PAGE 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Section 240.14a-11(c) or
Section 240.14a-12
T. ROWE PRICE HIGH YIELD FUND, INC.
_________________________________________________________________
(Name of Registrant as Specified in its Charter)
T. ROWE PRICE HIGH YIELD FUND, INC.
_________________________________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:
_________________________________________________________
2) Aggregate number of securities to which transaction
applies:
_________________________________________________________
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: (1)
_________________________________________________________
4) Proposed maximum aggregate value of transaction:
_________________________________________________________
1 Set forth the amount on which the filing fee is calculated and
state how it was determined.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
PAGE 2
filing by registration statement number, or the form or schedule
and the date of its filing,
1) Amount previously paid:
_________________________________________________________
2) Form, schedule, or Registration Statement no.:
_________________________________________________________
3) Filing party:
_________________________________________________________
4) Date filed:
_________________________________________________________
PAGE 3
Proxy for the T. Rowe Price High Yield Fund, Inc., should be
inserted here.
PAGE 1
T. ROWE PRICE
_________________________________________________________________
T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore,
MD 21202
James S. Riepe
Managing Director
Dear Shareholder:
All of the T. Rowe Price mutual funds will hold shareholder
meetings in 1994 to elect directors, ratify the selection of
independent accountants, and approve amendments to a number of
investment policies.
The T. Rowe Price funds are not required to hold annual
meetings each year if the only items of business are to elect
directors or ratify accountants. In order to save fund expenses,
most of the funds have not held annual meetings for a number of
years. There are, however, conditions under which the funds must
ask shareholders to elect directors, and one is to comply with a
requirement that a minimum number have been elected by
shareholders, not appointed by the funds' boards. Since the last
annual meetings of the T. Rowe Price funds, several directors
have retired and new directors have been added. In addition, a
number of directors will be retiring in the near future.
Given this situation, we believed it appropriate to hold
annual meetings for all the T. Rowe Price funds in 1994. At the
same time, we reviewed the investment policies of all of the
funds for consistency and to assure the portfolio managers have
the flexibility they need to manage your money in today's fast
changing financial markets. The changes being recommended, which
are explained in detail in the enclosed proxy material, do not
alter the funds' investment objectives or basic investment
programs.
In many cases the proposals are common to several funds, so
we have combined certain proxy statements to save on fund
expenses. For those of you who own more than one of these funds,
the combined proxy may also save you the time of reading more
than one document before you vote and mail your ballots. The
proposals which are specific to an individual fund are easily
identifiable on the Notice and in the proxy statement discussion.
If you own more than one fund, please note that each fund has a
PAGE 2
separate card. You should vote and sign each one, then return
all of them to us in the enclosed postage-paid envelope.
Your early response will be appreciated and could save your
fund the substantial costs associated with a follow-up mailing.
We know we are asking you to review a rather formidable proxy
statement, but this approach represents the most efficient one
for your fund as well as for the other funds. Thank you for your
cooperation. If you have any questions, please call us at 1-800-
225-5132.
Sincerely,
James S. Riepe
Director, Mutual Funds Division
CUSIP#77954D105/fund#069
CUSIP#741841105/fund#057
CUSIP#779570100/fund#043
CUSIP#779573104/fund#044
CUSIP#77957P105/fund#055
PAGE 3
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
Notice of Meeting of Shareholders
June 8, 1994
The Annual Meeting of Shareholders of the T. Rowe Price
Adjustable Rate U.S. Government Fund, Inc. ("Adjustable Rate
Fund"), T. Rowe Price High Yield Fund, Inc. ("High Yield Fund"),
T. Rowe Price New Income Fund, Inc. ("New Income Fund"), T. Rowe
Price Prime Reserve Fund, Inc. ("Prime Reserve Fund") and T. Rowe
Price Short-Term Bond Fund, Inc. ("Short-Term Bond Fund") (each a
"Fund" and collectively the "Funds"), each a Maryland
corporation, will be held jointly on Wednesday, June 8, 1994, at
10:30 o'clock a.m., Eastern time, at the offices of the Funds,
100 East Pratt Street, Baltimore, Maryland 21202. The following
matters will be acted upon at that time:
1. For the shareholders of each Fund: To elect directors
for the Fund in which you invest to serve until the
next annual meeting, if any, or until their successors
shall have been duly elected and qualified;
2. For the shareholders of each Fund:
A. To amend each Fund's fundamental policies to
increase its ability to engage in borrowing
transactions;
B. To amend each Fund's fundamental policies to
increase its ability to engage in lending
transactions;
C. To change from a fundamental to an operating policy
each Fund's policy on purchasing securities on
margin;
D. To amend each Fund's fundamental policies
concerning real estate;
E. To amend each Fund's fundamental policies on the
issuance of senior securities;
PAGE 4
F. To amend each Fund's fundamental policies on
industry concentration;
For the shareholders of the High Yield, New Income,
Prime Reserve and Short-Term Bond Funds:
G. To change from a fundamental to an operating policy
each Fund's policy on pledging assets;
For the shareholders of the Adjustable Rate, High
Yield, New Income and Short-Term Bond Funds:
H. To amend each Fund's fundamental policies on
investing in commodities and futures contracts to
permit greater flexibility in futures trading;
For the shareholders of the Adjustable Rate, High
Yield, Prime Reserve and Short-Term Bond Funds:
I. To change from a fundamental to an operating policy
each Fund's policy on investing in equity
securities;
For the shareholders of the New Income Fund:
J. To change from a fundamental to an operating policy
the Fund's policy on short sales;
For the shareholders of the High Yield and Prime
Reserve Funds:
K. To amend each Fund's fundamental policies to
increase the percentage of Fund assets which may be
invested in the securities of any single issuer;
L. To amend each Fund's fundamental policies to permit
the Fund to purchase more than 10% of an issuer's
voting securities;
M. To change from a fundamental to an operating policy
each Fund's policy on control of portfolio
companies;
N. To change from a fundamental to an operating policy
each Fund's policy on investing in other investment
companies;
PAGE 5
O. To change from a fundamental to an operating policy
each Fund's policy on investing in oil and gas
programs;
P. To change from a fundamental to an operating policy
each Fund's policy on investing in options;
Q. To change from a fundamental to an operating policy
each Fund's policy on ownership of portfolio
securities by officers and directors;
R. To change from a fundamental to an operating policy
each Fund's policy on purchasing illiquid
securities;
S. To change from a fundamental to an operating policy
each Fund's policy on unseasoned issuers;
3. For the shareholders of each Fund: To ratify or reject
the selection of the firms of Coopers & Lybrand as the
independent accountants for the Adjustable Rate Fund
and Price Waterhouse as the independent accountants for
the High Yield, New Income, Prime Reserve and Short-
Term Bond Funds for the three-month fiscal year ended
May 31, 1994 and for fiscal year 1995;
4. For the shareholders of the New Income and Prime
Reserve Funds: To amend each Fund's Articles of
Incorporation to delete the policy on pricing
securities; and
5. To transact such other business as may properly come
before the meeting and any adjournments thereof.
LENORA V. HORNUNG
Secretary
April 22, 1994
100 East Pratt Street
Baltimore, Maryland 21202
PAGE 6
_________________________________________________________________
YOUR VOTE IS IMPORTANT
Shareholders are urged to designate their choices on each of the
matters to be acted upon and to date, sign, and return the
enclosed proxy in the envelope provided, which requires no
postage if mailed in the United States. Your prompt return of
the proxy will help assure a quorum at the meeting and avoid the
additional Fund expense of further solicitation.
_________________________________________________________________
CUSIP#77954D105/fund#069
CUSIP#741841105/fund#057
CUSIP#779570100/fund#043
CUSIP#779573104/fund#044
CUSIP#77957P105/fund#055
PAGE 7
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
Meeting of Shareholders--June 8, 1994
PROXY STATEMENT
This statement is furnished in connection with the
solicitation of proxies by the T. Rowe Price Adjustable Rate U.S.
Government Fund, Inc. ("Adjustable Rate Fund"), T. Rowe Price
High Yield Fund, Inc. ("High Yield Fund"), T. Rowe Price New
Income Fund, Inc. ("New Income Fund"), T. Rowe Price Prime
Reserve Fund, Inc. ("Prime Reserve Fund") and T. Rowe Price
Short-Term Bond Fund, Inc. ("Short-Term Bond Fund") (each a
"Fund" and collectively the "Funds"), each a Maryland
corporation, for use at the Annual Meeting of Shareholders of
each Fund to be held jointly on June 8, 1994, and at any
adjournments thereof.
Shareholders may vote only on matters which concern the
Fund or Funds in which they hold shares. Shareholders are
entitled to one vote for each full share, and a proportionate
vote for each fractional share, of the Fund held as of the record
date. Under Maryland law, shares owned by two or more persons
(whether as joint tenants, co-fiduciaries, or otherwise) will be
voted as follows, unless a written instrument or court order
providing to the contrary has been filed with the Fund: (1) if
only one votes, that vote will bind all; (2) if more than one
votes, the vote of the majority will bind all; and (3) if more
than one votes and the vote is evenly divided, the vote will be
cast proportionately.
In order to hold the meeting, a majority of each Fund's
shares entitled to be voted must have been received by proxy or
be present at the meeting. In the event that a quorum is present
but sufficient votes in favor of one or more of the Proposals are
not received by the time scheduled for the meeting, the persons
named as proxies may propose one or more adjournments of the
meeting to permit further solicitation of proxies. Any such
adjournment will require the affirmative vote of a majority of
the shares present in person or by proxy at the session of the
meeting adjourned. The persons named as proxies will vote in
favor of such adjournment if they determine that such adjournment
PAGE 8
and additional solicitation is reasonable and in the interests of
each Fund's shareholders. The shareholders of each Fund vote
separately with respect to each Proposal.
The individuals named as proxies (or their substitutes) in
the enclosed proxy card (or cards if you own shares of more than
one Fund or have multiple accounts) will vote in accordance with
your directions as indicated thereon if your proxy is received
properly executed. You may direct the proxy holders to vote your
shares on a Proposal by checking the appropriate box "For" or
"Against," or instruct them not to vote those shares on the
Proposal by checking the "Abstain" box. Alternatively, you may
simply sign, date and return your proxy card(s) with no specific
instructions as to the Proposals. If you properly execute your
proxy card and give no voting instructions with respect to a
Proposal, your shares will be voted for the Proposal. Any proxy
may be revoked at any time prior to its exercise by filing with
the Fund a written notice of revocation, by delivering a duly
executed proxy bearing a later date, or by attending the meeting
and voting in person.
Abstentions and "broker non-votes" (as defined below) are
counted for purposes of determining whether a quorum is present,
but do not represent votes cast with respect to any Proposal.
"Broker non-votes" are shares held by a broker or nominee for
which an executed proxy is received by the Fund, but are not
voted as to one or more Proposals because instructions have not
been received from the beneficial owners or persons entitled to
vote and the broker or nominee does not have discretionary voting
power.
VOTE REQUIRED: A PLURALITY OF ALL VOTES CAST AT THE
MEETING BY EACH FUND IS SUFFICIENT TO APPROVE PROPOSAL 1 FOR EACH
FUND. A MAJORITY OF THE SHARES OF EACH FUND PRESENT IN PERSON OR
BY PROXY AT THE MEETING IS SUFFICIENT TO APPROVE PROPOSAL 3 FOR
EACH FUND. APPROVAL OF PROPOSAL 4 REQUIRES THE AFFIRMATIVE VOTE
OF THE HOLDERS OF A MAJORITY OF EACH OF THE NEW INCOME AND PRIME
RESERVE FUNDS' OUTSTANDING SHARES. APPROVAL OF ALL REMAINING
PROPOSALS OF EACH FUND REQUIRES THE AFFIRMATIVE VOTE OF THE
HOLDERS OF THE LESSER OF (A) 67% OF THE SHARES PRESENT AT THE
MEETING IN PERSON OR BY PROXY, OR (B) A MAJORITY OF EACH FUND'S
OUTSTANDING SHARES.
If the proposed amendments to each Fund's fundamental
investment policies are approved, they will become effective on
or about July 1, 1994. If a proposed amendment to a Fund's
PAGE 9
fundamental investment policies is not approved, that policy will
remain unchanged. If the proposed amendment to the Articles of
Incorporation of the New Income and Prime Reserve Funds is
approved, it will become effective on or about July 1, 1994. If
the proposed amendment to each Fund's Articles of Incorporation
is not approved, the Articles will remain unchanged.
Each Fund will pay a portion of the costs of the meeting,
including the solicitation of proxies, allocated on the basis of
the number of shareholder accounts of each Fund. Persons holding
shares as nominees will be reimbursed, upon request, for their
reasonable expenses in sending solicitation materials to the
principals of the accounts. In addition to the solicitation of
proxies by mail, directors, officers, and/or employees of each
Fund or of its investment manager, T. Rowe Price Associates, Inc.
("T. Rowe Price"), may solicit proxies in person or by telephone.
The approximate date on which this Proxy Statement and form
of proxy is first being mailed to shareholders of each Fund is
April 22, 1994.
1. ELECTION OF DIRECTORS
The following table sets forth information concerning each
of the nominees for director indicating the particular Board(s)
on which the nominee has been asked to serve. Each nominee has
agreed to hold office until the next annual meeting (if any) or
his/her successor is duly elected and qualified. With the
exception of Ms. Whittemore and Messrs. Black and Burnett, each
of the nominees is a member of the present Board of Directors of
the Fund and has served in that capacity since originally
elected. Messrs. Black and Burnett were elected directors of
each Fund by its Board of Directors on April 23, 1993 and January
19, 1993, respectively. A shareholder using the enclosed proxy
form can vote for all or any of the nominees of the Board of
Directors or withhold his or her vote from all or any of such
nominees. If the proxy card is properly executed but unmarked,
it will be voted for all of the nominees. Should any nominee
become unable or unwilling to accept nomination or election, the
persons named in the proxy will exercise their voting power in
favor of such other person or persons as the Board of Directors
of the Fund may recommend. There are no family relationships
among these nominees.
The membership of the five Boards will not be identical
following election at the meeting. Specifically, certain
PAGE 10
individuals who are interested persons of T. Rowe Price are being
elected to only one of the Funds. Shareholders are being asked
to elect the Board of Directors of their respective Fund only.
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
Robert P. Black Retired: formerly Adjustable 3,223
10 Dahlgren Road President, Federal Rate Fund: --
Richmond, VA Reserve Bank of Richmond; High Yield
23233 Director/Trustee of all Fund: --
12/21/27 other T. Rowe Price New Income
0Adjustable Rate taxable income Funds Fund: --
Fund: Director Prime
since 1993 Reserve
0High Yield Fund: --
Fund: Director Short-Term
since 1993 Bond Fund: --
0New Income
Fund: Director
since 1993
0Prime Reserve
Fund: Director
since 1993
0Short-Term Bond
Fund: Director
since 1993
Calvin W. President, Coppin State Adjustable
Burnett, PH.D. College; Director, Rate Fund:
2500 West North Maryland Chamber of High Yield
Avenue Commerce and Provident Fund:
Baltimore, MD Bank of Maryland; New Income
21216 President, Baltimore Fund:
3/16/32 Area Council Boy Scouts Prime
0Adjustable Rate of America; Vice President, Reserve
Fund: Director Board of Directors, The Fund:
since 1993 Walters Art Gallery, and Short-Term
0High Yield a Director/Trustee of the Bond Fund:
PAGE 11
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
Fund: Director 11 other Price Income
since 1993 Funds/Trusts
0New Income
Fund: Director
since 1993
0Prime Reserve
Fund: Director
since 1993
0Short-Term Bond
Fund: Director
since 1993
*George J. President, Managing Adjustable
Collins Director and Chief Rate Fund:
100 East Pratt Executive Officer, T. Rowe High Yield
Street Price Associates, Inc.; Fund:
Baltimore, MD Director, Rowe Price- New Income
21202 Fleming International, Fund:
7/31/40 Inc., T. Rowe Price Trust Prime
0Adjustable Rate Company, and T. Rowe Price Reserve
Fund: Chairman Retirement Plan Services, Fund:
of the Board and Inc.; Chairman of the Board Short-Term
member of of nine other T. Rowe Bond Fund:
Executive Price Funds/Trusts;
Committee since President and Director of
1991 the following T. Rowe Price
0High Yield Funds: Summit and U.S.
Fund: Chairman Treasury; Director of the
of the Board and following T. Rowe Price
member of Funds: New Era and Tax-Free
Executive Insured Intermediate; Vice
Committee since President, T. Rowe Price
1985 Spectrum Fund, Inc.
0New Income
Fund: Chairman
PAGE 12
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
of the Board and
member of
Executive
Committee since
1978
0Prime Reserve
Fund: Vice
President and
member of
Executive
Committee since
1975
0Short-Term Bond
Fund: Chairman
of the Board and
member of
Executive
Committee since
1983
Anthony W. Director, President and Adjustable 25,179
Deering Chief Operating Officer, Rate Fund: --
10275 Little The Rouse Company, real High Yield
Patuxent Parkway estate developers, Fund: 208
Columbia, MD Columbia, Maryland; New Income
21044 Advisory Director, Fund: 167
1/28/45 Kleinwort, Benson (North Prime
0Adjustable America) Corporation, a Reserve
Rate Fund: registered broker-dealer, Fund: 64,341
Director since and a Director/Trustee of Short-Term
1991 the 11 other Price Income Bond Fund: 251
0High Yield Funds/Trusts, Institutional
Fund: Director International Funds, Inc.
since 1985 and T. Rowe Price
PAGE 13
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
0New Income International Funds, Inc.
Fund: Director
since 1980
0Prime Reserve
Fund: Director
since 1979
0Short-Term Bond
Fund: Director
since 1983
*Carter O. Managing Director, T. Rowe New Income
Hoffman Price Associates, Inc.; Fund:
100 East Pratt Director, T. Rowe Price Prime
Street New Era Fund, Inc.; Vice Reserve
Baltimore, MD President, T. Rowe Price Fund:
21202 Growth Stock Fund, Inc.
9/3/27
0New Income
Fund: Vice
President and
member of
Executive
Committee
since 1973
0Prime Reserve
Fund: Chairman
of the Board
and member of
Executive
Committee
since 1975
PAGE 14
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
F. Pierce President, F. Pierce Adjustable 22,328
Linaweaver Linaweaver & Associates, Rate Fund: --
The Legg Mason Inc.; formerly (1987-1991) High Yield
Tower Executive Vice President, Fund: 10,427
Suite 2700 EA Engineering, Science, New Income
111 South and Technology, Inc. and Fund: --
Calvert Street (1987-1990) President, EA Prime
Baltimore, MD Engineering, Inc.; Reserve
21202 Director/Trustee of the Fund: 23,519
8/22/34 11 other Price Income Short-Term
0Adjustable Rate Funds/Trusts Bond Fund: --
Fund: Director
since 1991
0High Yield
Fund: Director
since 1985
0New Income
Fund: Director
since 1983
0Prime Reserve
Fund: Director
since 1980
0Short-Term Bond
Fund: Director
since 1983
*James S. Riepe Managing Director, T. Rowe Adjustable
100 East Pratt Price Associates, Inc.; Rate Fund:
Street President and Director, High Yield
Baltimore, MD T. Rowe Price Investment Fund:
21202 Services, Inc.; Chairman of New Income
6/25/43 the Board, T. Rowe Price Fund:
0Adjustable Services, Inc., T. Rowe Prime
Rate Fund: Vice Price Trust Company, T. Reserve
President and Rowe Price Retirement Plan Fund:
PAGE 15
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
member of Services, Inc., and four Short-Term
Executive T. Rowe Price Funds; Vice Bond Fund:
Committee since President and Director/
1991 Trustee of 20 other
0High Yield T. Rowe Price Funds/Trusts;
Fund: Vice Vice President of the
President and following T. Rowe Price
member of Funds/Trusts: New America
Executive Growth, New Era, Institutional
Committee since International and International;
1985 Director, T. Rowe Price
0New Income Tax-Free Insured Intermediate
Fund: Vice Bond Fund, Inc. and Rhone-
President and Poulenc Rorer, Inc.
member of
Executive
Committee since
1983
0Prime Reserve
Fund: Vice
President since
1982
0Short-Term Bond
Fund: Vice
President and
member of
Executive
Committee since
1983
PAGE 16
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
John G. President, Schreiber Adjustable
Schreiber Investments, a real estate Rate Fund:
1115 East investment company; High Yield
Illinois Road Director and formerly Fund:
Lake Forest, IL (1/80-12/90) Executive New Income
60045 Vice President, JMB Fund:
10/21/46 Realty Corporation, a Prime
0Adjustable national real estate Reserve
Rate Fund: investment manager and Fund:
Director developer; Director/Trustee Short-Term
since 1992 of the 11 other Price Bond Fund:
0High Yield Income Funds/Trusts
Fund: Director
since 1992
0New Income
Fund: Director
since 1992
0Prime Reserve
Fund: Director
since 1992
0Short-Term
Bond Fund:
Director since
1992
*Charles P. Managing Director; T. Rowe New Income
Smith Price Associates, Inc.; Fund:
100 East Pratt Vice President, Rowe Price-
Street Fleming International, Inc.;
Baltimore, MD Executive Vice President and
21202 Director, T. Rowe Price U.S.
12/4/43 Treasury Funds, Inc.; Vice
0New Income President of six other T. Rowe
Fund: President Price taxable income
and member of Funds/Trusts
PAGE 17
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
Executive
Committee
since 1988
*Richard S. Managing Director, T. Rowe High Yield
Swingle Price Associates, Inc. Fund:
100 East Pratt
Street
Baltimore, MD
21202
1/23/45
0High Yield
Fund: President
and member of
Executive
Committee
since 1987
*Peter Van Dyke Managing Director, T. Rowe Adjustable
100 East Pratt Price Associates, Inc.; Rate Fund:
Street Vice President, Rowe Price-
Baltimore, MD Fleming International, Inc.
