking fund payments that may shorten a bond's life. Since duration can also be computed for bond funds, you can estimate the effect of interest rates on a fund's share price. Simply multiply the fund's duration (available for T. Rowe Price bond funds in our shareholder reports) by an expected change in interest rates. For example, the price of a bond fund with a duration of five years would be expected to fall approximately 5% if rates rose by one percentage point. How is a bond's price affected by changes in interest rates? When interest rates rise, a bond's price usually falls, and vice versa. In general, the longer a bond's maturity, the greater the price increase or decrease in response to a given change in interest rates, as shown in Table 4. Table 4
How Interest Rates Affect Bond Prices Price per $1,000 of Bond Face Value if Interest Rates: Bond Maturity Coupon Increase Decrease 1 Point 2 Points 1 Point 2 Points ------------------------------------------------------------------------ 1 year 5.42% $ 990 $981 $ 1,010 $1,019 ---------------------------------------------------------------- 5 years 5.90 958 919 1,044 1,090 ---------------------------------------------------------------- 10 years 6.01 929 864 1,078 1,163 ---------------------------------------------------------------- 30 years 6.30 879 780 1,149 1,335 - ---------------------------------------------------------------------------------------------
Coupons reflect yields on Treasury securities as of July 31, 1997. The table may not be as representative of price changes for mortgage securities because of prepayments. This is an illustration and does not represent expected yields or share price changes of any T. Rowe Price fund. How can I decide if the fund is appropriate for me? Consider your investment goals, your time horizon for achieving them, and your tolerance for risk. The fund may be appropriate if you are looking for a higher level of income than provided by a shorter-term bond fund and can accept greater fluctuations in share price. Steadily reinvesting the fund's income is a conservative strategy for building capital over time. If you are investing for principal safety and liquidity, you should consider a money market fund. Is there other information I need to review before making a decision? Be sure to read Investment Policies and Practices in Section 3, which discusses the principal types of portfolio securities that the fund may purchase as well as the types of management practices that the fund may use. ABOUT YOUR ACCOUNT 2 PRICING SHARES AND RECEIVING SALE PROCEEDS ---------------------------------------------------------- Here are some procedures you should know when investing in a T. Rowe Price fixed income fund. 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. o 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. 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. How you can receive the proceeds from a sale o When filling out the New Account Form, you may wish to give yourself the widest range of options for receiving 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 Automated Clearing House (ACH) transfer or bank wire. Proceeds sent by ACH transfer should be credited the second day after the sale. ACH 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: 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 we receive 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. o If for some reason we cannot accept your request to sell shares, we will contact you. USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES ---------------------------------------------------------- o All net investment income and realized capital gains are distributed to shareholders. 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. 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 NAV on the business day of the reinvestment and to reinvest all subsequent distributions in shares of the fund. No interest will accrue on amounts represented by uncashed distribution or redemption checks. Income dividends . Bond funds declare income dividends daily at 4 p.m. ET to shareholders of record at that time provided payment has been received on the previous business day. . Bond funds pay dividends on the first business day of each month. . Bond fund shares will earn dividends through the date of redemption; also, shares redeemed on a Friday or prior to a holiday will continue to earn dividends until the next business day. Generally, if you redeem all of your shares at any time during the month, you will also receive all dividends earned through the date of redemption in the same check. When you redeem only a portion of your shares, all dividends accrued on those shares will be reinvested, or paid in cash, on the next dividend payment date. 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. Tax Information o You will be sent timely information for your tax filing needs. 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 you make (except for systematic purchases and redemptions) and a year-end statement detailing all your transactions in each fund account during the year. 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 a calendar 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. The tax treatment of a capital gain distribution is determined by how long the fund held the portfolio securities, not how long you held shares in the fund. Recent changes in the tax code revised capital gain holding periods for long-term gains and created a new class of mid-term gains. Short-term (one year or less) capital gain distributions continue to be taxable at the same rates as ordinary income. Gains on securities held more than 12 months but not more than 18 months (mid-term gains) are taxed at the rates formerly applicable to long-term gains, and gains on securities held for more than 18 months are taxed at a new and lower long-term rate. 