21202 and T. Rowe Price Trust
11/29/38 Company; Executive Vice
0Adjustable President and Director,
Rate Fund: T. Rowe Price U.S. Treasury
President and Funds, Inc.; President,
member of T. Rowe Price GNMA Fund and
Executive T. Rowe Price Spectrum Fund,
Committee Inc.; Executive Vice President,
since 1991 T. Rowe Price Summit Funds,
Inc.; Vice President of the
PAGE 18
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Owned, Shares
Name, Address, Directly Beneficially
Date of Birth or Owned
of Nominee and Indirectly, Directly
Position with Principal as of as of
Fund Occupations(1) 2/28/94(2) 2/28/94
_________________________________________________________________
following T. Rowe Price
Funds: Balanced,
International and New
Income
Anne Marie Partner, law firm of Adjustable
Whittemore McGuire, Woods, Battle & Rate Fund: --
One James Center Boothe, formerly, Chairman High Yield
901 East Cary and Director, Federal Fund: --
Street Reserve Bank of Richmond; New Income
Richmond, VA Director, Owens & Minor, Fund: --
23219-4030 Inc., USF&G Corporation, Prime
3/19/46 Old Dominion University, Reserve
0Adjustable and nominated to the Board Fund: --
Rate Fund: of James River Corporation; Short-Term
Initial election Member, Richmond Bar Bond Fund: --
0High Yield Association and American
Fund: Initial Bar Association
election
0New Income
Fund: Initial
election
0Prime Reserve
Fund: Initial
election
0Short-Term Bond
Fund: Initial
election
*Nominees considered "interested persons" of T. Rowe Price.
(1) Except as otherwise noted, each individual has held the
office indicated, or other offices in the same company, for
the last five years.
PAGE 19
(2) In addition to the shares owned beneficially and of record
by each of the nominees, the amounts shown reflect the
proportionate interests of Messrs. Collins, Riepe and Van
Dyke in _____ shares of the Adjustable Rate Fund, Messrs.
Collins, Riepe and Swingle in _______ shares of the High
Yield Fund, Messrs. Collins, Hoffman, Riepe and Smith in
_____ shares of the New Income Fund, Messrs. Collins,
Hoffman and Riepe in _____ shares of the Prime Reserve Fund
and Messrs. Collins and Riepe in shares of the Short-Term
Bond Fund which are owned by a wholly-owned subsidiary of
the Funds' investment manager, T. Rowe Price. The amount
shown also reflects the aggregate interests of these
individuals in _______, _______, _______, _________,
_______ and _______ shares of the Adjustable Rate, High
Yield, New Income, Prime Reserve and Short-Term Bond Funds,
respectively, owned by the T. Rowe Price Associates, Inc.
Profit Sharing Trust.
John Sagan a director of the Adjustable Rate Fund since
1991 and the High Yield, New Income, Prime Reserve and Short-Term
Bond Funds since 1986 will not be standing for reelection. As of
February 28, 1994, Mr. Sagan beneficially owned, directly or
indirectly, 12,000, 5,050 and 6,596 shares of the High Yield, New
Income and Short-Term Bond Funds, respectively.
Mr. Charles W. Shaeffer, a director of the New Income and
Prime Reserve Funds from 1973-1979 and 1975-1979, respectively,
and Mr. W. Ernest Issel, a director of the New Income Fund from
1968-1983, have been named by each Fund's Board of Directors as
director emeritus. The position of director emeritus is honorary
only and does not confer any responsibility or voting authority.
Mr. Shaeffer was formerly Chairman of the Board (1966-75),
President (1963-74), and Director (1947-76) of T. Rowe Price.
The directors of each Fund who are officers or employees of
T. Rowe Price receive no remuneration from the Fund. For the
fiscal year ended February 28, 1994, Messrs. Black, Burnett,
Deering, Linaweaver, Sagan, and Schreiber, received from the
Adjustable Rate, High Yield, New Income, Prime Reserve and Short-
Term Bond Funds' directors' fees aggregating $11,000, $27,000,
$27,000, $45,000 and $15,000, including expenses, respectively.
The fee paid to each such director is calculated in accordance
with the following fee schedule: a fee of $25,000 per year as the
initial fee for the first T. Rowe Price Fund/Trust on which a
director serves; a fee of $5,000 for each of the second, third,
and fourth T. Rowe Price Funds/Trusts on which a director serves;
a fee of $2,500 for each of the fifth and sixth T. Rowe Price
PAGE 20
Funds/Trusts on which a director serves; and a fee of $1,000 for
each of the seventh and any additional T. Rowe Price Funds/Trusts
on which a director serves. Those nominees indicated by an
asterisk (*) are persons who, for purposes of Section 2(a)(19) of
the Investment Company Act of 1940 are considered "interested
persons" of T. Rowe Price. Each such nominee is deemed to be an
"interested person" by virtue of his officership, directorship,
and/or employment with T. Rowe Price. Messrs. Black, Burnett,
Deering, Linaweaver, Sagan, and Schreiber are the current
independent directors of each Fund.
The T. Rowe Price Funds have established a Joint Audit
Committee, which is comprised of at least one independent
director representing each of the Funds. Mr. Deering, a director
of each Fund, is a member of the Committee. The other members
are Leo C. Bailey, Donald W. Dick, Jr., and Hubert D. Vos. These
directors also receive a fee of $500 for each Committee meeting
attended. The Audit Committee holds two regular meetings during
each fiscal year, at which time it meets with the independent
accountants of the T. Rowe Price Funds to review: (1) the
services provided; (2) the findings of the most recent audit; (3)
management's response to the findings of the most recent audit;
(4) the scope of the audit to be performed; (5) the accountants'
fees; and (6) any accounting questions relating to particular
areas of the T. Rowe Price Funds' operations or the operations of
parties dealing with the T. Rowe Price Funds, as circumstances
indicate.
The Board of Directors of each Fund has an Executive
Committee which is authorized to assume all the powers of the
Board to manage the Fund, in the intervals between meetings of
the Board, except the powers prohibited by statute from being
delegated.
The Board of Directors of each Fund has a Nominating
Committee, which is comprised of all the T. Rowe Price Funds'
independent directors. The Nominating Committee, which functions
only in an advisory capacity, is responsible for reviewing and
recommending to the full Board candidates for election as
independent directors to fill vacancies on the Board of
Directors. The Nominating Committee will consider written
recommendations from shareholders for possible nominees.
Shareholders should submit their recommendations to the Secretary
of the Fund. Members of the Nominating Committee met informally
during the last full fiscal year, but the Committee as such held
no formal meetings.
PAGE 21
Each Fund's Board of Directors held seven meetings during
the last full fiscal year. With the exception of Mr. Hoffman, a
director of the New Income and Prime Reserve Funds, and Mr.
Swingle, a director of the High Yield Fund, each director
standing for reelection attended 75% or more of the aggregate of
(i) the total number of meetings of the Board of Directors (held
during the period for which he was a director), and (ii) the
total number of meetings held by all committees of the Board on
which he served.
2. APPROVAL OR DISAPPROVAL OF CHANGES TO THE FUNDS'
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940 (the "1940 Act")
requires investment companies such as the Funds to adopt certain
specific investment policies that can be changed only by
shareholder vote. An investment company may also elect to
designate other policies that may be changed only by shareholder
vote. Both types of policies are often referred to as
"fundamental policies." Certain of the Funds' fundamental
policies have been adopted in the past to reflect regulatory,
business or industry conditions that are no longer in effect.
Accordingly, each Fund's Board of Directors has approved, and has
authorized the submission to each Fund's shareholders for their
approval, the amendment and/or reclassification of certain of the
fundamental policies applicable to each Fund.
The proposed amendments would (i) conform the fundamental
policies of each Fund to ones which are expected to become
standard for all T. Rowe Price Funds, (ii) simplify and modernize
the limitations that are required to be fundamental by the 1940
Act and (iii) eliminate as fundamental any limitations that are
not required to be fundamental by that Act. The Board believes
that standardized policies will assist the Funds and T. Rowe
Price in monitoring compliance with the various investment
restrictions to which the T. Rowe Price Funds are subject. By
reducing to a minimum those limitations that can be changed only
by shareholder vote, the Funds would be able to minimize the
costs and delay associated with holding frequent annual
shareholders' meetings. Finally, the Directors also believe that
T. Rowe Price's ability to manage the Funds' assets in a changing
investment environment will be enhanced and that investment
management opportunities will be increased by these changes.
In the following discussion "the Fund" is intended to refer
to each Fund.
PAGE 22
A. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY
TO INCREASE ITS ABILITY TO ENGAGE IN BORROWING TRANSACTIONS
Adjustable Rate Fund
Because the Fund may occasionally need to borrow money to
meet substantial shareholder redemption or exchange requests when
available cash is not sufficient to satisfy these needs, the
Board of Directors has proposed an amendment to the Fund's
fundamental policy which would permit the Fund greater
flexibility to engage in borrowing transactions. The current
restriction is not required by applicable law. The new
restriction would (1) allow the Fund to borrow larger amounts of
money; (2) borrow from persons in addition to other T. Rowe Price
Funds or banks to the extent permitted by applicable law; and (3)
clarify that the Fund's restriction on borrowing does not
prohibit the Fund from entering into other proper investments and
transactions. The new restriction would also conform the Fund's
policy on borrowing to one which is expected to become standard
for all T. Rowe Price Funds. The Board believes that
standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to
which the T. Rowe Price Funds are subject. The Board has
directed that such proposals be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of
borrowing is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Borrow money, except the Fund may borrow from banks or
other Price Funds, as a temporary measure for extraordinary
or emergency purposes, and then only in amounts not
exceeding 30% of its total assets valued at market. The
Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests
which might otherwise require untimely disposition of
portfolio securities. Interest paid on any such borrowings
will reduce net investment income. The Fund may enter into
interest rate futures contracts as set forth in [its
fundamental policy on futures] and reverse repurchase
agreements;"
As amended, the Fund's fundamental policy on borrowing
would be as follows:
PAGE 23
"[As a matter of fundamental policy, the Fund may not:]
Borrow money except that the Fund may (i) borrow for non-
leveraging, temporary or emergency purposes and (ii) engage
in reverse repurchase agreements and make other investments
or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in accordance
with applicable law. The Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law;"
If approved, the primary effect of the proposals would be
to allow the Fund to: (1) borrow up to 33 1/3% (or such higher
amount permitted by law) of its total assets (including the
amount borrowed) less liabilities (other than borrowings) as
opposed to the current limitation of 30%; (2) borrow from persons
in addition to banks and other mutual funds advised by T. Rowe
Price or Rowe Price-Fleming International, Inc. ("T. Rowe Price
Funds"); and (3) enter into other investments consistent with the
Fund's investment objective and program.
33 1/3% Limitation
The increase in the amount of money which the Fund could
borrow is primarily designed to allow the Fund greater
flexibility to meet shareholder redemption requests should the
need arise. As is the case under its current policy, the Fund
would not borrow to increase income through leveraging. It is
possible the Fund's ability to borrow a larger percentage of its
assets could adversely affect the Fund if the Fund were unable to
liquidate sufficient securities, or the Fund were forced to
liquidate securities at unfavorable prices, to pay back the
borrowed sums. However, the Directors believe the risks of such
possibilities are outweighed by the greater flexibility the Fund
would have in borrowing. The increased ability to borrow should
permit the Fund, if it were faced with substantial shareholder
redemptions, to avoid liquidating securities at unfavorable
prices or times to a greater degree than would be the case under
the current policy.
PAGE 24
Other Changes
The other proposed changes in the Fund's fundamental
policy--to allow the Fund to borrow from persons other than banks
and other T. Rowe Price Funds to the extent consistent with
applicable law and to engage in transactions other than reverse
repurchase agreements which may involve a borrowing--are simply
designed to permit the Fund the greatest degree of flexibility
permitted by law in pursuing its investment program. Although
not specifically referred to in the proposed new policy, the Fund
would continue to be able to enter into interest rate (as well as
other) futures contracts and options thereon. As noted above,
the Fund will not use its increased flexibility to borrow to
engage in transactions which could result in leveraging the Fund.
All activities of the Fund are, of course, subject to the 1940
Act and the rules and regulations thereunder as well as various
state securities laws.
The Board of Directors recommends that shareholders vote
FOR the proposal.
High Yield Fund
Because the Fund may occasionally need to borrow money to
meet substantial shareholder redemption or exchange requests when
available cash is not sufficient to satisfy these needs, the
Board of Directors has proposed an amendment to the Fund's
fundamental policy which would permit the Fund greater
flexibility to engage in borrowing transactions. The current
restriction is not required by applicable law. The new
restriction would (1) allow the Fund to borrow larger amounts of
money; (2) borrow from other T. Rowe Price Funds or persons to
the extent permitted by applicable law; and (3) clarify that the
Fund's restriction on borrowing does not prohibit the Fund from
entering into reverse repurchase agreements and other proper
investments and transactions. The new restriction would also
conform the Fund's policy on borrowing to one which is expected
to become standard for all T. Rowe Price Funds. The Board
believes that standardized policies will assist the Fund and T.
Rowe Price in monitoring compliance with the various investment
restrictions to which the T. Rowe Price Funds are subject. The
Board has directed that such proposals be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
borrowing is as follows:
PAGE 25
"[As a matter of fundamental policy, the Fund may not:]
Borrow money, except the Fund may borrow from banks as a
temporary measure for extraordinary or emergency purposes,
and then only from banks in amounts not exceeding 15% of
its total assets valued at market. The Fund will not
borrow in order to increase income (leveraging), but only
to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities.
Interest paid on any such borrowings will reduce net
investment income. The Fund may enter into interest rate
futures contracts as set forth in [its fundamental policy
on futures]. The Fund will not purchase additional
securities when money borrowed exceed 5% of total assets;"
As amended, the Fund's fundamental policy on borrowing
would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Borrow money except that the Fund may (i) borrow for non-
leveraging, temporary or emergency purposes and (ii) engage
in reverse repurchase agreements and make other investments
or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in accordance
with applicable law. The Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law;"
In addition, the Board of Directors intends to adopt the 5%
limitation on purchasing additional securities when money
borrowed exceeds 5% as an operating policy which may be changed
by the Board of Directors without further shareholder approval.
The operating policy would be as follows:
"[As a matter of operating policy, the Fund will not:]
Purchase additional securities when money borrowed exceeds
5% of the Fund's total assets;"
If approved, the primary effect of the proposals would be
to allow the Fund to: (1) borrow up to 33 1/3% (or such higher
amount permitted by law) of its total assets (including the
amount borrowed) less liabilities (other than borrowings) as
PAGE 26
opposed to the current limitation of 15%; (2) borrow from other
mutual funds advised by T. Rowe Price or Rowe Price-Fleming
International, Inc. ("T. Rowe Price Funds") and other persons;
and (3) enter into reverse repurchase agreements and other
investments consistent with the Fund's investment objective and
program.
33 1/3% Limitation
The increase in the amount of money which the Fund could
borrow is primarily designed to allow the Fund greater
flexibility to meet shareholder redemption requests should the
need arise. As is the case under its current policy, the Fund
would not borrow to increase income through leveraging. It is
possible the Fund's ability to borrow a larger percentage of its
assets could adversely affect the Fund if the Fund were unable to
liquidate sufficient securities, or the Fund were forced to
liquidate securities at unfavorable prices, to pay back the
borrowed sums. However, the Directors believe the risks of such
possibilities are outweighed by the greater flexibility the Fund
would have in borrowing. The increased ability to borrow should
permit the Fund, if it were faced with substantial shareholder
redemptions, to avoid liquidating securities at unfavorable
prices or times to a greater degree than would be the case under
the current policy.
Borrowing From Other Price Funds
Current law prohibits the Fund from borrowing from other T.
Rowe Price Funds. However, if the proposed amendments to the
Fund's fundamental investment policy on borrowing are approved by
shareholders, the Fund may apply to the Securities and Exchange
Commission ("SEC") for an exemption from this prohibition. There
is, of course, no assurance that the SEC would act favorably on
such a request. If the SEC did grant such an order, the Fund
could be allowed to borrow from other T. Rowe Price Funds. T.
Rowe Price believes that the ability to engage in borrowing
transactions with the participating T. Rowe Price Funds as part
of a program, referred to as the "interfund lending program," may
allow the Fund to obtain lower interest rates on money borrowed
for temporary or emergency purposes. Any existing T. Rowe Price
Fund participating in the interfund lending program would only do
so upon approval of its shareholders.
As noted above, when the Fund is required to borrow money,
it currently may do so only from banks. When the Fund borrows
money from banks, it typically pays interest on those borrowings
PAGE 27
at a rate that is higher than rates available contemporaneously
from investments in repurchase agreements. If the proposed
amendment is approved (and an SEC exemptive order were granted),
eligible T. Rowe Price Funds would be permitted to participate in
an interfund lending program to allow various of the T. Rowe
Price Funds, through a master loan agreement, to lend available
cash to and borrow from other T. Rowe Price Funds. Each lending
fund could lend available cash to another T. Rowe Price Fund only
when the interfund rate was higher than repurchase agreement
rates or rates on other comparable short-term investments. Each
borrowing fund could borrow through the interfund lending program
only when the interfund loan rate was lower than available bank
loan rates.
In determining to recommend the proposed amendment to
shareholders for approval, T. Rowe Price and the Directors
considered the possible risks to the Fund from participation in
the interfund lending program. T. Rowe Price does not view the
difference in rates available on bank borrowings and repurchase
agreements or other short-term investments as reflecting a
material difference in the quality of the risk of the
transactions, but rather as an indication of the ability of banks
to earn a higher rate of interest on loans than they pay on
repurchase agreements or other short-term investments. There is
a risk that a lending fund could experience a delay in obtaining
prompt repayment of a loan and, unlike repurchase agreements, the
lending fund would not necessarily have received collateral for
its loan, although it could require that collateral be provided
as a condition for making a loan. A delay in obtaining prompt
payment could cause a lending fund to miss an investment
opportunity or to incur costs to borrow money to replace the
delayed payment. There is also a risk that a borrowing fund
could have a loan recalled on one day's notice. In these
circumstances, the borrowing fund might have to borrow from a
bank at a higher interest cost if money to lend were not
available from another T. Rowe Price Fund. The Directors
consider that the benefits to the Fund of participating in the
program outweigh the possible risks to the Fund from such
participation.
In order to permit the Fund to engage in interfund lending
transactions, regulatory approval of the SEC is required because,
among other reasons, the transactions may be considered to be
among affiliated parties. If the proposed amendment is approved
by shareholders, the proposed interfund lending program would be
implemented only to the extent permitted by rule or by order of
the SEC and to the extent that the transactions were otherwise
PAGE 28
consistent with the investment objectives and limitations of each
participating T. Rowe Price Fund. If exemptive relief from the
SEC is not granted, the Fund, as previously noted, will not be
able to engage in the interfund lending program even though
shareholders have approved the proposal. As noted, no prediction
can be made as to whether the SEC would grant such relief.
Shareholders are being asked to approve an amendment to the
Fund's fundamental policy on borrowing in this proposal.
Shareholders are also being asked to vote separately on an
amendment to the Fund's fundamental policy on lending (see page
___). If both amendments are adopted, the Fund, subject to its
investment objective and policies, will be able to participate in
the interfund lending program as both a lender and a borrower.
If only one of the two proposals is adopted, then the Fund's
participation in the interfund lending program will be confined
to either lending or borrowing, depending on which amendment is
approved.
The Directors believe the proposed amendment may benefit
the Fund by facilitating its flexibility to explore cost-
effective alternatives to satisfy its borrowing requirements and
by borrowing money from other T. Rowe Price Funds.
Implementation of interfund borrowing would be accomplished
consistent with applicable regulatory requirements, including the
provisions of any order the SEC might issue to the Fund and to
other T. Rowe Price Funds.
Reverse Repurchase Agreements
To facilitate portfolio liquidity, it is possible the Fund
could enter into reverse repurchase agreements. In a repurchase
agreement, the Fund would purchase securities from a bank or
broker-dealer (Counterparty) with the agreement that the
Counterparty would repurchase the securities at a later date.
Reverse repurchase agreements are ordinary repurchase agreements
in which a fund is a seller of, rather than the purchaser of,
securities and agrees to repurchase them at an agreed upon time
and price. Reverse repurchase agreements can avoid certain
market risks and transaction costs associated with an outright
sale and repurchase. Reverse repurchase agreements, however, may
be viewed as borrowings. To the extent they are, the proposed
amendment would clarify that the Fund's restrictions on borrowing
would not prohibit the Fund from entering into a reverse
repurchase agreement.
PAGE 29
Other Changes
The other proposed changes in the Fund's fundamental
policy--to allow the Fund to borrow from persons in addition to
banks and other T. Rowe Price Funds to the extent consistent with
applicable law--and to engage in transactions other than reverse
repurchase agreements which may involve a borrowing--are simply
designed to permit the Fund the greatest degree of flexibility
permitted by law in pursuing its investment program. Although
not specifically referred to in the proposed new policy, the Fund
would continue to be able to enter into interest rate (as well as
other) futures contracts and options thereon. As noted above,
the Fund will not use its increased flexibility to borrow to
engage in transactions which could result in leveraging the Fund.
All activities of the Fund are, of course, subject to the 1940
Act and the rules and regulations thereunder as well as various
state securities laws.
The Board of Directors recommends that shareholders vote
FOR the proposal.
New Income and Short-Term Bond Funds
Because the Fund may occasionally need to borrow money to
meet substantial shareholder redemption or exchange requests when
available cash is not sufficient to satisfy these needs, the
Board of Directors has proposed an amendment to the Fund's
fundamental policy which would permit the Fund greater
flexibility to engage in borrowing transactions. The current
restriction is not required by applicable law. The new
restriction would (1) allow the Fund to borrow larger amounts of
money; (2) borrow from persons in addition to other T. Rowe Price
Funds or banks to the extent permitted by applicable law; and (3)
clarify that the Fund's restriction on borrowing does not
prohibit the Fund from entering into reverse repurchase
agreements and other proper investments and transactions. The
new restriction would also conform the Fund's policy on borrowing
to one which is expected to become standard for all T. Rowe Price
Funds. The Board believes that standardized policies will assist
the Fund and T. Rowe Price in monitoring compliance with the
various investment restrictions to which the T. Rowe Price Funds
are subject. The Board has directed that such proposals be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
borrowing is as follows:
PAGE 30
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Borrow money, except the Fund may borrow from banks or
other Price Funds, as a temporary measure for extraordinary
or emergency purposes, and then only in amounts not
exceeding 30% of its total assets valued at market. The
Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests
which might otherwise require untimely disposition of
portfolio securities. Interest paid on any such borrowings
will reduce net investment income. The Fund may enter into
interest rate futures contracts as set forth in [its
fundamental policy on futures];"
As amended, the Fund's fundamental policy on borrowing
would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Borrow money except that the Fund may (i) borrow for non-
leveraging, temporary or emergency purposes and (ii) engage
in reverse repurchase agreements and make other investments
or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in accordance
with applicable law. The Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law;"
If approved, the primary effect of the proposals would be
to allow the Fund to: (1) borrow up to 33 1/3% (or such higher
amount permitted by law) of its total assets (including the
amount borrowed) less liabilities (other than borrowings) as
opposed to the current limitation of 30%; (2) borrow from persons
in addition to banks and other mutual funds advised by T. Rowe
Price or Rowe Price-Fleming International, Inc. ("T. Rowe Price
Funds"); and (3) enter into reverse repurchase agreements and
other investments consistent with the Fund's investment objective
and program.
PAGE 31
33 1/3% Limitation
The increase in the amount of money which the Fund could
borrow is primarily designed to allow the Fund greater
flexibility to meet shareholder redemption requests should the
need arise. As is the case under its current policy, the Fund
would not borrow to increase income through leveraging. It is
possible the Fund's ability to borrow a larger percentage of its
assets could adversely affect the Fund if the Fund were unable to
liquidate sufficient securities, or the Fund were forced to
liquidate securities at unfavorable prices, to pay back the
borrowed sums. However, the Directors believe the risks of such
possibilities are outweighed by the greater flexibility the Fund
would have in borrowing. The increased ability to borrow should
permit the Fund, if it were faced with substantial shareholder
redemptions, to avoid liquidating securities at unfavorable
prices or times to a greater degree than would be the case under
the current policy.
Reverse Repurchase Agreements
To facilitate portfolio liquidity, it is possible the Fund
could enter into reverse repurchase agreements. In a repurchase
agreement, the Fund would purchase securities from a bank or
broker-dealer (Counterparty) with the agreement that the
Counterparty would repurchase the securities at a later date.
Reverse repurchase agreements are ordinary repurchase agreements
in which a fund is a seller of, rather than the purchaser of,
securities and agrees to repurchase them at an agreed upon time
and price. Reverse repurchase agreements can avoid certain
market risks and transaction costs associated with an outright
sale and repurchase. Reverse repurchase agreements, however, may
be viewed as borrowings. To the extent they are, the proposed
amendment would clarify that the Fund's restrictions on borrowing
would not prohibit the Fund from entering into a reverse
repurchase agreement.
Other Changes
The other proposed changes in the Fund's fundamental
policy--to allow the Fund to borrow from persons other than banks
and other T. Rowe Price Funds to the extent consistent with
applicable law and to engage in transactions other than reverse
repurchase agreements which may, or may be deemed to, involve a
borrowing--are simply designed to permit the Fund the greatest
degree of flexibility permitted by law in pursuing its investment
program. Although not specifically referred to in the proposed
PAGE 32
new policy, the Fund would continue to be able to enter into
interest rate (as well as other) futures contracts and options
thereon. As noted above, the Fund will not use its increased
flexibility to borrow to engage in transactions which could
result in leveraging the Fund. All activities of the Fund are,
of course, subject to the 1940 Act and the rules and regulations
thereunder as well as various state securities laws.
The Board of Directors recommends that shareholders vote
FOR the proposal.
Prime Reserve Fund
The Board of Directors has proposed amendments to the
Fund's Fundamental Investment Policy on borrowing to conform such
policy to one which is expected to become standard for all T.
Rowe Price Funds. The Board believes that standardized policies
will assist the Fund and T. Rowe Price in monitoring compliance
with the various investment restrictions to which the T. Rowe
Price Funds are subject. Although the proposal would provide the
Fund greater flexibility to engage in borrowing transactions, as
a practical matter, the Fund does not expect the amendments will
result in any changes to its investment program. The Fund has no
current intention of engaging in any borrowing. The current
restriction is not required by applicable law. The new
restriction would (1) allow the Fund to borrow larger amounts of
money; (2) borrow from other T. Rowe Price Funds or persons to
the extent permitted by applicable law; and (3) clarify that the
Fund's restriction on borrowing does not prohibit the Fund from
entering into reverse repurchase agreements and other proper
investments and transactions. The Board has directed that such
proposals be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
borrowing is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Borrow money, except the Fund may borrow from banks as a
temporary measure for extraordinary or emergency purposes,
and then only from banks in amounts not exceeding the
lesser of 10% of its total assets valued at cost or 5% of
its total assets valued at market. The Fund will not
borrow in order to increase income (leveraging), but only
to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities.
PAGE 33
Interest paid on any such borrowings will reduce net
investment income;"
As amended, the Fund's fundamental policy on borrowing
would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Borrow money except that the Fund may (i) borrow for non-
leveraging, temporary or emergency purposes and (ii) engage
in reverse repurchase agreements and make other investments
or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in accordance
with applicable law. The Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law;"
If approved, the primary effect of the proposals would be
to allow the Fund to: (1) borrow up to 33 1/3% (or such higher
amount permitted by law) of its total assets (including the
amount borrowed) less liabilities (other than borrowings) as
opposed to the current lesser limitations; (2) borrow from other
mutual funds advised by T. Rowe Price or Rowe Price-Fleming
International, Inc. ("T. Rowe Price Funds") and other persons;
and (3) enter into reverse repurchase agreements and other
investments consistent with the Fund's investment objective and
program.
33 1/3% Limitation
The increase in the amount of money which the Fund could
borrow is primarily designed to allow the Fund greater
flexibility to meet shareholder redemption requests should the
need arise. As is the case under its current policy, the Fund
would not borrow to increase income through leveraging. It is
possible the Fund's ability to borrow a larger percentage of its
assets could adversely affect the Fund if the Fund were unable to
liquidate sufficient securities, or the Fund were forced to
liquidate securities at unfavorable prices, to pay back the
borrowed sums. However, the Directors believe the risks of such
possibilities are outweighed by the greater flexibility the Fund
would have in borrowing. The increased ability to borrow should
PAGE 34
permit the Fund, if it were faced with substantial shareholder
redemptions, to avoid liquidating securities at unfavorable
prices or times to a greater degree than would be the case under
the current policy.
Borrowing From Other Price Funds
Current law prohibits the Fund from borrowing from other T.
Rowe Price Funds. However, if the proposed amendments to the
Fund's fundamental investment policy on borrowing are approved by
shareholders, the Fund may apply to the Securities and Exchange
Commission ("SEC") for an exemption from this prohibition. There
is, of course, no assurance that the SEC would act favorably on
such a request. If the SEC did grant such an order, the Fund
could be allowed to borrow from other T. Rowe Price Funds. T.
Rowe Price believes that the ability to engage in borrowing
transactions with the participating T. Rowe Price Funds as part
of a program, referred to as the "interfund lending program," may
allow the Fund to obtain lower interest rates on money borrowed
for temporary or emergency purposes. Any existing T. Rowe Price
Fund participating in the interfund lending program would only do
so upon approval of its shareholders.
As noted above, when the Fund is required to borrow money,
it currently may do so only from banks. When the Fund borrows
money from banks, it typically pays interest on those borrowings
at a rate that is higher than rates available contemporaneously
from investments in repurchase agreements. If the proposed
amendment is approved (and an SEC exemptive order were granted),
eligible T. Rowe Price Funds would be permitted to participate in
an interfund lending program to allow various of the T. Rowe
Price Funds, through a master loan agreement, to lend available
cash to and borrow from other T. Rowe Price Funds. Each lending
fund could lend available cash to another T. Rowe Price Fund only
when the interfund rate was higher than repurchase agreement
rates or rates on other comparable short-term investments. Each
borrowing fund could borrow through the interfund lending program
only when the interfund loan rate was lower than available bank
loan rates.
In determining to recommend the proposed amendment to
shareholders for approval, T. Rowe Price and the Directors
considered the possible risks to the Fund from participation in
the interfund lending program. T. Rowe Price does not view the
difference in rates available on bank borrowings and repurchase
agreements or other short-term investments as reflecting a
material difference in the quality of the risk of the
PAGE 35
transactions, but rather as an indication of the ability of banks
to earn a higher rate of interest on loans than they pay on
repurchase agreements or other short-term investments. There is
a risk that a lending fund could experience a delay in obtaining
prompt repayment of a loan and, unlike repurchase agreements, the
lending fund would not necessarily have received collateral for
its loan, although it could require that collateral be provided
as a condition for making a loan. A delay in obtaining prompt
payment could cause a lending fund to miss an investment
opportunity or to incur costs to borrow money to replace the
delayed payment. There is also a risk that a borrowing fund
could have a loan recalled on one day's notice. In these
circumstances, the borrowing fund might have to borrow from a
bank at a higher interest cost if money to lend were not
available from another T. Rowe Price Fund. The Directors
consider that the benefits to the Fund of participating in the
program outweigh the possible risks to the Fund from such
participation.
In order to permit the Fund to engage in interfund lending
transactions, regulatory approval of the SEC is required because,
among other reasons, the transactions may be considered to be
among affiliated parties. If the proposed amendment is approved
by shareholders, the proposed interfund lending program would be
implemented only to the extent permitted by rule or by order of
the SEC and to the extent that the transactions were otherwise
consistent with the investment objectives and limitations of each
participating T. Rowe Price Fund. If exemptive relief from the
SEC is not granted, the Fund, as previously noted, will not be
able to engage in the interfund lending program even though
shareholders have approved the proposal. As noted, no prediction
can be made as to whether the SEC would grant such relief.
Shareholders are being asked to approve an amendment to the
Fund's fundamental policy on borrowing in this proposal.
Shareholders are also being asked to vote separately on an
amendment to the Fund's fundamental policy on lending (see page
___). If both amendments are adopted, the Fund, subject to its
investment objective and policies, will be able to participate in
the interfund lending program as both a lender and a borrower.
If only one of the two proposals is adopted, then the Fund's
participation in the interfund lending program will be confined
to either lending or borrowing, depending on which amendment is
approved.
The Directors believe the proposed amendment may benefit
the Fund by facilitating its flexibility to explore cost-
PAGE 36
effective alternatives to satisfy its borrowing requirements and
by borrowing money from other T. Rowe Price Funds.
Implementation of interfund borrowing would be accomplished
consistent with applicable regulatory requirements, including the
provisions of any order the SEC might issue to the Fund and to
other T. Rowe Price Funds.
Reverse Repurchase Agreements
To facilitate portfolio liquidity, it is possible the Fund
could enter into reverse repurchase agreements. In a repurchase
agreement, the Fund would purchase securities from a bank or
broker-dealer (Counterparty) with the agreement that the
Counterparty would repurchase the securities at a later date.
Reverse repurchase agreements are ordinary repurchase agreements
in which a fund is a seller of, rather than the purchaser of,
securities and agrees to repurchase them at an agreed upon time
and price. Reverse repurchase agreements can avoid certain
market risks and transaction costs associated with an outright
sale and repurchase. Reverse repurchase agreements, however, may
be viewed as borrowings. To the extent they are, the proposed
amendment would clarify that the Fund's restrictions on borrowing
would not prohibit the Fund from entering into a reverse
repurchase agreement.
Other Changes
The other proposed changes in the Fund's fundamental
policy--to allow the Fund to borrow from persons in addition to
banks and other T. Rowe Price Funds to the extent consistent with
applicable law--and to engage in transactions other than reverse
repurchase agreements which may, or may be deemed to, involve a
borrowing--are simply designed to permit the Fund the greatest
degree of flexibility permitted by law in pursuing its investment
program. As noted above, the Fund will not use its increased
flexibility to borrow to engage in transactions which could
result in leveraging the Fund. All activities of the Fund are,
of course, subject to the 1940 Act and the rules and regulations
thereunder as well as various state securities laws.
The Board of Directors recommends that shareholders vote
FOR the proposal.
B. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY
REGARDING THE MAKING OF LOANS
PAGE 37
Adjustable Rate, New Income and Short-Term Bond Funds
The Board of Directors has proposed an amendment to the
Fundamental Investment Policies of the Fund in order to (i)
increase the amount of its assets which may be subject to its
lending policy and (ii) clarify that the Fund could purchase the
entire or any portion of the debt of a borrower. The new
restriction would also conform the Fund's policy on lending to
one which is expected to become standard for all T. Rowe Price
Funds. The Board believes that standardized policies will assist
the Fund and T. Rowe Price in monitoring compliance with the
various investment restrictions to which the T. Rowe Price Funds
are subject. The Board has directed that such amendment be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of making
loans is as follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements; (ii)
acquire publicly-distributed bonds, debentures, notes and
other debt securities and purchase debt securities at
private placement; (iii) lend portfolio securities; and
(iv) participate in an interfund lending program with other
Price Funds provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed 30% of the
value of the Fund's total assets;"
As amended, the Fund's fundamental policy on loans would be
as follows:
"[As a matter of fundamental policy, the Fund may not:]
Make loans, although the Fund may (i) lend portfolio
securities and participate in an interfund lending program
with other Price Funds provided that no such loan may be
made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter into
repurchase agreements; and (iii) acquire publicly-
distributed or privately-placed debt securities and
purchase debt;"
PAGE 38
33 1/3% Restriction
The Fund's current fundamental policy on lending restricts
the Fund to lending no more than 30% of the value of the Fund's
total assets. The new policy would raise this amount to 33 1/3%
of the value of the Fund's total assets. The purpose of this
change is to conform the Fund's policy to one that is expected to
become standard for all T. Rowe Price Funds and to permit the
Fund to lend its assets to the maximum extent permitted under
applicable law. The Board of Directors does not view this change
as significantly raising the level of risk to which the Fund
would be subject.
Purchase of Debt
The Fund's fundamental policy on lending allows the Fund to
purchase debt securities as an exception to the general
limitation on making loans. However, the policy could be
interpreted as not providing a similar exception for the purchase
of straight debt, e.g., a loan to a corporate loan held by a bank
which might not be considered a debt security. The amended
policy would clarify that the purchase of this kind of debt is
permissible. Because the purchase of straight debt could be
viewed as a loan by the Fund to the issuer of the debt, the Board
of Directors has determined to clarify this matter by including
the purchase of debt as an exception to the Fund's general
prohibition against making loans. The purchase of debt might be
subject to greater risks of illiquidity and unavailability of
public information than would be the case for an investment in a
publicly held security. The primary purpose of this proposal is
to conform the Fund's fundamental policy in this area to one that
is expected to become standard for all T. Rowe Price Funds. The
Board of Directors believes that increased standardization will
help promote operational efficiencies and facilitate monitoring
of compliance with the Fund's investment restrictions.
Other Changes
Finally, for purposes of this restriction, the Fund will
consider the acquisition of a debt security to include the
execution of a note or other evidence of an extension of credit
with a term of more than nine months. Because such transactions
by the Fund could be viewed as a loan by the Fund to the maker of
the note, the Board of Directors has determined to clarify this
matter by including these transactions as an exception to the
Fund's general prohibition against making loans.
PAGE 39
The Board of Directors recommends that shareholders vote
FOR the proposal.