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 net 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 a fund's ordinary income dividend. Net foreign currency losses may result in the fund's dividend being classified as a return of capital. If a 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 deduction on your tax return for your portion of foreign taxes paid by the fund. o Distributions are taxable whether reinvested in additional shares or received in cash. Tax effect of buying shares before a capital gain 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 a portion of the money you just invested in the form of a taxable distribution. 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 ---------------------------------------------------------- o Following these procedures helps assure timely and accurate transactions. Purchase Conditions 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. 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. If, during the clearing period, we receive a check drawn against your bond or money market account, it will be returned marked "uncollected." (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/(R)/, and personal computer transactions Exchange and redemption services through telephone and Tele*Access are established automatically when you sign the New Account Form unless you check the box that states that you do not want these services. Personal computer transactions must be authorized separately. T. Rowe Price funds use reasonable procedures (including shareholder identity verification) to confirm that instructions given by telephone are genuine and are not liable for acting on these instructions. If these procedures are not followed, it is the opinion of certain regulatory agencies that the funds 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 fund net assets, the fund has the right to pay the difference between the redemption amount and the lesser of the two previously mentioned figures with securities from the fund. Excessive Trading o T. Rowe Price may bar excessive traders from purchasing shares. 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. 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.) Signature Guarantees o A signature guarantee is designed to protect you and the T. Rowe Price funds from fraud by verifying your signature. You may need to have your signature guaranteed in certain situations, such as: . Written requests 1) to redeem over $100,000, 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 or 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. MORE ABOUT THE FUND 3 ORGANIZATION AND MANAGEMENT ---------------------------------------------------------- How is the fund organized? The fund was incorporated in Maryland in 1973 and is a "diversified, open-end investment company," or mutual fund. Mutual funds pool money received from shareholders and invest it to try to achieve specified objectives. o Shareholders benefit from T. Rowe Price's 60 years of investment management experience. 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. 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 the fund's management contract. Do T. Rowe Price funds have annual shareholder meetings? The funds are not required to hold annual meetings and, in order to avoid unnecessary costs to fund shareholders, 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. 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. o All decisions regarding the purchase and sale of fund investments are made by T. Rowe Price - specifically by the fund's portfolio managers. Portfolio Management The fund has an Investment Advisory Committee with the following members: Peter Van Dyke, Chairman, Connice A. Bavely, Steven G. Brooks, Heather R. Landon, Edmund M. Notzon III, Robert M. Rubino, and Gwendolyn G. Wagner. The committee chairman has day-to-day responsibility for managing the fund and works with the committee in developing and executing the fund's investment program. Mr. Van Dyke became chairman of the fund's committee effective May 1, 1998. He has been managing investments since joining T. Rowe Price in 1985. Marketing T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe Price, distributes (sells) shares of this and all other T. Rowe Price funds. 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. o For the fiscal year ended May 31, 1997, fees paid by the fund included the following: $1,858,000 to T. Rowe Price Services, Inc., for transfer and dividend disbursing functions and shareholder services; $1,529,000 to T. Rowe Price Retirement Plan Services, Inc., for recordkeeping services for certain retirement plans; and $108,000 to T. Rowe Price for accounting services. 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, 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 0.360% Next $2 billion 0.310% Next $16 billion 0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion 0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter 0.390% Next $1 billion 0.330% Next $10 billion 0.370% Next $1 billion 0.320% Next $10 billion