High Yield Fund
The Board of Directors has proposed an amendment to the
Fundamental Investment Policies of the Fund in order to: (i)
increase the amount of its assets which may be subject to its
lending policy; (ii) authorize the Fund to participate as a
lender in an interfund lending program involving the funds
advised by T. Rowe Price or Rowe Price-Fleming International,
Inc. (the "T. Rowe Price Funds"); and (iii) make certain other
clarifying changes. The new restriction would also conform the
Fund's policy on lending to one which is expected to become
standard for all T. Rowe Price Funds. The Board believes that
standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to
which the T. Rowe Price Funds are subject. The Board has
directed that such amendment be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of making
loans is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements, and (ii)
lend portfolio securities provided that no such loan may be
made if, as a result, the aggregate of such loans would
exceed 30% of the value of the Fund's total assets;
provided, however, that the Fund may acquire publicly-
distributed bonds, debentures, notes and other debt
securities and may purchase debt securities at private
placement within the limits imposed on the acquisition of
restricted securities;"
As amended, the Fund's fundamental policy on loans would be
as follows:
"[As a matter of fundamental policy, the Fund may not:]
Make loans, although the Fund may (i) lend portfolio
securities and participate in an interfund lending program
with other Price Funds provided that no such loan may be
made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter into
repurchase agreements; and (iii) acquire publicly-
PAGE 40
distributed or privately-placed debt securities and
purchase debt;"
33 1/3% Restriction
The Fund's current fundamental policy on lending restricts
the Fund to lending no more than 30% of the value of the Fund's
total assets. The new policy would raise this amount to 33 1/3%
of the value of the Fund's total assets. The purpose of this
change is to conform the Fund's policy to one that is expected to
become standard for all T. Rowe Price Funds and to permit the
Fund to lend its assets to the maximum extent permitted under
applicable law. The Board of Directors does not view this change
as significantly raising the level of risk to which the Fund
would be subject.
Interfund Lending Program
The proposed amendments to the Fund's fundamental policy
would allow the Fund to participate in an interfund lending
program with other T. Rowe Price Funds. The nature of this
program and the risks associated with the Fund's participation
are set forth under "Borrowing from Other Price Funds" beginning
on page ____. Shareholders are being asked to consider, and vote
separately, on the Fund's participation in the interfund lending
program as a borrower and as a lender.
The Directors believe that the interfund lending program:
(i) may benefit the Fund by providing it with greater flexibility
to engage in lending transactions; and (ii) would facilitate the
Fund's ability to earn a higher return on short-term investments
by allowing it to lend cash to other T. Rowe Price Funds.
Implementation of interfund lending would be accomplished
consistent with applicable regulatory requirements, including the
provisions of any order the SEC might issue to the Fund and to
other T. Rowe Price Funds. The Fund has not yet applied for such
an order and there is no guarantee any such order would be
granted, even if applied for.
Purchase of Debt
The Fund's fundamental policy on lending allows the Fund to
purchase debt securities as an exception to the general
limitations on making loans. However, there is no similar
exception for the purchase of straight debt, e.g., a corporate
loan held by a bank for example which might not be considered a
debt security. The amended policy would allow the purchase of
PAGE 41
this kind of debt. Because the purchase of straight debt could
be viewed as a loan by the Fund to the issuer of the debt, the
Board of Directors has determined to clarify this matter by
including the purchase of debt as an exception to the Fund
general prohibition against making loans. The purchase of debt
might be subject to greater risks of illiquidity and
unavailability of public information than would be the case for
an investment in a publicly held security.
Other Matters
For purposes of this restriction, the Fund will consider
the acquisition of a debt security to include the execution of a
note or other evidence of an extension of credit with a term of
more than nine months. Because such transactions by the Fund
could be viewed as a loan by the Fund to the maker of the note,
the Board of Directors has determined to clarify this matter by
including these transactions as an exception to the Fund's
general prohibition against making loans.
The Board of Directors recommends that shareholders vote
FOR the proposal.
Prime Reserve Fund
The Board of Directors has proposed an amendment to the
Fundamental Investment Policies of the Fund in order to: (i)
increase the amount of its assets which may be subject to its
lending policy; (ii) authorize the Fund to participate as a
lender in an interfund lending program involving the funds
advised by T. Rowe Price or Rowe Price-Fleming International,
Inc. (the "T. Rowe Price Funds"); and (iii) make certain other
clarifying changes. The new restriction would also conform the
Fund's policy on lending to one which is expected to become
standard for all T. Rowe Price Funds. The Board believes that
standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to
which the T. Rowe Price Funds are subject. The Board has
directed that such amendment be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of making
loans is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements, and (ii)
PAGE 42
lend portfolio securities provided that no such loan may be
made if, as a result, the aggregate of such loans would
exceed 30% of the value of the Fund's total assets;"
As amended, the Fund's fundamental policy on loans would be
as follows:
"[As a matter of fundamental policy, the Fund may not:]
Make loans, although the Fund may (i) lend portfolio
securities and participate in an interfund lending program
with other Price Funds provided that no such loan may be
made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter into
repurchase agreements; and (iii) acquire publicly-
distributed or privately-placed debt securities and
purchase debt;"
33 1/3% Restriction
The Fund's current fundamental policy on lending restricts
the Fund to lending no more than 30% of the value of the Fund's
total assets. The new policy would raise this amount to 33 1/3%
of the value of the Fund's total assets. The purpose of this
change is to conform the Fund's policy to one that is expected to
become standard for all T. Rowe Price Funds and to permit the
Fund to lend its assets to the maximum extent permitted under
applicable law. The Board of Directors does not view this change
as significantly raising the level of risk to which the Fund
would be subject.
Interfund Lending Program
The proposed amendments to the Fund's fundamental policy
would allow the Fund to participate in an interfund lending
program with other T. Rowe Price Funds. The nature of this
program and the risks associated with the Fund's participation
are set forth under "Borrowing from Other Price Funds" beginning
on page ____. Shareholders are being asked to consider, and vote
separately, on the Fund's participation in the interfund lending
program as a borrower and as a lender.
The Directors believe that the interfund lending program:
(i) may benefit the Fund by providing it with greater flexibility
to engage in lending transactions; and (ii) would facilitate the
Fund's ability to earn a higher return on short-term investments
by allowing it to lend cash to other T. Rowe Price Funds.
PAGE 43
Implementation of interfund lending would be accomplished
consistent with applicable regulatory requirements, including the
provisions of any order the SEC might issue to the Fund and to
other T. Rowe Price Funds. The Fund has not yet applied for such
an order and there is no guarantee any such order would be
granted, even if applied for.
Other Matters
The new policy would also provide that the purchase of
publicly-distributed or privately-placed debt and the purchase of
debt are exceptions to the Fund's general prohibition against
making loans. The Fund, in accordance, with Rule 2a-7, under the
1940 Act, will continue to purchase only money market securities.
The purpose of the proposed amendment is to conform the Fund's
policy in this area to one which is expected to become standard
for all T. Rowe Price Funds.
For purposes of the restriction on lending, the Fund will
consider the acquisition of a debt security to include the
execution of a note or other evidence of an extension of credit
with a term of more than nine months. Because such transactions
by the Fund could be viewed as a loan by the Fund to the maker of
the note, the Board of Directors has determined to clarify this
matter by including these transactions as an exception to the
Fund's general prohibition against making loans.
The Board of Directors recommends that shareholders vote
FOR the proposal.
C. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON PURCHASING SECURITIES ON MARGIN
Adjustable Rate, High Yield and Short-Term Bond Funds
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on purchasing securities on margin
be changed from a fundamental policy to an operating policy.
Fundamental policies may be changed only by shareholder vote,
while operating policies may be changed by the Board of Directors
without shareholder approval. The purpose of the proposal is to
allow the Fund greater flexibility in responding to market and
regulatory developments by providing the Board of Directors with
the authority to make changes in the Fund's policy on margin
without further shareholder approval. The new restriction would
PAGE 44
also conform the Fund's policy on margin to one which is expected
to become standard for all T. Rowe Price Funds other than money
market funds. The Board believes that standardized policies will
assist the Fund and T. Rowe Price in monitoring compliance with
the various investment restrictions to which the T. Rowe Price
Funds are subject. The Board has directed that such amendment be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing securities on margin is as follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio
securities; except that it may make margin deposits in
connection with interest rate futures contracts, subject to
[its fundamental policy on futures];"
As amended, the Fund's operating policy on purchasing
securities on margin would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase securities on margin, except (i) for use of short-
term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits
in connection with futures contracts or other permissible
investments;"
The Fund's current policy and the proposed operating policy
prohibit the purchase of securities on margin but allow the Fund
to use such short-term credit as is necessary for clearance of
purchases of portfolio securities and make margin deposits in
connection with interest rate futures contracts. Set forth
elsewhere in this proxy is a proposal to allow the Fund to invest
in additional types of futures contracts, not just interest rate
futures as set forth in the current policy. The proposed
operating policy also would acknowledge that the Fund is
permitted to make margin deposits in connection with other
investments in addition to futures. Such investments might
include, but are not limited to, written options where the Fund
could be required to put up margin with a broker as security for
the Fund's obligation to deliver the security on which the option
is written.
PAGE 45
The Board of Directors recommends that shareholders vote
FOR the proposal.
GNMA Fund
The Board has proposed that the Fund's Fundamental
Investment Policy on purchasing securities on margin be changed
from a fundamental policy to an operating policy. Fundamental
policies may be changed only by shareholder vote, while operating
policies may be changed by the Board of Trustees without
shareholder approval. The purpose of the proposal is to allow
the Fund greater flexibility in responding to market and
regulatory developments by providing the Board with the authority
to make changes in the Fund's policy on margin without further
shareholder approval. The new restriction would also conform the
Fund's policy on margin to one which is expected to become
standard for all T. Rowe Price Funds other than money market
funds. The Board believes that standardized policies will assist
the Fund and T. Rowe Price in monitoring compliance with the
various investment restrictions to which the T. Rowe Price Funds
are subject. The Board has directed that such amendment be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing securities on margin is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio
securities; except that it may make margin deposits in
connection with futures contracts, subject to [its
fundamental policy on futures];"
As amended, the Fund's operating policy on purchasing
securities on margin would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase securities on margin, except (i) for use of short-
term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits
in connection with futures contracts or other permissible
investments;"
The Fund's current policy and the proposed operating policy
prohibit the purchase of securities on margin but allow the Fund
to make margin deposits in connection with futures contracts and
use such short-term credit as is necessary for clearance of
PAGE 46
purchases of portfolio securities. The proposed operating policy
also would acknowledge that the Fund is permitted to make margin
deposits in connection with other investments in addition to
futures. Such investments might include, but are not limited to,
written options where the Fund could be required to put up margin
with a broker as security for the Fund's obligation to deliver
the security on which the option is written.
The Board recommends that shareholders vote FOR the
proposal.
Prime Reserve Fund
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on purchasing securities on margin
be changed from a fundamental policy to an operating policy.
Fundamental policies may be changed only by shareholder vote,
while operating policies may be changed by the Board of Directors
without shareholder approval. The only effect of the proposal
would be to change the Fund's fundamental policy on margin to an
operating policy. The Fund has no current intention of
purchasing any securities on margin. The Board has directed that
such amendment be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
purchasing securities on margin is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio
securities;"
As amended, the Fund's operating policy on purchasing
securities on margin would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio
securities;"
The Board of Directors recommends that shareholders vote
FOR the proposal.
PAGE 47
D. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT
POLICIES CONCERNING REAL ESTATE
Adjustable Rate and New Income Funds
The Board of Directors has proposed an amendment to the
Fundamental Investment Policies of the Fund to conform the Fund's
fundamental policy on investing in real estate to a policy that
is expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The proposed amendment is not expected to affect the
investment program of the Fund or instruments in which the Fund
invests. Although not specifically referred to in the new
restriction, the Fund will not purchase or sell real estate
limited partnerships. The Board has directed that such amendment
be submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy on investing in real
estate in the area of investing in real estate is as follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell real estate or real estate limited
partnerships (although it may purchase money market
securities secured by real estate or interests therein, or
issued by companies which invest in real estate or
interests therein);"
As amended, the Fund's fundamental policy would be as
follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this
shall not prevent the Fund from investing in securities or
other instruments backed by real estate or securities of
companies engaged in the real estate business);"
The Board of Directors recommends that shareholders vote
FOR the proposal.
PAGE 48
High Yield, Prime Reserve and Short-Term Bond Funds
The Board of Directors has proposed an amendment to the
Fundamental Investment Policies of the Fund to conform the Fund's
fundamental policy on investing in real estate to a policy that
is expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The proposed amendment is not expected to affect the
investment program of the Fund or instruments in which the Fund
invests. The Board has directed that such amendments be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
investing in real estate is as follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell real estate (although it may purchase
money market securities secured by real estate or interests
therein, or issued by companies which invest in real estate
or interests therein);"
As amended, the Fund's fundamental policy on investing in
real estate would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this
shall not prevent the Fund from investing in securities or
other instruments backed by real estate or securities of
companies engaged in the real estate business);"
The Board of Directors recommends that shareholders vote
FOR the proposal.
E. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY
ON THE ISSUANCE OF SENIOR SECURITIES
The Fund's Board of Directors has proposed an amendment to
the Fund's Fundamental Investment Policy on issuing senior
securities which would allow the Fund to issue senior securities
to the extent permitted under the 1940 Act. The new policy, if
adopted, would provide the Fund with greater flexibility in
PAGE 49
pursuing its investment objective and program and would conform
the Fund's policy in this area to one which is expected to become
standard for all T. Rowe Price Funds. The Board believes that
standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to
which the T. Rowe Price Funds are subject. The Board has
directed that such amendment be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of
issuing senior securities is as follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Issue any class of securities senior to any other class of
securities;"
As amended, the Fund's fundamental policy on issuing senior
securities would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Issue senior securities except in compliance with the
Investment Company Act of 1940;"
The 1940 Act limits a Fund's ability to issue senior
securities or engage in investment techniques which could be
deemed to create a senior security. Although the definition of a
"senior security" involves complex statutory and regulatory
concepts, a senior security is generally thought of as a class of
security preferred over shares of the Fund with respect to the
Fund's assets or earnings. It generally does not include
temporary or emergency borrowings by the Fund (which might occur
to meet shareholder redemption requests) in accordance with
federal law and the Fund's investment limitations. Various
investment techniques that obligate the Fund to pay money at a
future date (e.g., the purchase of securities for settlement on a
date that is longer than required under normal settlement
practices) occasionally raise questions as to whether a "senior
security" is created. The Fund utilizes such techniques only in
accordance with applicable regulatory requirements under the 1940
Act. Although the Fund has no current intention of issuing
senior securities, the proposed change will clarify the Fund's
authority to issue senior securities in accordance with the 1940
Act without the need to seek shareholder approval.
PAGE 50
The Board of Directors recommends that shareholders vote
FOR the proposal.
F. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY
ON INDUSTRY CONCENTRATION
Adjustable Rate Fund
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on industry concentration be
eliminated and replaced with a substantially similar fundamental
policy. The amendment would conform the Fund's policy in this
area to one which is expected to become a standard policy for all
T. Rowe Price Funds. The Board believes that standardized
policies will assist the Fund and T. Rowe Price in monitoring
compliance with the various investment restrictions to which the
T. Rowe Price Funds are subject. The Board has directed that
such amendments be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
industry concentration is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities) if, as a result, more
than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;"
As amended the Fund's fundamental policy on industry
concentration would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;"
The amended policy does not include any reference to
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities as exceptions to the general
prohibition against industry concentration. This is because
PAGE 51
governments are not industries (a position confirmed by the SEC).
Therefore, there is no need to make specific reference to these
securities in the policy.
The Board of Directors recommends that shareholders vote
FOR the proposal.
High Yield Fund
The Board of Directors has proposed amendments to the
Fundamental Investment Policy of the Fund on industry
concentration. The first amendment would change the limit of the
Fund's total assets which may be invested in the securities of
issuers in the same industry from "25% or more" to "more than
25%." This is merely a technical change. The other amendment
would clarify that bank certificates of deposit and bankers'
acceptances are excluded from the policy against concentration.
The Board has directed that such amendments be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
industry concentration is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities) if, as a result, 25% or
more of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;
provided, however, that the Fund will normally concentrate
25% or more of its assets in the securities of the banking
industry when the Fund's position in issues maturing in one
year or less equals 35% or more of the Fund's total
assets;"
As amended the Fund's fundamental policy on industry
concentration would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;
provided, however, that the Fund will normally concentrate
25% or more of its assets in the securities of the banking
industry including, but not limited to, bank certificates
PAGE 52
of deposit and bankers' acceptances, when the Fund's
position in issues maturing in one year or less equals 35%
or more of the Fund's total assets;"
The amended policy does not include any reference to
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities as exceptions to the general
prohibition against industry concentration. This is because
governments are not industries (a position confirmed by the SEC).
Therefore, there is no need to make specific reference to these
securities in the policy.
The Board of Directors recommends that shareholders vote
FOR the proposal.
New Income Fund
The Board of Directors has proposed amendments to the
Fundamental Investment Policy of the Fund on industry
concentration. The first amendment would change the limit of the
Fund's total assets which may be invested in the securities of
issuers in the same industry from "25% or more" to "more than
25%." This is merely a technical change. The other amendment
would expand the types of banking instruments to which the policy
does not apply from bank certificates of deposit to securities of
the banking industry, including but not limited to, certificates
of deposit and bankers' acceptances. The Board has directed that
such amendments be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
industry concentration is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase a security if, as a result, 25% or more of the
value of the Fund's total assets would be invested in the
securities of issuers having their principal activities in
the same industry; provided, however, that the Fund will
invest 25% or more of its assets, but not more than 50%, in
any one of the gas utility, gas transmission utility,
electric utility, telephone utility, and petroleum
industries under certain circumstances, but this limitation
does not apply to bank certificates of deposit;"
As amended the Fund's fundamental policy on industry
concentration would be as follows:
PAGE 53
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;
provided, however, that the Fund will invest 25% or more of
its assets, but not more than 50%, in any one of the gas
utility, gas transmission utility, electric utility,
telephone utility, and petroleum industries under certain
circumstances, and further provided that this limitation
does not apply to securities of the banking industry
including, but not limited to, certificates of deposit and
bankers' acceptances;"
The Board of Directors recommends that shareholders vote
FOR the proposal.
Prime Reserve Fund
The Board of Directors has proposed amendments to the
Fundamental Investment Policy of the Fund on industry
concentration. The first amendment would change the limit of the
Fund's total assets which may be invested in the securities of
issuers in the same industry from "25% or more" to "more than
25%." This is merely a technical change. The other amendment
would expand the types of banking instruments to which the policy
does not apply from bank certificates of deposit to securities of
the banking industry, including but not limited to, certificates
of deposit and bankers' acceptances. The Board has directed that
such amendments be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
industry concentration is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, 25%
or more of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry (other
than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities); this
limitation does not apply to certificates of deposit, or
bankers' acceptances;"
As amended the Fund's fundamental policy on industry
concentration would be as follows:
PAGE 54
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;
provided, however, that this limitation does not apply to
securities of the banking industry including, but not
limited to, certificates of deposit and bankers'
acceptances"
The amended policy does not include any reference to
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities as exceptions to the general
prohibition against industry concentration. This is because
governments are not industries (a position confirmed by the SEC).
Therefore, there is no need to make specific reference to these
securities in the policy.
The Board of Directors recommends that shareholders vote
FOR the proposal.
Short-Term Bond Fund
The Board of Directors has proposed amendments to the
Fundamental Investment Policy of the Fund on industry
concentration. The first amendment would change the limit of the
Fund's total assets which may be invested in the securities of
issuers in the same industry from "25% or more" to "more than
25%." This is merely a technical change. The other amendment
would clarify that bank certificates of deposit and bankers'
acceptances are excluded from the policy against concentration.
The Board has directed that such amendments be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
industry concentration is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities) if, as a result, 25% or
more of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;
provided, however, that the Fund will normally concentrate
25% or more of its assets in the securities of the banking
PAGE 55
industry when the Fund's position in issues maturing in one
year or less equals 35% or more of the Fund's total assets;
provided, further, that the Fund will invest 25% or more of
its assets, but not more than 50%, in any one of the gas
utility, gas transmission utility, electric utility,
telephone utility, and petroleum industries under certain
circumstances;"
As amended the Fund's fundamental policy on industry
concentration would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same industry;
provided, however, that the Fund will normally concentrate
25% or more of its assets in the securities of the banking
industry including, but not limited to, bank certificates
of deposit and bankers' acceptances when the Fund's
position in issues maturing in one year or less equals 35%
or more of the Fund's total assets; provided, further, that
the Fund will invest 25% or more of its assets, but not
more than 50%, in any one of the gas utility, gas
transmission utility, electric utility, telephone utility,
and petroleum industries under certain circumstances;"
The amended policy does not include any reference to
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities as exceptions to the general
prohibition against industry concentration. This is because
governments are not industries (a position confirmed by the SEC).