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 T. Rowe Price funds described previously. Based on combined T. Rowe Price funds' assets of over $71 billion at June 30, 1997, the group fee was 0.33%. 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. 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. o 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. 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 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. Yield The current or "dividend" yield on a fund or any investment tells you the relationship between the investment's current level of annual income and its price on a particular day. The dividend yield reflects the actual income paid to shareholders for a given period, annualized, and divided by the fund's net asset value. For example, a fund providing $5 of annual income per share and a price of $50 has a current yield of 10%. Yields can be calculated for any time period. The advertised or "SEC" yield is found by determining the net income per share (as defined by the SEC) earned by a fund during a 30-day base period and dividing this amount by the per share price on the last day of the base period. The SEC yield may differ from the dividend yield. o You will see frequent references to a fund's yield in our reports, in advertisements, in media stories, and so on. 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. 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 in this prospectus. 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 of an impact on the fund's share price than its weighting in the portfolio. 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. o 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 described in this section) 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. Fundamental policy The fund will not purchase a security if, as a result, with respect to 75% of its total assets, more than 5% of its total assets would be invested in securities of a single issuer or more than 10% of the outstanding voting securities of the issuer would be held by the fund. These limitations do not apply to the fund's purchase of securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities. Bonds A bond is an interest-bearing security - an IOU - issued by companies or governmental units. The issuer has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the bond's face value) on a specified date. An issuer may have the right to redeem or "call" a bond before maturity, and the investor may have to reinvest the proceeds at lower market rates. A bond's annual interest income, set by its coupon rate, is usually fixed for the life of the bond. Its yield (income as a percent of current price) will fluctuate to reflect changes in interest rate levels. A bond's price usually rises when interest rates fall, and vice versa, so its yield stays current. Bonds may be unsecured (backed by the issuer's general creditworthiness only) or secured (also backed by specified collateral). Certain bonds have interest rates that are adjusted periodically. These interest rate adjustments tend to minimize fluctuations in the bonds' principal values. The maturity of those securities may be shortened under certain specified conditions. Bonds may be designated as senior or subordinated obligations. Senior obligations generally have the first claim on a corporation's earnings and assets and, in the event of liquidation, are paid before subordinated debt. 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 pre- ferred 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). Operating policy Without regard to quality, the fund may invest up to 25% of its total assets (not including cash) in preferred and common stocks and convertible securities, convertible into or which carry warrants for common stocks or other equity securities. 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. Operating policy The fund may invest without limitation in U.S. dollar-denominated debt securities issued by foreign issuers, foreign branches of U.S. banks, and U.S. branches of foreign banks. The fund may also invest up to 20% of its total assets (excluding reserves) in non-U.S. dollar-denominated fixed income securities principally traded in financial markets outside the United States. Asset-Backed Securities An underlying pool of assets, such as credit card or automobile trade receivables or corporate loans or bonds, backs these bonds and provides the interest and principal payments to investors. Credit quality depends primarily on the quality of the underlying assets and the level of credit support, if any, provided by the issuer. The underlying assets (i.e., loans) are subject to prepayments which can shorten the securities' weighted average life and may lower their return. The value of these securities also may change because of actual or perceived changes in the creditworthiness of the originator, servicing agent, or of the financial institution providing the credit support. There is no limit on the fund's investment in these securities. Mortgage-Backed Securities The fund may invest in a variety of mortgage-backed securities. Mortgage lenders pool individual home mortgages with similar characteristics to back a certificate or bond, which is sold to investors such as the fund. Interest and principal payments generated by the underlying mortgages are passed through to the investors. The "big three" issuers are the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). GNMA certificates are backed by the full faith and credit of the U.S. government, while others, such as Fannie Mae and Freddie Mac certificates, are only supported by the ability to borrow from the U.S. Treasury or supported only by the credit of the agency. Private mortgage bankers and other institutions also issue mortgage-backed securities. Mortgage-backed securities are subject to scheduled and unscheduled principal payments as homeowners pay down or prepay their mortgages. As these payments are received, they must be reinvested when interest rates may be higheror lower than on the original mortgage security. Therefore, these securities are not an effective means of locking in long-term interest rates. In addition, when interest rates fall, the pace of mortgage prepayments picks up. These refinanced mortgages are paid off at face value (par), causing a loss for any investor who may have purchased the security at a price above par. In such an environment, this risk limits the potential price appreciation of these securities and can negatively affect the fund's net asset value. When rates rise, the prices of mortgage-backed securities can be expected to decline, although historically these securities have experienced smaller price declines than comparable quality bonds. In addition, when rates rise and prepayments slow, the effective duration of mortgage-backed securities extends, resulting in increased volatility. o There is no limit on the fund's investment in mortgage-backed securities. Additional mortgage-backed securities in which the fund may invest include: . Collateralized Mortgage Obligations (CMOs) CMOs are debt securities that are fully collateralized by a portfolio of mortgages or mortgage-backed securities. All interest and principal payments from the underlying mortgages are passed through to the CMOs in such a way as to create, in most cases, more definite maturities than is the case with the underlying mortgages. CMOs may pay fixed or variable rates of interest, and certain CMOs have priority over others with respect to the receipt of prepayments. . Stripped Mortgage Securities Stripped mortgage securities (a type of potentially high-risk derivative) are created by separating the interest and principal payments generated by a pool of mortgage-backed securities or a CMO to create additional classes of securities. Generally, one class receives only interest payments (IOs), and another receives principal payments (POs). Unlike other mortgage-backed securities and POs, the value of IOs tends to move in the same direction as interest rates. The fund could use IOs as a hedge against falling prepayment rates (interest rates are rising) and/or a bear market environment. POs can be used as a hedge against rising prepayment rates (interest rates are falling) and/or a bull market environment. IOs and POs are acutely sensitive to interest rate changes and to the rate of principal prepayments. A rapid or unexpected increase in prepayments can severely depress the price of IOs, while a rapid or unexpected decrease in prepayments could have the same effect on POs. These securities are very volatile in price and may have lower liquidity than most other mortgage-backed securities. Certain non-stripped CMOs may also exhibit these qualities, especially those that pay variable rates of interest that adjust inversely with, and more rapidly than, short-term interest rates. In addition, if interest rates rise rapidly and prepayment rates slow more than expected, certain CMOs, in addition to losing value, can exhibit characteristics of longer-term securities and become more volatile. There is no guarantee the fund's investment in CMOs, IOs, or POs will be successful, and the fund's total return could be adversely affected as a result. Operating policy The fund may invest up to 10% of its total assets in stripped mortgage securities. 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 or interest rate of a hybrid could be tied (positively or negatively) to the price of some commodity, currency, or securities index or another interest rate (each a "benchmark"). Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the fund to the credit risk of the issuer of the hybrid. These risks may cause significant fluctuations in the net asset value of the fund. o Hybrids can have volatile prices and limited liquidity, and their use by the fund may not be successful. Operating policy The fund may invest up to 10% of its total assets in hybrid instruments. Deferrable Subordinated Securities Recently, securities have been issued which have long maturities and are deeply subordinated in the issuer's capital structure. They generally have 30-year maturities and permit the issuer to defer distributions for up to five years. These characteristics give the issuer more financial flexibility than is typically the case with traditional bonds. As a result, the securities may be viewed as possessing certain "equity-like" features by rating agencies and bank regulators. However, the securities are treated as debt securities by market participants, and the fund intends to treat them as such as well. These securities may offer a mandatory put or remarketing option that creates an effective maturity date significantly shorter than the stated one. The fund will invest in these securities to the extent their yield, credit, and maturity characteristics are consistent with the fund's investment objective and program. 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. Utility Industry Concentration The fund may, under certain circumstances, invest a substantial amount of its assets in the utility industry. Investments in this industry may be affected by environmental conditions, energy conservation programs, fuel shortages, availability of capital to finance operations and construction programs, and federal and state legislative and regulatory actions. T. Rowe Price believes that any risk to the fund which might result from concentrating in any such industry will be minimized by diversification of the fund's investments. Fundamental policy The fund will, under certain conditions, invest up to 50% of its assets in any one of the following industries: gas utility, gas transmission utility, electric utility, telephone utility, and petroleum. Types of Management Practices Reserve Position The fund will hold a certain portion of its assets in money market reserves. The fund's reserve position can consist of shares of one or more T. Rowe Price internal money market funds as well as short-term, high-quality U.S. and foreign dollar-denominated money market securities, including repurchase agreements. For temporary, defensive purposes, the fund may invest without limitation in money market reserves. The reserve position provides flexibility in meeting redemptions, expenses, and the timing of new investments and can serve 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 33 1/3% of the fund's total assets. The fund may not purchase additional securities when borrowings exceed 5% of total assets. 