Therefore, there is no need to make specific reference to these
securities in the policy.
The Board of Directors recommends that shareholders vote
FOR the proposal.
HIGH YIELD, NEW INCOME, PRIME RESERVE AND SHORT-TERM BOND FUNDS
G. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON PLEDGING ITS ASSETS
High Yield Fund
PAGE 56
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on pledging its assets be
eliminated and replaced with an operating policy. Fundamental
policies may be changed by shareholder vote, while operating
policies may be changed by vote of the Board of Directors without
shareholder approval. Applicable law does not require the
current percentage limitation set forth in the policy and does
not require such policy to be fundamental. The new operating
policy would allow the Fund to pledge, in connection with Fund
indebtedness, 33 1/3% of its total assets (an increase from the
current restriction) and allow the Fund to pledge assets in
connection with permissible investments. The Board of Directors
believes it is advisable to provide the Fund with greater
flexibility in pursuing its investment objective and program and
responding to regulatory and market developments. The new
restriction would also conform the Fund's policy on pledging its
assets to one which is expected to become standard for all T.
Rowe Price mutual funds. The Board believes that standardized
policies will assist the Fund and T. Rowe Price in monitoring
compliance with the various investment restrictions to which the
T. Rowe Price mutual funds are subject. The Board has directed
that such proposals be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
pledging its assets is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Mortgage, pledge, hypothecate or, in any other manner,
transfer as security for indebtedness any security owned by
the Fund, except (i) as may be necessary in connection with
permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's
assets, valued at cost; provided, however, that as a matter
of operating policy, which may be changed without
shareholder approval, the Fund will limit any such
mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market, in order to comply with certain
state investment restrictions; and (ii) it may enter into
interest rate futures contracts;"
The operating policy on pledging of assets, to be adopted by
the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Fund as security for indebtedness
PAGE 57
except as may be necessary in connection with permissible
borrowings or investments and then such mortgaging, pledging
or hypothecating may not exceed 33 1/3% of the Fund's total
assets at the time of the borrowing or investment;"
The operating policy would allow the Fund to pledge 33 1/3%
of its total assets instead of the current 15% as set forth in
the Fund's fundamental policy and (10% as set forth in the Fund's
current operating policy). The new policy, in addition to
allowing pledging in connection with indebtedness would clarify
the Fund's ability to pledge its assets in connection with
permissible investments. Such pledging could arise, for example,
when the Fund engages in futures or options transactions or
purchases securities on a when-issued or forward basis. As an
operating policy, the Board of Directors could modify the
proposed policy on pledging in the future as the need arose,
without seeking further shareholder approval.
Pledging assets to other parties is not without risk.
Because assets that have been pledged to other parties may not be
readily available to the Fund, the Fund may have less flexibility
in liquidating such assets if needed. Therefore, the new policy,
by allowing the Fund to pledge a greater portion of its assets,
could, to a greater extent than the current policy, impair the
Fund's ability to meet current obligations, or impede portfolio
management. On the other hand, these potential risks should be
considered together with the potential benefits, such as
increased flexibility to borrow and the increased ability of the
Fund to pursue its investment program.
The Board of Directors recommends that shareholders vote FOR
the proposal.
New Income and Short-Term Bond Funds
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on pledging its assets be
eliminated and replaced with an operating policy. Fundamental
policies may be changed by shareholder vote, while operating
policies may be changed by vote of the Board of Directors without
shareholder approval. Applicable law does not require the
current percentage limitation set forth in the policy and does
not require such policy to be fundamental. The new operating
policy would allow the Fund to pledge, in connection with Fund
indebtedness, 33 1/3% of its total assets (a slight increase from
the current restriction) and allow the Fund to pledge assets in
connection with permissible investments. The Board of Directors
PAGE 58
believes it is advisable to provide the Fund with greater
flexibility in pursuing its investment objective and program and
responding to regulatory and market developments. The new
restriction would also conform the Fund's policy on pledging its
assets to one which is expected to become standard for all T.
Rowe Price mutual funds. The Board believes that standardized
policies will assist the Fund and T. Rowe Price in monitoring
compliance with the various investment restrictions to which the
T. Rowe Price mutual funds are subject. The Board has directed
that such proposals be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
pledging its assets is as follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Fund as security for indebtedness
except as may be necessary in connection with permissible
borrowings and then such mortgaging, pledging or
hypothecating may not exceed 30% of the Fund's total assets
valued at market at the time of the borrowing;"
The operating policy on pledging of assets, to be adopted by
the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Fund as security for indebtedness
except as may be necessary in connection with permissible
borrowings or investments and then such mortgaging, pledging
or hypothecating may not exceed 33 1/3% of the Fund's total
assets at the time of the borrowing or investment;"
The operating policy would allow the Fund to pledge 33 1/3%
of its total assets instead of the current 30%. The new policy,
in addition to allowing pledging in connection with indebtedness
would clarify the Fund's ability to pledge its assets in
connection with permissible investments. Such pledging could
arise, for example, when the Fund engages in futures or options
transactions or purchases securities on a when-issued or forward
basis. As an operating policy, the Board of Directors could
modify the proposed policy on pledging in the future as the need
arose, without seeking further shareholder approval.
PAGE 59
Pledging assets to other parties is not without risk.
Because assets that have been pledged to other parties may not be
readily available to the Fund, the Fund may have less flexibility
in liquidating such assets if needed. Therefore, the new policy,
by allowing the Fund to pledge a greater portion of its assets,
could, to a greater extent than the current policy, impair the
Fund's ability to meet current obligations, or impede portfolio
management. On the other hand, these potential risks should be
considered together with the potential benefits, such as
increased flexibility to borrow and the increased ability of the
Fund to pursue its investment program.
The Board of Directors recommends that shareholders vote FOR
the proposal.
Prime Reserve Fund
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on pledging its assets be
eliminated and replaced with an operating policy. Fundamental
policies may be changed by shareholder vote, while operating
policies may be changed by vote of the Board of Directors without
shareholder approval. Applicable law does not require the
current percentage limitation set forth in the policy and does
not require such policy to be fundamental. The new operating
policy would allow the Fund to pledge, in connection with Fund
indebtedness, 33 1/3% of its total assets (an increase from the
current restriction) and allow the Fund to pledge assets in
connection with permissible investments. The Fund has no current
intention of pledging its assets. The purpose of the proposal is
to conform the Fund's policy on pledging its assets to one which
is expected to become standard for all T. Rowe Price mutual
funds. The Board believes that standardized policies will assist
the Fund and T. Rowe Price in monitoring compliance with the
various investment restrictions to which the T. Rowe Price mutual
funds are subject. The Board has directed that such proposals be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
pledging its assets is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Mortgage, pledge, hypothecate or, in any other manner,
transfer as security for indebtedness any security owned by
the Fund, except as may be necessary in connection with
permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's
PAGE 60
assets, valued at cost; provided, however, that as a matter
of operating policy, which may be changed without
shareholder approval, the Fund will limit any such
mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market, in order to comply with certain
state investment restrictions;"
The operating policy on pledging of assets, to be adopted by
the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Fund as security for indebtedness
except as may be necessary in connection with permissible
borrowings or investments and then such mortgaging, pledging
or hypothecating may not exceed 33 1/3% of the Fund's total
assets at the time of the borrowing or investment;"
The operating policy would allow the Fund to pledge 33 1/3%
of its total assets instead of the current 15% as set forth in
the Fund's fundamental policy and (10% as set forth in the Fund's
current operating policy). The new policy, in addition to
allowing pledging in connection with indebtedness would clarify
the Fund's ability to pledge its assets in connection with
permissible investments. It is not currently contemplated that
the Fund would pledge its assets under any circumstances. As an
operating policy, the Board of Directors could modify the
proposed policy on pledging in the future as the need arose,
without seeking further shareholder approval.
Pledging assets to other parties is not without risk.
Because assets that have been pledged to other parties may not be
readily available to the Fund, the Fund may have less flexibility
in liquidating such assets if needed. Therefore, the new policy,
by allowing the Fund to pledge a greater portion of its assets,
could, to a greater extent than the current policy, impair the
Fund's ability to meet current obligations, or impede portfolio
management. On the other hand, these potential risks should be
considered together with the potential benefits, such as
increased flexibility to borrow and the increased ability of the
Fund to pursue its investment program.
The Board of Directors recommends that shareholders vote FOR
the proposal.
PAGE 61
ADJUSTABLE RATE, HIGH YIELD, NEW INCOME AND SHORT-TERM BOND FUNDS
H. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICIES
ON INVESTING IN COMMODITIES AND FUTURES CONTRACTS TO PROVIDE
GREATER FLEXIBILITY IN FUTURES TRADING
Adjustable Rate, New Income and Short-Term Bond Funds
The Board of Directors has proposed amendments to the Fund's
Fundamental Investment Policies on commodities and futures. The
principal purpose of the proposals is to conform the Fund's
policies on commodities and futures with policies which are
expected to become standard for all T. Rowe Price Funds (other
than the money market funds). The Board believes that
standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to
which the T. Rowe Price Funds are subject. The Board has
directed that such amendments be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policies in the area of
investing in commodities and futures are as follows:
Commodities
Adjustable Rate and New Income Funds
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell commodities or commodity contracts; except
that it may (i) enter into financial futures contracts and
options on financial futures contracts; (ii) invest in or
commit its assets to forward foreign currency exchange
contracts (although the Fund does not consider such
contracts to be commodities); and (iii) purchase or sell
financial instruments which have the characteristics of both
futures contracts and securities;"
Short-Term Bond Fund
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell commodities or commodity contracts; except
that it may (i) enter into futures contracts and options on
futures contracts; (ii) invest in or commit its assets to
forward foreign currency exchange contracts (although the
Fund does not consider such contracts to be commodities);
and (iii) purchase or sell instruments which have the
characteristics of both futures contracts and securities;"
PAGE 62
Futures Contracts
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Enter into a futures contract or options thereon, although
the Fund may enter into financial and currency futures
contracts or options on financial and currency futures
contracts;"
As amended, the Fund's fundamental policies on investing in
futures and commodities would be combined and would be as
follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;"
In addition, the Board of Directors intends to adopt the
following operating policy, which may be changed by the Board of
Directors without further shareholder approval.
"[As a matter of operating policy, the Fund will not:]
Purchase a futures contract or an option thereon if, with
respect to positions in futures or options on futures which
do not represent bona fide hedging, the aggregate initial
margin and premiums on such options would exceed 5% of the
Fund's net asset value (the "New Operating Policy");"
If adopted, the primary effect of the amendment would be to
remove the restriction in the current policies that the Fund may
only enter into financial and currency futures. Although not
specifically described in the amended fundamental restriction,
the Fund would continue to have the ability to enter into forward
foreign currency contracts and to invest in instruments which
have the characteristics of futures and securities or whose value
is determined, in whole or in part, by reference to commodity
prices.
As noted, the principal purpose of seeking the proposed
change in the Fund's fundamental policies is to conform such
policies to ones which are expected to become standard for all T.
Rowe Price Funds (other than the money market funds). The Board
of Directors believes that standardized policies will assist the
Fund and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. However, the new policy, if adopted, would allow the
PAGE 63
Fund to enter into any type of futures contract which was
consistent with the Fund's investment objective and program. The
risks of any such futures activity could differ from the risks of
the Fund's currently permitted futures activity.
The Board of Directors recommends that shareholders vote FOR
the proposal.
High Yield Fund
The Board of Directors has proposed amendments to the
Fundamental Investment Policies of the Fund to provide the Fund
with greater flexibility in buying and selling futures contracts.
The provisions of the Fund's current fundamental investment
policies in this area are not required by applicable law and the
Directors believe the Fund's investment manager, T. Rowe Price,
should have greater flexibility to enter into futures contracts
consistent with the Fund's investment objective and program and
as market and regulatory developments require and permit without
the necessity of seeking further shareholder approval. The new
restriction would also conform the Fund's policy on commodities
and futures to one which is expected to become standard for all
T. Rowe Price Funds (other than the money market funds). The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that such amendments be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policies in the area of
investing in commodities and futures are as follows:
Commodities
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell commodities or commodity contracts; except
that it may enter into interest rate futures contracts,
subject to [its fundamental policy on futures];"
Futures Contracts
"[As a matter of fundamental policy, the Fund may not:]
Enter into futures contracts or options thereon if, as a
result thereof, more than 5% of the Fund's total assets
(taken at market value at the time of entering into the
contract) would be committed to initial margin and premiums
on such contracts or options thereon, provided, however,
PAGE 64
that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount, as defined in
certain CFTC regulations, may be excluded in computing such
5%;"
As amended, the Fund's fundamental policies on investing in
commodities and futures would be combined and would be as
follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;"
In addition, the Board of Directors intends to adopt the
following operating policy, which may be changed by the Board of
Directors without further shareholder approval.
"[As a matter of operating policy, the Fund will not:]
Purchase a futures contract or an option thereon if, with
respect to positions in futures or options on futures which
do not represent bona fide hedging, the aggregate initial
margin and premiums on such options would exceed 5% of the
Fund's net asset value (the "New Operating Policy")."
If approved, the primary effects of the amendments would be
to replace the restriction that the Fund may not commit more than
5% of its total assets to initial margin on futures contracts or
premiums on options (the "5% Limitation") with the New Operating
Policy. Although not specifically described in the existing or
the amended fundamental restriction, the Fund would continue to
have the ability to enter into forward foreign currency contracts
and could also invest in instruments which have the
characteristics of futures and securities or whose value is
determined, in whole or in part, by reference to commodity
prices. Although it has no current intention of doing so, the
new policy would also permit the Fund to enter into any type of
futures contract, not just those described in its current
prospectus. The risks of such futures could differ from the
risks of the Fund's currently permitted futures activity.
The 5% Limitation
The 5% Limitation was previously required by rules of the
CFTC in order for the Fund to be excluded from status as a
commodity pool operator under applicable CFTC regulations, even
if the Fund used futures for hedging purposes only. The CFTC no
longer applies the 5% test to bona fide hedging activities.
PAGE 65
Although applicable state law may still require compliance with
similar limitations, the Board of Directors believes the best
interest of the Fund would be served by replacing the 5%
Limitation with the New Operating Policy. This would provide the
Fund with the flexibility to adapt to changes in CFTC regulations
and any state laws without seeking further shareholder approval.
The Board of Directors recommends that shareholders vote FOR
the proposal.
ADJUSTABLE RATE, HIGH YIELD, PRIME RESERVE AND SHORT-TERM BOND
FUNDS
I. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON PURCHASING EQUITY SECURITIES
Adjustable Rate, Prime Reserve and Short-Term Bond Funds
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on purchasing equity securities be
eliminated and replaced with a substantially similar operating
policy. Fundamental policies may be changed only by shareholder
vote, while operating policies may be changed by the Board of
Directors without shareholder approval. The current policy of
the Fund is not required by applicable law to be fundamental.
The purpose of the proposal is to conform the Fund's policy on
purchasing equity securities to one which is expected to become
standard for all T. Rowe Price taxable income funds (other than
the T. Rowe Price High Yield Fund, Inc). The Board believes that
standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to
which the T. Rowe Price Funds are subject. The Fund has no
current intention of purchasing any equity securities. The Board
has directed that the proposal be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing equity securities is as follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Purchase any common stocks or other equity securities, or
securities convertible into equity securities;"
PAGE 66
The operating policy on purchasing equity securities, to be
adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase any common stocks or other equity securities, or
securities convertible into equity securities except as set
forth in its operating policy on investment companies;"
The Board of Directors recommends that shareholders vote FOR
the proposal.
High Yield Fund
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on purchasing equity securities be
eliminated and replaced with an identical operating policy.
Fundamental policies may be changed only by shareholder vote,
while operating policies may be changed by the Board of Directors
without shareholder approval. The current policy of the Fund is
not required by applicable law to be fundamental. The Board has
directed that the proposal be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing equity securities is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Invest more than 20% of the Fund's total assets in common
stocks (including up to 5% in warrants);"
The operating policy on purchasing equity securities, to be
adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Invest more than 20% of the Fund's total assets in common
stocks (including up to 5% in warrants);"
The Board of Directors recommends that shareholders vote FOR
the proposal.
NEW INCOME FUND
J. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON SHORT SALES
PAGE 67
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on effecting short sales be
eliminated and replaced with a substantially similar operating
policy. Fundamental policies may be changed only by shareholder
vote, while operating policies may be changed by the Board of
Directors without shareholder approval. The current policy of
the Fund is not required by applicable law to be fundamental.
The proposal, if adopted, would provide the Fund with greater
flexibility in pursuing its investment objective and program.
The Board has directed that the proposal be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
effecting short sales of securities is as follows:
"[As a matter of fundamental policy, the Fund may not:] . .
. Effect short sales of securities . . .;"
The operating policy on short sales, to be adopted by the
Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Effect short sales of securities;"
The current fundamental policy was formerly required by
certain states to be fundamental. This is no longer the case and
the replacement of the policy with an operating policy will
adequately protect the Fund while providing greater flexibility
to the Fund to respond to market or regulatory developments by
allowing the Board of Directors the authority to make changes in
this policy without seeking further shareholder approval.
In a short sale, an investor, such as the Fund, sells a
borrowed security and must return the same security to the
lender. Although the Board has no current intention of allowing
the Fund to engage in short sales, if the proposed amendment is
adopted, the Board would be able to authorize the Fund to engage
in short sales at any time without further shareholder action.
In such a case, the Fund's prospectus would be amended and a
description of short sales and their risks would be set forth
therein.
The Board of Directors recommends that shareholders vote FOR
the proposal.
PAGE 68
PROPOSALS K-S PERTAIN ONLY TO HIGH YIELD AND PRIME RESERVE FUNDS
K. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY
TO INCREASE THE PERCENTAGE OF FUND ASSETS WHICH MAY BE
INVESTED IN ANY ONE ISSUER
High Yield Fund
The Board of Directors has proposed an amendment to the
Fundamental Investment Policies of the Fund to conform such
policies to Section 5(b)(1) of the 1940 Act and to permit the
Fund greater flexibility to invest in securities considered by T.
Rowe Price to present attractive investment opportunities. Under
the amended policy, the Fund would be limited, with respect to
75% of its total assets, to investing no more than 5% of its
total assets in the securities of any one issuer. However, no
such limitation would apply with respect to the remaining 25% of
the Fund's assets. It should be understood that the proposed
amendment, by permitting the Fund to invest a greater percentage
of its assets with a single issuer, could increase the risk to
the Fund in the event of adverse developments affecting the
securities of such issuer. The Board has directed that such
amendment be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
investing in the securities of a single issuer is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities) if, as a result, more than 5%
of the value of the Fund's total assets would be invested in
the securities of a single issuer (including repurchase
agreements with any one issuer);"
As amended, the Fund's fundamental policy on investing in
the securities of a single issuer would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase a security if, as a result, with respect to 75% of
the value of its total assets, more than 5% of the value of
the Fund's total assets would be invested in the securities
of a single issuer, except securities issued or guaranteed
by the U.S. government, or any of its agencies or
instrumentalities;"
PAGE 69
The proposed amendments will not affect the status of the
Fund as a diversified investment company under the 1940 Act.
However, the proposed amendments would allow the Fund to invest a
significantly larger portion of its assets in the securities of a
single issuer. Thus, for example, the Fund could invest 25% of
its total assets in the securities of a single issuer, or 10% of
its total assets in securities of one issuer and 15% of its total
assets in securities of another issuer. This would cause the
Fund's net asset value per share to be more affected by changes
in the value of, and market, credit and business developments
with respect to, the securities of such issuer(s). In addition,
if the Fund were to have a substantial portion of its assets
invested in the securities of a single issuer, the liquidity of
the Fund's investment in that issuer could be reduced. However,
the Fund's Board of Directors believes the Fund should have the
increased flexibility to pursue its investment program which the
proposed amendment would allow.
The Board of Directors recommends that shareholders vote FOR
the proposal.
Prime Reserve Fund
The Board of Directors has proposed an amendment to the
Fundamental Investment Policies of the Fund to conform such
policies to Section 5(b)(1) of the 1940 Act and to conform the
Fund's policy in this area to one which is expected to become
standard for all T. Rowe Price Funds. The Board believes that
standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to
which the T. Rowe Price Funds are subject. Under the amended
policy, the Fund would be limited, with respect to 75% of its
total assets, to investing no more than 5% of its total assets in
the securities of any one issuer. No such limitation would apply
with respect to the remaining 25% of the Fund's assets. However,
under Rule 2a-7 of the 1940 Act, the Fund is not permitted to
invest more than 5% of the value of its total assets in the
securities of any single issuer. Thus, the added flexibility
which the proposed new policy would provide would not have any
effect on the Fund's investment program. However, should Rule
2a-7 be amended to allow money market funds to invest more than
5% of their assets in the securities of a single issuer, the
Fund's new fundamental policy would allow it to do so. Any such
change would be reflected in the Fund's prospectus, if and when
it occurred. The Board has directed that such amendment be
submitted to shareholders for approval or disapproval.
PAGE 70
The Fund's current fundamental policy in the area of
investing in the securities of a single issuer is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including
repurchase agreements with any one issuer) (other than
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities);"
As amended, the Fund's fundamental policy on investing in
the securities of a single issuer would be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase a security if, as a result, with respect to 75% of
the value of its total assets, more than 5% of the value of
the Fund's total assets would be invested in the securities
of a single issuer, except securities issued or guaranteed
by the U.S. government, or any of its agencies or
instrumentalities;"
The Board of Directors recommends that shareholders vote FOR
the proposal.
L. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY
REGARDING PURCHASING MORE THAN 10% OF AN ISSUER'S VOTING
SECURITIES
High Yield Fund
The Board of Directors has proposed an amendment to the
Fundamental Investment Restrictions of the Fund to conform such
policies to Section 5(b)(1) of the 1940 Act and to provide the
Fund with greater flexibility to invest its assets in the
outstanding voting securities of various companies. Under the
amended policy, the Fund would be restricted from owning more
than 10% of an issuer's outstanding voting securities only with
respect to 75% of the value of its total assets, as opposed to
100% under the current policy. By permitting the Fund to own
more than 10% of the outstanding voting securities of an issuer,
the proposed amendment, if adopted, could increase the risk to
the Fund with respect to adverse developments concerning such
securities. The Board of Directors, however, believes the Fund
should have the increased flexibility which the amendment would
PAGE 71
provide. The Board has directed that such change be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing more than 10% of an issuer's voting securities is as
follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. government, it
agencies or instrumentalities) if, as a result, more than
10% of the outstanding voting securities of any issuer would
be held by the Fund;"
As amended, the Fund's fundamental policy in the area of
purchasing more than 10% of an issuer's voting securities would
be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase a security if, as a result, with respect to 75% of
the value of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by
the Fund (other than obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities);"
The proposed amendments will not affect the status of the
Fund as a diversified investment company under the 1940 Act.
However, the proposed amendments would permit the Fund to take a
larger position in the voting securities of companies than under
the current investment limitation. Thus, for example, the Fund
could purchase 100% of the voting securities of one or more
companies. This would cause the Fund's net asset value per share
to be more affected by changes in the value of, and market,
credit and business developments with respect to, the securities
of such companies. In addition, if the Fund were to own a
substantial percentage of an issuer's voting securities, there is
a risk that the liquidity of those securities would be reduced.
However, the Fund's Board of Directors believes the Fund should
have the increased flexibility to pursue its investment program
which the proposed amendment would allow.
The Board of Directors recommends that shareholders vote FOR
the proposal.
PAGE 72
Prime Reserve Fund
The Board of Directors has proposed an amendment to the
Fundamental Investment Policy of the Fund to conform such policy
to Section 5(b)(1) of the 1940 Act. The Fund is not permitted to
purchase equity securities so it is unlikely the changed policy
would have any effect on the Fund's investment program in the
foreseeable future. However, the proposal, if adopted, would
conform the Fund's policy in this area to one which is expected
to become standard for all T. Rowe Price Funds. The Directors
believe that increased standardization will help promote
efficiencies and facilitate monitoring of compliance with the
Fund's investment restrictions. The Board has directed that such
change be submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing more than 10% of an issuer's voting securities is as
follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 10% of the outstanding voting securities of any issuer
would be held by the Fund (other than obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities);"
As amended, the Fund's fundamental policy in the area of
purchasing more than 10% of an issuer's voting securities would
be as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase a security if, as a result, with respect to 75% of
the value of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by
the Fund (other than obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities);"
The Board of Directors recommends that shareholders vote FOR
the proposal.
M. PROPOSAL TO CHANGE THE DESIGNATION OF THE FUND'S FUNDAMENTAL
INVESTMENT POLICY ON INVESTING FOR CONTROL OF PORTFOLIO
COMPANIES
High Yield Fund
PAGE 73
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing for control of
portfolio companies be changed from a fundamental policy to an
identical operating policy. Fundamental policies may only be
changed with shareholder approval, while operating policies may
be changed by vote of the Board of Directors without shareholder
approval. While the Fund has no current intention of investing
in companies for the purpose of obtaining or exercising control,
the proposed change would allow the Fund to do so if the Board of
Directors determined to change the new operating policy. The
policy is not required to be fundamental under the 1940 Act. The
purpose of the proposal is to provide the Fund with the maximum
flexibility permitted by law to pursue its investment program and
to conform the Fund's policy in this area to one which is
expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that such change be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
investing for control of portfolio companies is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Invest in companies for the purpose of exercising management
or control;"
As changed, the Fund's operating policy on investing for
control of portfolio companies would be as follows:
"[As a matter of operating policy, the Fund may not:]
Invest in companies for the purpose of exercising management
or control;"
The Board of Directors recommends that shareholders vote FOR
the proposal.
Prime Reserve Fund
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing for control of
portfolio companies be changed from a fundamental policy to an
identical operating policy. Fundamental policies may only be
changed with shareholder approval, while operating policies may
be changed by vote of the Board of Directors without shareholder
approval. The Fund cannot purchase equity securities and has no
PAGE 74
current intention of investing in companies for the purpose of
obtaining or exercising control. The policy is not required to
be fundamental under the 1940 Act. The purpose of the proposal
is to conform the Fund's policy in this area to one which is
expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that such change be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
investing for control of portfolio companies is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Invest in companies for the purpose of exercising management
or control;"
As changed, the Fund's operating policy on investing for
control of portfolio companies would be as follows:
"[As a matter of operating policy, the Fund may not:]
Invest in companies for the purpose of exercising management
or control;"
The Board of Directors recommends that shareholders vote FOR
the proposal.
N. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON INVESTING IN THE SECURITIES OF OTHER INVESTMENT
COMPANIES
High Yield Fund
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing in the securities of
other investment companies be eliminated and replaced with a
substantially similar operating policy. Fundamental policies may
be changed only by shareholder vote, while operating policies may
be changed by vote of the Board of Directors without shareholder
approval. The current policy of the Fund is not required by
applicable law to be fundamental. The purpose of the proposed
change is to provide the Fund greater flexibility in pursuing its
investment objective and in responding to regulatory and market
PAGE 75
developments. Although the Fund does not typically invest in the
securities of other open-end investment companies and would only,
on occasion, purchase securities of closed-end investment
companies, the proposed change would permit the Fund to invest in
the securities of other investment companies to the maximum
extent permitted under the 1940 Act and applicable state law, as
described below, without further shareholder approval. Duplicate
fees may result from any such purchases. The Board has directed
that such change be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of
investing in the securities of other investment companies is as
follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or
reorganization. Duplicate fees may result from such
purchases;"
The operating policy on investing in the securities of other
investment companies, to be adopted by the Fund, would be as
follows:
"[As a matter of operating policy, the Fund may not:]
Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company
Act of 1940 and applicable state law;"
Under the 1940 Act, the Fund is subject to various
restrictions in purchasing the securities of closed-end and open-
end investment companies. The 1940 Act limits the Fund,
immediately after a purchase, (1) to investing no more than 10%
of its total assets in the securities of other investment
companies; (2) to owning no more than 3% of the total outstanding
voting stock of any other investment company; and (3) to having
no more than 5% of its total assets invested in securities of
another investment company. Additionally, in the case of a
closed-end investment company, the Fund, and all other mutual
funds having T. Rowe Price as an investment manager, are limited
to owning no more than 10% of the total outstanding voting stock
of any closed-end company.
The 1940 Act provides an alternative set of restrictions if
the Fund were to exceed certain of these percentage limitations.
Under the alternative, the Fund could invest any or all of its
PAGE 76
assets in other investment companies, provided the Fund and all
of its affiliates, immediately after a purchase, did not own more
than 3% of the total outstanding stock of the other investment
company. Under this alternative restriction, the rate at which
the Fund could redeem its investment in the other investment
companies in which it invests might be restricted which could
result in a situation where the Fund would not be able to redeem
a portfolio security when it appears to T. Rowe Price to be in
the best interest of the Fund to do so. T. Rowe Price would
consider the effect on the Fund's liquidity and the Fund's
ability to timely dispose of securities, before purchasing the
securities of another investment company.
Certain states impose further limitations on the purchase by
the Fund of the securities of other investment companies. At the
present time, these restrictions could prohibit the Fund, with
certain exceptions, from: (i) purchasing or retaining the
securities of any open-end investment company; (ii) purchasing
the securities of any closed-end investment company except
through a purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other
than the customary broker's commission or when the purchase is
part of a plan of merger, consolidation, reorganization or
acquisition; and (iii) investing more than 10% of its assets in
one or more investment companies.
It is possible the requirements of the 1940 Act or the
states regarding the Fund's investment in the securities of
closed-end and open-end investment companies could change, or
that the Fund could obtain a waiver of their application. The
Board of Directors believes the Fund should have the ability to
respond to potential changes in these areas without the necessity
of holding a further meeting of shareholders.
The Board of Directors recommends that shareholders vote FOR
the proposal.
Prime Reserve Fund
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing in the securities of
other investment companies be eliminated and replaced with a
substantially similar operating policy. Fundamental policies may
be changed only by shareholder vote, while operating policies may
be changed by vote of the Board of Directors without shareholder
approval. The current policy of the Fund is not required by
applicable law to be fundamental. The purpose of the proposed
PAGE 77
change is to conform the Fund's policy in this area to one which
is expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Fund has no current intention of purchasing the
securities of any other investment companies. The Board has
directed that such change be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of
investing in the securities of other investment companies is as
follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or
reorganization. Duplicate fees may result from such
purchases;"
The operating policy on investing in the securities of other
investment companies, to be adopted by the Fund, would be as
follows:
"[As a matter of operating policy, the Fund may not:]
Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company
Act of 1940 and applicable state law;"
Duplicate fees may result from any such purchases.
The Board of Directors recommends that shareholders vote FOR
the proposal.
O. TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT POLICY ON
INVESTING IN OIL AND GAS PROGRAMS
High Yield Fund
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing in oil and gas
programs be eliminated and replaced with a substantially similar
operating policy. Fundamental policies may be changed only by
shareholder vote, while operating policies may be changed by the
Board of Directors without shareholder approval. The current
policy of the Fund is not required by applicable law to be
PAGE 78
fundamental. The purpose of the proposal is to conform the
Fund's policy on investing in oil and gas programs to one which
is expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that the proposal be submitted
to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
investing in oil and gas programs is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase participations or other direct interests or enter
into leases with respect to oil, gas, other mineral
exploration or development programs;"
The operating policy on investing in oil and gas programs,
to be adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase participations or other direct interests or enter
into leases with respect to, oil, gas or other mineral
exploration or development programs;"
The current fundamental policy was formerly required by
certain states to be fundamental. This is no longer the case and
the replacement of the policy with an operating policy will
adequately protect the Fund while providing greater flexibility
to the Fund to respond to market or regulatory developments by
allowing the Board of Directors the authority to make changes in
this policy without seeking further shareholder approval
The Board of Directors recommends that shareholders vote FOR
the proposal.
Prime Reserve Fund
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing in oil and gas
programs be eliminated and replaced with a substantially similar
operating policy. Fundamental policies may be changed only by
shareholder vote, while operating policies may be changed by the
Board of Directors without shareholder approval. The current
policy of the Fund is not required by applicable law to be
fundamental. The purpose of the proposal is to conform the
Fund's policy on investing in oil and gas programs to one which
PAGE 79
is expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that the proposal be submitted
to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
investing in oil and gas programs is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase participations or other direct interests or enter
into leases with respect to oil, gas, other mineral
exploration or development programs;"
The operating policy on investing in oil and gas programs,
to be adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase participations or other direct interests or enter
into leases with respect to, oil, gas or other mineral
exploration or development programs;"
The Board of Directors recommends that shareholders vote FOR
the proposal.
P. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON OPTIONS
High Yield Fund
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing in options be
eliminated and replaced with a substantially similar operating
policy. Fundamental policies may be changed only by shareholder
vote, while operating policies may be changed by vote of the
Board of Directors without shareholder approval. Under the new
operating policy, the Fund would be permitted to purchase and
sell options of any type for any purpose consistent with the
Fund's investment program. The purpose of the proposal is to
allow the Fund greater flexibility in responding to market and
regulatory developments by allowing the Board of Directors the
authority to make changes in the Fund's policy on options without
seeking further shareholder approval. The new restriction would
also conform the Fund's policy on investing in options to one
PAGE 80
which is expected to become standard for all T. Rowe Price Funds.
The Board believes that standardized policies will assist the
Fund and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that such change be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
investing in options is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Invest in options except in furtherance of the Fund's
investment objectives and policies, and in this connection
the Fund may: (1) buy and sell covered and uncovered put,
call and spread options on securities and currencies, and
(2) purchase, hold, and sell contracts for the future
delivery of debt securities and warrants where the grantor
of the warrants is the issuer of the underlying securities;"
The operating policy on investing in options, to be adopted
by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the
prospectus and Statement of Additional Information;"
The Board of Directors recommends that shareholders vote FOR
the proposal.
Prime Reserve Fund
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing in options be
eliminated and replaced with a substantially similar operating
policy. Fundamental policies may be changed only by shareholder
vote, while operating policies may be changed by vote of the
Board of Directors without shareholder approval. The new
restriction would also conform the Fund's policy on investing in
options to one which is expected to become standard for all T.
Rowe Price funds. The Board believes that standardized policies
will assist the Fund and T. Rowe Price in monitoring compliance
with the various investment restrictions to which the T. Rowe
Price funds are subject. The Board has directed that such change
be submitted to shareholders for approval or disapproval.
PAGE 81
The Fund's current fundamental policy in the area of
investing in options is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Invest in puts, calls, straddles, spreads, or any
combination thereof;"
The operating policy on investing in options, to be adopted
by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the
prospectus and Statement of Additional Information;"
While the Fund does not normally engage in options
transactions, some of the Fund's investments may include demand
or "put" features, which can provide additional liquidity or
protection against loss. In addition, the Fund may from time to
time enter into agreements with option-like features, such as
standby commitments or other instruments conveying the right or
obligation to buy or sell securities at a future date. Approval
of the proposal would allow T. Rowe Price to develop and
implement additional strategies in the future, without the need
to seek further shareholder approval. Any such strategies must,
of course, be in accordance with applicable federal and state
regulation. In addition to review by the Directors, the Fund
would not engage in such strategies until they had been described
sufficiently in the Fund's Prospectus and Statement of Additional
Information.
The Board of Directors recommends that shareholders vote FOR
the proposal.
Q. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND
DIRECTORS
The Fund's Board of Directors has proposed that the Fund's
Fundamental Investment Policy on the ownership of portfolio
securities by officers and directors of the Fund and T. Rowe
Price be eliminated and replaced with a substantially similar
operating policy. Fundamental policies may be changed only by
shareholder vote, while operating policies may be changed by vote
of the Board of Directors without shareholder approval. The
current fundamental policy was formerly required by certain
PAGE 82
states to be fundamental, but this is no longer the case. The
Board has directed that the proposal be submitted to shareholders
for approval or disapproval.
The Fund's current fundamental policy in the area of
ownership of portfolio securities by officers and directors is as
follows:
EACH FUND
"[As a matter of fundamental policy, the Fund may not:]
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and
directors of the Fund, and of its investment manager, who
each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more
than 5% of such securities;"
As changed, the Fund's operating policy in the area of
ownership of portfolio securities by officers and directors would
be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and
directors of the Fund, and of its investment manager, who
each own beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more
than 5% of such securities."
The Board of Directors recommends that shareholders vote FOR
the proposal.
R. PROPOSAL TO CHANGE THE DESIGNATION OF THE FUND'S FUNDAMENTAL
INVESTMENT POLICY REGARDING THE PURCHASE OF ILLIQUID
SECURITIES
High Yield Fund
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on purchasing unmarketable
securities be changed from a fundamental policy to an operating
policy. Fundamental policies may be changed only by shareholder
vote, while operating polices may be changed by the Board of
Directors without shareholder approval. If the proposed change
is approved by shareholders, the Board of Directors of the Fund
PAGE 83
intends to adopt an operating policy which would (1) allow the
Fund to invest up to 15% of its net assets in illiquid securities
and (2) conform the Fund's operating policy in this area to one
which is expected to become standard for all T. Rowe Price Funds,
except the T. Rowe Price money market funds. The Fund's current
fundamental policy in this area is not required by applicable law
and the proposed change should provide the Fund with greater
flexibility in responding to market and regulatory developments.
The Board has directed that such change be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing illiquid securities is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Invest more than 10% of the value of its net assets in
repurchase agreements which do not provide for payment
within seven days and restricted securities, illiquid
securities and securities which are not readily marketable;"
As changed, the operating policy on investing in illiquid
securities, to be adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase illiquid securities if, as a result, more than 15%
of its net assets would be invested in such securities;"
Illiquid Securities
As an open-end investment company, the Fund may not hold a
significant amount of illiquid securities because such securities
may present problems of accurate valuation and it is possible the
Fund could have difficulty satisfying redemptions within seven
days as required under the 1940 Act. In general, the SEC defines
an illiquid security as one which can not be sold in the ordinary
course of business within seven days at approximately the value
at which the Fund has valued the security. Illiquid securities
have included those enumerated in the Fund's fundamental
restriction on restricted securities and repurchase agreements of
a duration of more than seven days.
The securities markets, however, are evolving and new types
of instruments have developed. In light of these developments,
the Fund's fundamental investment restriction, by essentially
assuming restricted securities are unmarketable, may be overbroad
and unnecessarily restrictive. For example, the markets for
various types of securities -- repurchase agreements, commercial
PAGE 84
paper, and some corporate bonds and notes -- are almost
exclusively institutional. These instruments are often either
exempt from registration or sold in transactions not requiring
registration. Although these securities may be legally
classified as "restricted," institutional investors will often
justifiably rely either on the issuer's ability to honor a demand
for repayment in less than seven days or on an efficient
institutional market in which the unregistered security can be
readily resold. The fact that the securities may be restricted
because of legal or contractual restrictions on resale to the
general public will, therefore, not be dispositive of the
liquidity of such investments.
In recognition of the increased size and liquidity of the
institutional markets for unregistered securities and the
importance of institutional investors in the capital formation
process, the SEC has adopted rules, including Rule 144A under the
Securities Act of 1933, designed to further facilitate efficient
trading among institutional investors. These rules permit a
broader institutional trading market for securities subject to
restriction on resale to the general public. If institutional
markets develop which trade in these securities, the Fund could
be constrained by its current investment restrictions.