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 interest rates, bond prices, and foreign currencies; as an efficient means of adjusting its overall exposure to certain markets; in an effort to enhance income; to protect the value of portfolio securities; and to adjust portfolio duration. The fund may purchase, sell, or write call and put options on securities, financial indices, and foreign currencies. Futures contracts and options may not always be successful hedges, and 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 writes 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 Exchange 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." The fund may also use these contracts to create a synthetic bond - issued by a U.S. company, for example, but with the dollar component transformed into a foreign currency. 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. Operating policy The fund will not commit more than 20% of its total assets to forward currency contracts. 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 total fund assets. When-Issued Securities and Forward Commitment Contracts The fund may purchase securities on a when-issued or delayed delivery basis or may purchase or sell securities on a forward commitment basis. There is no limit on the fund's investment in these securities. The price of these securities is fixed at the time of the commitment to buy, but delivery and payment can take place a month or more later. During the interim period, the market value of the securities can fluctuate, and no interest accrues to the purchaser. At the time of delivery, the value of the securities may be more or less than the purchase or sale price. To the extent the fund remains fully or almost fully invested (in securities with a remaining maturity of more than one year) at the same time it purchases these securities, there will be greater fluctuations in the fund's net asset value than if the fund did not purchase them. Portfolio Turnover Although the fund will not generally trade for short-term profits, circumstances may warrant a sale without regard to the length of time a security was held. A high turnover rate may increase transaction costs and result in additional taxable gains. The fund's portfolio turnover rates for the fiscal years ended May 31, 1997, 1996, and 1995, were 87.1%, 35.5%, and 54.1%, respectively. INVESTING WITH T. ROWE PRICE 4 ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION ---------------------------------------------------------- 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. Always verify your transactions by carefully reviewing the confirmation we send you. Please report any discrepancies to Shareholder Services promptly. Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price Trust Company 1-800-492-7670 1-410-625-6585 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 plans or gifts or transfers to minors (UGMA/UTMA) accounts Account Registration If you own other T. Rowe Price funds, be sure to register any new account just like your existing accounts so you can exchange among them easily. (The name and account type would have to be identical.) By Mail 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 on the next page. We do not accept third party checks to open new accounts, except for IRA Rollover checks that are properly endorsed. 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 By Wire Call Investor Services for an account number and give the following wire information to your bank: PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account# 1004397951 name of owner(s) and account number Complete a New Account Form and mail it to one of the appropriate addresses listed above. 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. By Exchange Call Shareholder Services or use Tele*Access or your personal computer (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. For limitations on exchanging, see explanation of Excessive Trading under Transaction Procedures and Special Requirements. In Person Drop off your New Account Form at any location listed on the cover and obtain a receipt. Through a Broker 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 T. Rowe Price funds for transactions conducted directly with the fund. PURCHASING ADDITIONAL SHARES ---------------------------------------------------------- $100 minimum purchase; $50 minimum for retirement plans, Automatic Asset Builder, and gifts or transfers to minors (UGMA/UTMA) accounts By ACH Transfer Use Tele*Access or your personal computer or call Investor Services if you have established electronic transfers using the ACH network. By Wire Call Shareholder Services or use the wire address in Opening a New Account. By Mail 1. Make your check payable to T. Rowe Price Funds (otherwise it may be returned). 2. Mail the check to us at the address shown below with either a fund reinvestment slip or a note indicating the fund you want to buy and your fund account number. 3. Remember to provide your account number and the fund name on the memo line of your check. 