Accordingly, T. Rowe Price recommends that the Fund eliminate its
fundamental limitations in this area so that restricted
securities that are nonetheless liquid may be purchased without
regard to the Fund's limit on investing in illiquid securities.
Of course, the Fund would modify its operating policy to comply
with future regulatory and market developments.
If this proposal is approved by shareholders, the specific
types of securities that may be deemed to be illiquid will be
determined from time to time by T. Rowe Price under the
supervision of the Directors, with reference to legal, regulatory
and market developments. By making the Fund's policy on illiquid
securities non-fundamental, the Fund will be able to respond more
quickly to such developments because no shareholder vote will be
required to redefine what types of securities may be deemed
illiquid.
Percentage Limitations
The Fund's fundamental policy limits it to investing no more
than 10% of the value of its total assets in restricted and
unmarketable securities. The new operating policy to be adopted
by the Board of Directors, if shareholders approve elimination of
the fundamental policy, would allow the Fund to invest up to 15%
PAGE 85
of its net assets in illiquid securities. The 15% limitation
represents a higher percentage than the Fund was previously
allowed to invest in illiquid securities and is the result of a
1992 liberalization by the SEC in this area. If the fundamental
policy is changed to an operating policy, the Fund will, without
the necessity of any further shareholder vote, be able to take
advantage of any future changes in SEC policy in this area.
The Board of Directors recommends that shareholders vote FOR
the proposal.
Prime Reserve Fund
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on purchasing unmarketable
securities be changed from a fundamental policy to an operating
policy. Fundamental policies may be changed only by shareholder
vote, while operating polices may be changed by the Board of
Directors without shareholder approval. If the proposed change
is approved by shareholders, the Board of Directors of the Fund
intends to adopt an operating policy which would (1) allow the
Fund to invest up to 10% of its net assets in illiquid securities
and (2) conform the Fund's operating policy in this area to one
which is expected to become standard for all T. Rowe Price Funds
(except that the percentage limit on investing in illiquid
securities for the other T. Rowe Price Funds is 15% instead of
10%). The Fund's current fundamental policy in this area is not
required by applicable law and the proposed change should provide
the Fund with greater flexibility in responding to market and
regulatory developments. The Board has directed that such change
be submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
purchasing illiquid securities is as follows:
"[As a matter of fundamental policy, the Fund may not:]
Purchase securities which are not readily marketable, or
invest more than 10% of its net assets in repurchase
agreements which do not provide for payment within seven
days and in the obligations of small banks and savings and
loan associations which are not readily marketable;"
As changed, the operating policy on investing in illiquid
securities, to be adopted by the Fund, would be as follows:
PAGE 86
"[As a matter of operating policy, the Fund may not:]
Purchase illiquid securities if, as a result, more than 15%
of its net assets would be invested in such securities;"
Illiquid Securities
As an open-end investment company, the Fund may not hold a
significant amount of illiquid securities because such securities
may present problems of accurate valuation and it is possible the
Fund could have difficulty satisfying redemptions within seven
days as required under the 1940 Act. In general, the SEC defines
an illiquid security as one which can not be sold in the ordinary
course of business within seven days at approximately the value
at which the Fund has valued the security. The current policy of
the Fund prohibits the Fund from purchasing any illiquid (or
unmarketable) securities. The new policy would allow the Fund to
make such investments provided they are consistent with the
maturity and credit standards for the Fund and Rule 2a-7 under
the 1940 Act which governs the operation of money market funds.
The securities which the Fund purchases are usually highly
liquid and this would continue to be the case even under the new
policy. However, the new policy would allow the Fund to purchase
certain types of illiquid securities--for example privately
placed securities which are not registered under the Securities
Act of 1933 and may only be sold under certain limited
conditions. Such securities may, at times, present additional
investment opportunities for the Fund and the Board believes the
Fund should have the maximum flexibility allowed by law to make
such investments in a manner consistent with its investment
objective and program. There are, however, additional risks when
investing in illiquid securities. Such securities can be
difficult to value and, by definition, are not easily sold. The
Board believes, however, that these risks are manageable and that
the Fund's ability to purchase illiquid securities will not
subject it to undue risk.
If this proposal is approved by shareholders, the specific
types of securities that may be deemed to be illiquid will be
determined from time to time by T. Rowe Price under the
supervision of the Directors, with reference to legal, regulatory
and market developments. By making the Fund's policy on illiquid
securities non-fundamental, the Fund will be able to respond more
quickly to such developments because no shareholder vote will be
required to redefine what types of securities may be deemed
illiquid or to make other changes in the policy as permitted by
applicable law.
PAGE 87
The Board of Directors recommends that shareholders vote FOR
the proposal.
S. PROPOSAL TO CHANGE THE DESIGNATION OF THE FUND'S FUNDAMENTAL
INVESTMENT POLICY ON INVESTING IN UNSEASONED ISSUERS
The Board of Directors has proposed that the Fund's
Fundamental Investment Policy on investing in the securities of
unseasoned issuers be eliminated and replaced by a substantially
similar operating policy. Fundamental policies may only be
changed with shareholder approval, while operating policies may
be changed by vote of the Board of Directors without shareholder
approval. The proposed change should provide the Fund with
greater flexibility in responding to market and regulatory
developments without the necessity of seeking further shareholder
approval. The new restriction would also conform the Fund's
policy on investing in unseasoned issuers to one which is
expected to become standard for all T. Rowe Price Funds. The
Board believes that standardized policies will assist the Fund
and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that such change be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of
investing in unseasoned issuers is as follows:
High Yield Fund
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities) if, as a result, more than 5%
of the value of the Fund's total assets would be invested in
the securities of issuers which at the time of purchase had
been in operation for less than three years, including
predecessors and unconditional guarantors ;"
Prime Reserve Fund
"[As a matter of fundamental policy, the Fund may not:]
Purchase the securities of any issuer if, as a result, more
than 5% of the value of the Fund's total assets would be
invested in the securities of issuers which at the time of
purchase had been in operation for less than three years,
including predecessors and unconditional guarantors (other
PAGE 88
than obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities);"
The operating policy on investing in unseasoned issuers, to
be adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:]
Purchase a security (other than obligations issued or
guaranteed by the U.S., any foreign, state or local
government, their agencies or instrumentalities) if, as a
result, more than 5% of the value of the Fund's total assets
would be invested in the securities of issuers which at the
time of purchase had been in operation for less than three
years (for this purpose, the period of operation of any
issuer shall include the period of operation of any
predecessor or unconditional guarantor of such issuer).
This restriction does not apply to securities of pooled
investment vehicles or mortgage or asset-backed securities;"
The new operating policy would add securities issued or
guaranteed by foreign, state or local governments, as well as
securities of pooled investment vehicles and mortgage and asset-
backed securities, to the list of those which are excluded from
the percentage restriction on investing in unseasoned issuers.
The Board of Directors recommends that shareholders vote FOR
the proposal.
EACH FUND
3. RATIFICATION OR REJECTION OF SELECTION OF INDEPENDENT
ACCOUNTANTS
The selection by the Board of Directors of the Adjustable
Rate Fund of the firm of Coopers & Lybrand as the independent
accountants for the Fund for the three-month fiscal year ended
May 31, 1994 and for fiscal year 1995 is to be submitted for
ratification or rejection by the shareholders of the Fund at the
Shareholders Meeting. The firm of Coopers & Lybrand has served
the Adjustable Rate Fund as independent accountants since its
inception. The selection by the Board of Directors of the High
Yield, New Income, Prime Reserve, and Short-Term Bond Funds of
the firm of Price Waterhouse as the independent accountants for
each Fund for the three-month fiscal year ended May 31, 1994 and
for fiscal year 1995 is to be submitted for ratification or
rejection by the shareholders of each Fund at the Shareholders
PAGE 89
Meeting. The firm of Price Waterhouse has served each Fund as
independent accountants since each such Fund's inception.
Each Fund has been advised by its independent accountants
that they have no direct or material indirect financial interest
in the Fund. Representatives of the firm of Coopers & Lybrand
and Price Waterhouse are expected to be present at the
Shareholders Meeting and will be available to make a statement,
if they desire to do so, and to respond to appropriate questions
which the shareholders may wish to address to them.
NEW INCOME AND PRIME RESERVE FUNDS
4. PROPOSAL TO AMEND THE FUND'S ARTICLES OF INCORPORATION TO
ELIMINATE THE POLICY ON PRICING SECURITIES
The Board of Directors has proposed that the New Income and
Prime Reserve Funds amend their Articles of Incorporation by
deleting subparagraphs (iii), (iv) and (v) of Paragraph
3.04(b)(2) of Article SEVENTH from the New Income Fund's Articles
of Incorporation and subparagraph (iii) of Paragraph 3.04(b)(2)
of Article SEVENTH from the Prime Reserve Fund's Articles of
Incorporation regarding the policy on pricing securities in their
portfolios. The manner in which the Fund prices its securities
is currently set forth in the Fund's Statement of Additional
Information and the Fund's policy on pricing securities is not
required to be included in its Articles of Incorporation. The
purpose of the proposed amendment is to provide the Fund with
greater flexibility to respond to regulatory and market
developments in pricing its securities, should the need arise.
Although there is no current intention to change the manner in
which the Fund's portfolio securities are priced, the proposal,
if adopted, would allow the Fund's Board of Directors to make
changes in the Fund's policy on pricing, in a manner consistent
with applicable law, without seeking further shareholder
approval. The Board has directed that the proposal be submitted
to shareholders for approval or disapproval.
The Fund's policy on pricing securities as stated in the
Articles of Incorporation is as follows:
NEW INCOME FUND
"Article SEVENTH
PAGE 90
(2) Valuation of Assets. The value of such assets is to
be determined as follows:
(iii) Securities Listed or Dealt in on New York Stock
Exchange. The value of any security listed or dealt in
upon the New York Stock Exchange and not subject to
restrictions against sale by the Corporation on such
Exchange shall be determined as of the close of trading by
taking the last sale price on the date as of which net
asset value is being determined, all as reported by any
means in common use. Lacking any sales, the value shall be
deemed to be such, not higher than the closing asked price
and not lower than the closing bid price therefor on such
date, as the Board of Directors or its delegate may from
time to time determine. When an appraisal is made as part
of a determination other than as of the close of trading,
the latest available quotations (i.e., last sale on that
day or latest bid and asked if no sale on that day) shall
be used. The Board of Directors may by resolution permit
quotations on an exchange other than the New York Stock
exchange or over-the-counter rather than stock exchange
quotations to be used when they appear to the Board of
Directors or its delegate to reflect more closely the fair
value of any particular security in the portfolio and may
authorize adjustments to be made in applying any market
quotation in order to reflect the size of the Corporation's
holding of the particular security, the relation to such
size of the volume of trading on which such market
quotation is based and other similar factors.
(iv) Securities Listed on Other Exchanges. The value
of any security listed or dealt in on one or more
securities exchanges, but not on the New York Stock
Exchange, and not subject to restrictions against sale by
the Corporation on such exchanges, shall be determined as
nearly as possible in the manner described in the preceding
subparagraph, with reference to the quotations on the
exchange that, in the opinion of the Board of Directors or
its delegate, best reflects the fair value of the security.
(v) Unlisted Securities and Other Property. The
value of any other property, the valuation of which is not
provided for above, shall be its fair market value as
determined in such manner as the Board of Directors shall
from time to time prescribe by resolution."
PAGE 91
PRIME RESERVE FUND
"Article SEVENTH
(2) Valuation of Assets. The value of such assets is to
be determined as follows:
(iii) Securities. The short-term money market
securities in which the Fund invests are traded primarily
in the over-the-counter market. Securities for which
representative market quotations are readily available are
valued at the most recent bid price or yield equivalent as
quoted by one or more dealers who make markets in such
securities. Other securities are appraised at values
deemed best to reflect their fair value as determined in
good faith by or under the supervision of officers of the
Fund specifically authorized by the Board of Directors."
The Board of Directors recommends that these provisions of
the Articles of Incorporation be deleted and that the Fund's
policy on pricing securities be described only in the Fund's
Statement of Additional Information.
The Board of Directors recommends that shareholders vote
FOR the proposal.
INVESTMENT MANAGER
The Fund's investment manager is T. Rowe Price, a Maryland
corporation, 100 East Pratt Street, Baltimore, Maryland 21202.
The principal executive officer of T. Rowe Price is George J.
Collins, who together with Messrs. Hoffman and Riepe, Thomas H.
Broadus, Jr., James E. Halbkat, Jr., Henry H. Hopkins, George A.
Roche, John W. Rosenblum, Robert L. Strickland, M. David Testa,
and Philip C. Walsh, constitute its Board of Directors. The
address of each of these persons, with the exception of Messrs.
Halbkat, Rosenblum, Strickland and Walsh, is 100 East Pratt
Street, Baltimore, Maryland 21202, and, with the exception of
Messrs. Halbkat, Rosenblum, Strickland, and Walsh, all are
employed by T. Rowe Price. Mr. Halbkat is President of U.S.
Monitor Corporation, a provider of public response systems, P.O.
Box 23109, Hilton Head Island, South Carolina 29925. Mr.
Rosenblum, whose address is P.O. Box 6550, Charlottesville,
Virginia 22906, is the Tayloe Murphy Professor at the University
of Virginia, and a director of: Chesapeake Corporation, a
manufacturer of paper products; Cadmus Communications Corp., a
PAGE 92
provider of printing and communication services; Comdial
Corporation, a manufacturer of telephone systems for businesses;
and Cone Mills Corporation, a textiles producer. Mr. Strickland
is Chairman of Lowe's Companies, Inc., a retailer of specialty
home supplies, 604 Two Piedmont Plaza Building, Winston-Salem,
North Carolina 27104. Mr. Walsh, whose address is Blue Mill
Road, Morristown, New Jersey 07960, is a consultant to Cyprus
Amax Minerals Company, Englewood, Colorado, and a director of
Piedmont Mining Company, Charlotte, North Carolina.
The officers of the Funds (other than the nominees for
reelection as directors) and their positions with T. Rowe Price
are as follows:
Position Position with
Officer with Fund Manager
Patrice L. Berchtenbreiter* Vice President Vice President
Paul W. Boltz* Vice President Vice President
Catherine H. Bray** Vice President Vice President
Andrew M. Brooks** Vice President Vice President
Robert P. Campbell+ Executive Vice
President Vice President
Michael J. Conelius*** Vice President Assistant Vice
President
Christy M. DiPietro++ Vice President Vice President
Henry H. Hopkins Vice President Managing Director
Veena A. Kutler++ President Vice President
Heather R. Landon! Executive Vice
President Vice President
James M. McDonald!! Executive Vice
President Vice President
Edmund M. Notzon! Vice President Vice President
Joan R. Potee@ Vice President Vice President
Robert M. Rubino+ Vice President Vice President
Hubert M. Stiles, Jr.** Vice President Vice President
Jay W. Van Ert** Vice President Vice President
Mark J. Vaselkiv** Vice President Vice President
Edward A. Wiese@ President Vice President
Thea N. Williams** Vice President Assistant Vice
President
Lenora V. Hornung Secretary Vice President
Carmen F. Deyesu Treasurer Vice President
David S. Middleton Controller Vice President
Roger L. Fiery Assistant Vice
President Employee
PAGE 93
Edward T. Schneider Assistant Vice
President Employee
Ingrid I. Vordemberge Assistant Vice
President Employee
* Ms. Berchtenbreiter and Mr. Boltz are Vice Presidents of the
Prime Reserve Fund only.
** Mmes. Bray and Williams and Messrs. Brooks, Stiles, Van Ert,
and Vaselkiv are Vice Presidents of the High Yield Fund only.
*** Mr. Conelius is a Vice President of the Adjustable Rate and
Prime Reserve Funds and an Assistant Vice President of the
High Yield Fund.
+ Mr. Campbell is an Executive Vice President of the Prime
Reserve Fund and a Vice President of the New Income and
Short-Term Bond Funds. Mr. Campbell's date of birth is
January 31, 1956, and he has been employed by T. Rowe Price
since July 30, 1990. Mr. Rubino is a Vice President of the
New Income, Prime Reserve and Short-Term Bond Funds only.
++ Ms. Kutler is the President of the Short-Term Bond Fund and a
Vice President of the Adjustable Rate Fund. Ms. Kutler's
date of birth is December 22, 1956, and she has been employed
by T. Rowe Price since November 23, 1987. Ms. DiPietro is a
Vice President of the Short-Term Bond Fund only.
! Ms. Landon is an Executive Vice President of the Adjustable
Rate Fund and a Vice President of the New Income Fund. Ms.
Landon's date of birth is July 8, 1954, and she has been
employed by T. Rowe Price since August 27, 1979. Mr. Notzon
is a Vice President of the Adjustable Rate and New Income
Funds only.
!! Mr. McDonald is an Executive Vice President of the Prime
Reserve Fund, a Vice President of the Adjustable Rate, High
Yield, New Income and Short-Term Bond Funds, and an Assistant
Vice President of the High Yield Fund. Mr. McDonald's date
of birth is September 29, 1949, and he has been employed by
T. Rowe Price since September 18, 1976.
@ Ms. Potee is a Vice President of the New Income and Prime
Reserve Funds only.
PAGE 94
@@ Mr. Wiese is the President of the Prime Reserve Fund and a
Vice President of the Short-Term Bond Fund. Mr. Wiese's date
of birth is April 12, 1959, and he has been employed by T.
Rowe Price since June 25, 1984.
The Funds have an Underwriting Agreement with T. Rowe Price
Investment Services, Inc. ("Investment Services"), a Transfer
Agency Agreement with T. Rowe Price Services, Inc. ("Price
Services"), and an Agreement with T. Rowe Price Retirement Plan
Services, Inc. ("Retirement Services"), which are wholly-owned
subsidiaries of T. Rowe Price. In addition, the Funds have an
Agreement with T. Rowe Price to perform fund accounting services.
James S. Riepe, a Director and Vice President of the Adjustable
Rate, High Yield, New Income and Short-Term Bond Funds and a Vice
President of the Prime Reserve Fund, is Chairman of the Board of
Price Services and Retirement Services and President and Director
of Investment Services. Henry H. Hopkins, a Vice President of
each Fund, is a Vice President and Director of both Investment
Services and Price Services and a Vice President of Retirement
Services. Edward T. Schneider, an Assistant Vice President of
each Fund, is a Vice President of Price Services. Certain
officers of the Funds own shares of the common stock of T. Rowe
Price, its only class of securities.
The following information pertains to transactions involving
common stock of T. Rowe Price, par value $.20 per share
("Stock"), during the period March 1, 1993 through February 28,
1994. There were no transactions during the period by any
director or officer of the Fund, or any director or officer of T.
Rowe Price which involved more than 1% of the outstanding Stock
of T. Rowe Price. These transactions did not involve, and should
not be mistaken for, transactions in the stock of the Fund.
During the period, the holders of certain options purchased
a total of 371,535 shares of common stock at varying prices from
$0.67 to $18.75 per share. Pursuant to the terms of T. Rowe
Price's Employee Stock Purchase Plan, eligible employees of T.
Rowe Price and its subsidiaries purchased an aggregate of 95,380
shares at fair market value. Such shares were purchased in the
open market during this period for employees' accounts.
The Company's Board of Directors has approved the purchase
of up to 2,200,000 shares of its common stock in the open market.
During the period, the Company purchased 110,000 common shares
under this plan, leaving 1,402,000 shares authorized for future
repurchase at February 28, 1994.
PAGE 95
During the period, T. Rowe Price issued 1,154,000 common
stock options with an exercise price of $28.13 per share to
certain employees under terms of the 1990 and 1993 Stock
Incentive Plans.
An audited consolidated balance sheet of T. Rowe Price as of
December 31, 1993, is included in this Proxy Statement.