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 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 your personal computer, Tele*Access (if you have previously authorized telephone services), mailgram, or express mail. For exchange policies, please see Transaction Procedures and Special Requirements - -Excessive Trading. Redemption proceeds can be mailed to your account address, sent by ACH transfer, or wired to your bank (provided your bank information is already on file). For charges, see Electronic Transfers - By Wire under Shareholder Services. 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. T. Rowe Price requires the signatures of all owners exactly as registered, and possibly a signature guarantee (see Transaction Procedures and Special Requirements - Signature Guarantees). Regular Mail For 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 /(For mailgrams, express, registered, or certified mail, see addresses under Opening a New Account.)/ 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 refuse any purchase order; 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 Investor Services 1-800-638-5660 1-410-547-2308 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. If you are a new T. Rowe Price investor, you will receive a Services Guide with our Welcome Kit. Note: Corporate and other institutional 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, institutions, and large and small businesses: IRAs, SIMPLE 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, including our no-load variable annuity, 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 fund is registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for less than six months or one year, as specified in the prospectus. The fee is paid to the fund. Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days Tele*Access 24-hour service via toll-free number enables you to (1) access information on fund yields, prices, distributions, account balances, and your latest transaction; (2) request checks, prospectuses, services forms, duplicate statements, and tax forms; and (3) initiate purchase, redemption, and exchange transactions in your accounts (see Electronic Transfers below). T. Rowe Price OnLine 24-hour service via dial-up modem provides the same services as Tele*Access but on a personal computer. Please call Investor Services for an information guide. After obtaining proper authorization, account transactions may also be conducted on the Internet. Plan Account Line 1-800-401-3279 Plan Account Line This 24-hour service is similar to Tele*Access, but is designed specifically to meet the needs of retirement plan investors. 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 or your personal computer, or call Shareholder Services. By Wire Electronic transfers can 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 or Emerging Markets Bond Funds) 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. 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 ---------------------------------------------------------- This additional service gives you the opportunity to easily consolidate all of your investments with one company. Through our discount brokerage, you can buy and sell individual securities - stocks, bonds, options, and others - at commission savings over full-service brokers. We also provide a wide range of services, including: To open an account 1-800-638-5660 For existing discount brokerage investors 1-800-225-7720 Automated telephone and on-line services You can enter trades, access quotes, and review account information 24 hours a day, seven days a week. Any trades executed through these programs save you an additional 10% on commissions. Note: Discount applies to our current commission schedule, subject to our $35 minimum commission. Investor information A variety of informative reports, such as our Brokerage Insights series, S&P Market Month newsletter, and select stock reports can help you better evaluate economic trends and investment opportunities. Dividend Reinvestment Service Virtually all stocks held in customer accounts are eligible for this service - free of charge. /Discount Brokerage is a division of //T. Rowe Price// Investment Services, Inc., Member NASD/SIPC./ INVESTMENT INFORMATION ---------------------------------------------------------- To help shareholders monitor their current investments and make decisions that accurately reflect their financial goals, T. Rowe Price offers a wide variety of information in addition to account statements. Shareholder Reports Fund managers' reviews of their strategies and results. If several members of a household own the same fund, only one fund report is mailed to that address. To receive additional copies, please call Shareholder Services or write to us at 100 East Pratt Street, Baltimore, Maryland 21202. The T. Rowe Price Report A quarterly investment newsletter discussing markets and financial strategies. Performance Update A quarterly review of all T. Rowe Price fund results. Insights Educational reports on investment strategies and financial markets. Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe Price Guide to International Investing, How to Choose a Bond Fund, Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax Considerations for Investors. 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. To Open a Mutual Fund 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, Prices, Account Information, or to Conduct Transactions Tele*Access/(R)/ 1-800-638-2587 24 hours, 7 days To Open a Discount Brokerage Account 1-800-638-5660 Plan Account Line 1-800-401-3279 For retirement plan investors 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 Internet Address www.troweprice.com Invest With Confidence T. Rowe Price Ram Logo F43-040 5/13/98 -----END PRIVACY-ENHANCED MESSAGE-----