INVESTMENT MANAGEMENT AGREEMENT
T. Rowe Price serves as investment manager to the Funds
pursuant to their respective Investment Management Agreements
(each the "Management Agreement" and collectively the "Management
Agreements"). The date of each Fund's Management Agreement and
the date it was approved by the respective Fund's shareholders is
as follows:
Date of Shareholder
Management Approval
Fund Agreement Date
________ __________ ___________
Adjustable Rate July 1, 1992 June 11, 1992
High Yield July 1, 1987 June 10, 1987
New Income July 1, 1987 June 10, 1987
Prime Reserve July 1, 1987 June 9, 1987
Short-Term Bond July 1, 1991 June 13, 1991
By their terms, the Management Agreements will, continue in
effect from year to year as long as they are approved annually by
each Fund's Board of Directors, (at a meeting called for that
purpose) or by vote of a majority of each Fund's outstanding
shares. In either case, renewal of the Management Agreements
must be approved by a majority of each Fund's independent
directors. On March 1, 1994, the directors of each Fund,
including all of the independent directors, voted to extend the
Management Agreements for an additional period of one year,
commencing May 1, 1994, and terminating April 30, 1995. Each
Management Agreement is subject to termination by either party
without penalty on 60 days' written notice to the other and will
terminate automatically in the event of assignment.
Under each Management Agreement, T. Rowe Price provides each
Fund with discretionary investment services. Specifically, T.
Rowe Price is responsible for supervising and directing the
PAGE 96
investments of each Fund in accordance with the Funds' investment
objectives, programs, and restrictions as provided in their
prospectuses and Statements of Additional Information. T. Rowe
Price is also responsible for effecting all securities
transactions on behalf of the Funds, including the negotiation of
commissions and the allocation of principal business and
portfolio brokerage. In addition to these services, T. Rowe
Price provides the Funds with certain corporate administrative
services, including: maintaining each Fund's corporate existence,
corporate records, and registering and qualifying Fund shares
under federal and state laws; monitoring the financial,
accounting, and administrative functions of the Funds;
maintaining liaison with the agents employed by the Funds, such
as each Fund's custodian and transfer agent; assisting the Funds
in the coordination of such agents' activities; and permitting T.
Rowe Price's employees to serve as officers, directors, and
committee members of the Funds without cost to the Fund.
Each Fund's Management Agreement also provides that T. Rowe
Price, its directors, officers, employees, and certain other
persons performing specific functions for the Fund will only be
liable to the Fund for losses resulting from willful misfeasance,
bad faith, gross negligence, or reckless disregard of duty.
The Management Agreement provides that each Fund will bear
all expenses of its operations not specifically assumed by T.
Rowe Price. However, in compliance with certain state
regulations, T. Rowe Price will reimburse the Funds for any
expenses (excluding interest, taxes, brokerage, other
expenditures which are capitalized in accordance with generally
accepted accounting principles, and extraordinary expenses) which
in any year exceed the limits prescribed by any state in which
the Funds' shares are qualified for sale. Presently, the most
restrictive expense ratio limitation imposed by any state is 2.5%
of the first $30 million of the Fund's average daily net assets,
2% of the next $70 million of such assets, and 1.5% of net assets
in excess of $100 million. For the purpose of determining
whether a Fund is entitled to reimbursement, the expenses of the
Fund are calculated on a monthly basis. If the Fund is entitled
to reimbursement, that month's management fee will be reduced or
postponed, with any adjustment made after the end of the year.
For its services to each Fund under the Management
Agreement, T. Rowe Price is paid a management fee ("Management
Fee") consisting of two elements: a "group" fee ("Group Fee") and
an "individual" fund fee ("Individual Fund Fee"). The Group Fee
varies and is based on the combined net assets of all of the T.
PAGE 97
Rowe Price Funds distributed by T. Rowe Price Investment
Services, Inc., other than institutional or "private label"
products. For this purpose, the T. Rowe Price Funds include all
Funds managed and sponsored by T. Rowe Price as well as those
Funds managed and sponsored by Rowe Price-Fleming International,
Inc. Each Fund pays, as its portion of the Group Fee, an amount
equal to the ratio of its daily net assets to the daily net
assets of all the T. Rowe Price Funds. At February 28, 1994, the
Group Fee was 0.34% based on combined T. Rowe Price Funds' assets
of approximately $36.1 billion. In addition, each Fund pays a
flat Individual Fund Fee based on the net assets of each Fund.
The following table lists each Fund's individual fee, combined
fee, net assets and management fee paid to T. Rowe Price, at
February 28, 1994.
Individual Combined Net Management
Fund Fee Fee Assets Fee
______ __________ ________ ______ __________
Adjustable Rate 0.10% 0.44% $ 225,154,000 $ 526,000
High Yield 0.30% 0.64% 1,623,770,000 10,554,000
New Income 0.15% 0.49% 1,457,959,000 7,750,000
Prime Reserve 0.05% 0.39% 3,378,976,000 13,617,000
Short-Term Bond 0.10% 0.44% 668,066,000 2,873,000
The following chart shows the ratio of operating expenses to
average net assets of the following Funds for the fiscal years
ended February 28, 1994, February 28, 1993 and February 28, 1992.
Fund 1994 1993 1992
______ ____ ____ ____
High Yield 0.85% 0.89% 0.97%
New Income 0.82% 0.84% 0.87%
Prime Reserve 0.74% 0.75% 0.78%
Short-Term Bond 0.74% 0.76% 0.88%
Adjustable Rate Fund
Effective July 1, 1992, T. Rowe Price agreed to bear any
expenses through June 30, 1993 which would cause the Fund's ratio
of expenses to average net assets to exceed 0.40%. Effective
July 1, 1993, T. Rowe Price agreed to extend the Fund's 0.40%
expense limitation for a period of six months through December
31, 1993. Effective January 1, 1994, T. Rowe Price agreed to
bear any expenses through May 31, 1996 which would cause the
Fund's ratio of expenses to average net assets to exceed 0.70%.
PAGE 98
The 0.70% expense limitation will be phased in beginning with a
0.40% limitation on January 1, 1994; 0.50% on March 1, 1994;
0.60% on September 1, 1994; and 0.70% on March 1, 1995. Expenses
paid or assumed under each agreement are subject to reimbursement
to T. Rowe Price by the Fund whenever the Fund's expense ratio is
below 0.40% (for the first two agreements) and 0.70% (for the
third agreement); however, no reimbursement will be made after
June 30, 1995 (for the first agreement), December 31, 1995 (for
the second agreement), or May 31, 1998 (for the third agreement)
or if it would result in the expense ratio exceeding 0.40% (for
the first two agreements) and 0.70% (for the third agreement).
The Fund's Management Agreement also provides that one or
more additional expense limitation periods (of the same or
different time periods) may be implemented after the expiration
of the current expense limitation, and that with respect to any
such additional limitation period, the Fund may reimburse T. Rowe
Price, provided the reimbursement does not result in the Fund's
aggregate expenses exceeding the additional expense limitation.
Pursuant to the present expense limitation, $938,000 of
management fees were not accrued by the Fund for the year ended
February 28, 1994.
PORTFOLIO TRANSACTIONS
In the following discussion "the Fund" is intended to refer
to each Fund.
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund are made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business. The Fund's purchases
and sales of portfolio securities are normally done on a
principal basis and do not involve the payment of a commission
although they may involve the designation of selling concessions.
That part of the discussion below relating solely to brokerage
commissions would not normally apply to the Fund. However, it is
included because T. Rowe Price does manage a significant number
of common stock portfolios which do engage in agency transactions
and pay commissions and because some research and services
resulting from the payment of such commissions may benefit the
Fund.
PAGE 99
How Brokers and Dealers are Selected
Fixed Income Securities
Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client, although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
T. Rowe Price may effect principal transactions on behalf of
the Fund with a broker or dealer who furnishes brokerage and/or
research services, designate any such broker or dealer to receive
selling concessions, discounts or other allowances, or otherwise
deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. The Fund may receive
brokerage and research services in connection with such
designations in fixed priced underwritings.
In purchasing and selling the Fund's portfolio securities,
it is T. Rowe Price's policy to obtain quality execution at the
most favorable prices through responsible brokers and dealers
and, in the case of agency transactions (in which the Fund does
not generally engage), at competitive commission rates. However,
under certain conditions, the Fund may pay higher brokerage
commissions in return for brokerage and research services. In
selecting broker-dealers to execute the Fund's portfolio
transactions, consideration is given to such factors as the price
of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial
condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research
services provided by them. It is not the policy of T. Rowe Price
to seek the lowest available commission rate where it is believed
that a broker or dealer charging a higher commission rate would
offer greater reliability or provide better price or execution.
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
PAGE 100
transactions executed on behalf of the Fund. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services
from brokers and dealers. These services include information on
the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law
interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement
analysis, performance analysis and analysis of corporate
responsibility issues. These services provide both domestic and
international perspective. Research services are received
primarily in the form of written reports, computer generated
services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form
of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some
cases, research services are generated by third parties but are
provided to T. Rowe Price by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price to
generate all of the information presently provided by brokers and
dealers. T. Rowe Price pays cash for certain research services
received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash.
While receipt of research services from brokerage firms has not
reduced T. Rowe Price's normal research activities, the expenses
of T. Rowe Price could be materially increased if it attempted to
generate such additional information through its own staff. To
PAGE 101
the extent that research services of value are provided by
brokers or dealers, T. Rowe Price may be relieved of expenses
which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
Commissions to Brokers who Furnish Research Services
With regard to the payment of brokerage commissions, T. Rowe
Price has adopted a brokerage allocation policy embodying the
concepts of Section 28(e) of the Securities Exchange Act of 1934,
which permits an investment adviser to cause an account to pay
commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates charged by broker-dealers reflect the value of
their research services, T. Rowe Price would expect to assess the
reasonableness of commissions in light of the total brokerage and
research services provided by each particular broker.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage or selling
concessions business where special needs do not exist, or where
the business may be allocated among several brokers or dealers
which are able to meet the needs of the transaction.
PAGE 102
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers and dealers,
and attempts to allocate a portion of its brokerage and selling
concession business in response to these assessments. Research
analysts, counselors, various investment committees, and the
Trading Department each seek to evaluate the brokerage and
research services they receive from brokers and dealers and make
judgments as to the level of business which would recognize such
services. In addition, brokers and dealers sometimes suggest a
level of business they would like to receive in return for the
various brokerage and research services they provide. Actual
business received by any firm may be less than the suggested
allocations but can, and often does, exceed the suggestions,
because the total business is allocated on the basis of all the
considerations described above. In no case is a broker or dealer
excluded from receiving business from T. Rowe Price because it
has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers through which T. Rowe Price effects
securities transactions may be used in servicing all accounts
(including non-Fund accounts) managed by T. Rowe Price.
Conversely, research services received from brokers which execute
transactions for the Fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the Fund.
From time to time, orders for clients may be placed through
a computerized transaction network.
The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Fund. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
PAGE 103
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
At the present time, T. Rowe Price does not recapture commissions
or underwriting discounts or selling group concessions in
connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
elimination of all or a portion of the selling-group concession
or underwriting discount when purchasing tax-exempt municipal
securities on behalf of its clients in underwritten offerings.
Transactions with Related Brokers and Dealers (All Funds except
Adjustable Rate and Prime Reserve Funds)
As provided in the Investment Management Agreement between
the Fund and T. Rowe Price, T. Rowe Price is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that T. Rowe Price may place orders for the Fund's
portfolio transactions with broker-dealers through the same
trading desk T. Rowe Price uses for portfolio transactions in
domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities
are located. These brokers and dealers may include certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"), persons
indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary,
owns 25% of the common stock of Rowe Price-Fleming International,
Inc. ("RPFI"), an investment adviser registered under the
Investment Advisers Act of 1940. Fifty percent of the common
PAGE 104
stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is
50% owned by Robert Fleming Holdings and 50% owned by Jardine
Matheson Holdings Limited. Orders for the Fund's portfolio
transactions placed with affiliates of Robert Fleming Holdings
and JFG will result in commissions being received by such
affiliates.
The Board of Directors of the Fund has authorized T. Rowe
Price to utilize certain affiliates of Robert Fleming Holdings
and JFG in the capacity of broker in connection with the
execution of the Fund's portfolio transactions. These affiliates
include, but are not limited to, Jardine Fleming (Securities)
Limited ("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming
& Co. Limited ("RF&Co."), Jardine Fleming Australia Securities
Limited, and Robert Fleming, Inc. (a New York brokerage firm).
Other affiliates of Robert Fleming Holdings and JFG also may be
used. Although it does not believe that the Fund's use of these
brokers would be subject to Section 17(e) of the 1940 Act, the
Board of Directors of the Fund has agreed that the procedures set
forth in Rule 17e-1 under that Act will be followed when using
such brokers.
Other
The Funds engaged in portfolio transactions involving
broker-dealers in the following amounts for the fiscal years
ended February 28, 1994, February 28, 1993 and February 29, 1992:
Fund 1994 1993 1992
______ ____ ____ ____
Adjustable Rate $793,565,000 $ 1,876,498,000 $ 427,475,000
High Yield 16,168,606,000 6,702,967,000
New Income 20,265,475,000 15,193,999,000 6,648,064,000
Prime Reserve 36,478,989,000 29,975,769,000
Short-Term Bond 4,266,837,000 5,805,958,000 5,534,535,000
The entire amount for each of these years represented
principal transactions as to which the Adjustable Rate and Prime
Reserve Funds have no knowledge of the profits or losses realized
by the respective broker-dealers for the fiscal years ended
February 28, 1994, February 28, 1993 and February 29, 1992. With
respect to the High Yield, New Income and Short-Term Bond Funds,
the following amounts consisted of principal transactions as to
which the Funds have no knowledge of the profits or losses
PAGE 105
realized by the respective broker-dealers for the fiscal years
ended February 28, 1994, February 28, 1993 and February 29, 1992:
Fund 1994 1993 1992
______ ____ ____ ____
High Yield $15,737,460,000 $6,682,140,000
New Income 20,206,382,000 15,189,019,000 6,518,595,000
Short-Term Bond 0 0 5,034,535,000
The following amounts involved trades with brokers acting as
agents or underwriters for the fiscal years ended February 28,
1994, February 28, 1993, and February 29, 1992:
Fund 1994 1993 1992
______ ____ ____ ____
High Yield $431,147,000 $ 20,827,000
New Income 59,093,000 4,980,000 129,469,000
Short-Term Bond 0 0 5,000,000
The amounts shown below involved trades with brokers acting
as agents or underwriters, in which such brokers received total
commissions, including discounts received in connection with
underwritings for the fiscal years ended February 28, 1994,
February 28, 1993 and February 29, 1992:
Fund 1994 1993 1992
______ ____ ____ ____
High Yield $3,661,000 $1,201,000
New Income 169,000 20,000 402,000
Short-Term Bond 0 0 15,000
The percentage of total portfolio transactions, placed with
firms which provided research, statistical, or other services to
T. Rowe Price in connection with the management of the Funds, or
in some cases, to the Funds for the fiscal years ended February
28, 1994, February 28, 1993 and February 29, 1992, are shown
below:
PAGE 106
Fund 1994 1993 1992
______ ____ ____ ____
Adjustable Rate 100% 94% 100%
High Yield 70% 59%
New Income 61% 61% 87%
Prime Reserve 81% 76%
Short-Term Bond 61% 84% 79%
The portfolio turnover rates for the following Funds for the
fiscal years ended February 28, 1994, February 28, 1993 and
February 29, 1992 are as follows:
Fund 1994 1993 1992
______ ____ ____ ____
Adjustable Rate 70.4% 110.8% 98.4%
High Yield 107.0% 104.4% 58.9%
New Income 58.3% 85.8% 49.7%
Short-Term Bond 90.8% 68.4% 380.7%
OTHER BUSINESS
The management of each Fund knows of no other business which
may come before the meeting. However, if any additional matters
are properly presented at the meeting, it is intended that the
persons named in the enclosed proxy, or their substitutes, will
vote such proxy in accordance with their judgment on such
matters.
GENERAL INFORMATION
The number of outstanding shares, the number of shares
registered to the T. Rowe Price Trust Company, and the percentage
of those shares registered to the T. Rowe Price Trust Company as
Trustee for participants in the T. Rowe Price Funds Retirement
Plan for Self-Employed (Keogh), as Trustee for participants in T.
Rowe Price Funds 401(k) plans, as Custodian for participants in
the T. Rowe Price Funds Individual Retirement Account (IRA), as
Custodian for participants in various 403(b)(7) plans, and as
Custodian for various Profit Sharing and Money Purchase plans for
each Fund are shown below.
PAGE 107
Shares Percent
Registered Representing
Shares to T. Rowe Price Outstanding
Fund Outstanding Trust Company Shares
______ ___________ ____________ ____________
Adjustable Rate 47,373,000 9,208,060 19.4
High Yield 177,392,000 48,150,870 23.7
New Income 159,860,000 45,312,965 28.2
Prime Reserve 3,384,443,000 905,131,023 26.7
Short-Term Bond 133,552,000 34,413,959 25.8
The T. Rowe Price Trust Company has no beneficial interest in
such accounts, nor in any other account for which it may serve as
trustee or custodian.
At February 28, 1994, approximately 5,250,340, 651,425, and
11,238,984 shares of the outstanding stock of the High Yield, New
Income and Prime Reserve Funds, respectively, representing
approximately 3.0%, 0.41% and 0.33%, respectively, were owned by
various counsel clients of T. Rowe Price, as to which T. Rowe
Price has discretionary authority. Accordingly such shares are
deemed to be owned beneficially by T. Rowe Price only for the
limited purposes as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934. T. Rowe Price disclaims actual
beneficial ownership of such shares. In addition, as of February
28, 1994, a wholly-owned subsidiary of T. Rowe Price owned
directly 230,088, 130,781, 18,222, 106,319 and 4,284,314 shares
of the outstanding stock of the Adjustable Rate, High Yield, New
Income, Prime Reserve and Short-Term Bond Funds, respectively,
representing approximately 0.49%, 0.07%, 0.01%, .003% and 3.21%,
respectively. As of February 28, 1994, T. Rowe Price owned
712,713 shares of the outstanding stock of the Prime Reserve Fund
representing approximately 0.02%. In addition as of February 28,
1994, Yachtcrew & Co., FBO Spectrum Income Account, State Street
Bank and Trust Co., 1776 Heritage Drive-4W, North Quincy, MA
02171-2101 owned beneficially 14,753,293, 12,227,925 and
7,444,297 shares of the High Yield, New Income and Short-Term
Bond Funds, respectively, representing approximately 8.3%, 7.6%
and 5.6%, respectively.
The following chart indicates the number of shares
beneficially owned, directly or indirectly, by the officers and
directors of each Fund, and the percentage this ownership
represents of each Fund's outstanding shares.
PAGE 108
Shares
Beneficially % Ownership of
Owned Directly Outstanding
Fund or Indirectly Shares
______ ______________ ______________
Adjustable Rate
High Yield
New Income
Prime Reserve
Short-Term Bond
The ownership of the officers and directors reflects their
proportionate interests, if any, in ______, ______, ______,
______ and ______ shares of the Adjustable Rate, High Yield, New
Income, Prime Reserve, and Short-Term Bond Funds, respectively,
which are owned by a wholly-owned subsidiary of T. Rowe Price and
their interests in 14,101, 90,158, 48,461, 2,631,168 and 81,056
shares, respectively, owned by the T. Rowe Price Associates, Inc.
Profit Sharing Trust.
A copy of the Annual Report of each Fund for the year ended
February 28, 1994, including financial statements, has been
mailed to shareholders of record at the close of business on that
date and to persons who became shareholders of record between
that time and the close of business on April 8, 1994, the record
date for the determination of the shareholders who are entitled
to be notified of and to vote at the meeting.
ANNUAL MEETINGS
Under Maryland General Corporation Law, any corporation
registered under the 1940 Act is not required to hold an annual
meeting in any year in which the 1940 Act does not require action
by shareholders on the election of directors. The Board of
Directors of each Fund has determined that in order to avoid the
significant expense associated with holding annual meetings,
including legal, accounting, printing and mailing fees incurred
in preparing proxy materials, each Fund will take advantage of
these Maryland law provisions. Accordingly, no annual meetings
shall be held in any year in which a meeting is not otherwise
required to be held by the 1940 Act for the election of Directors
unless the Board of Directors otherwise determines that there
should be an annual meeting. However, special meetings will be
held in accordance with applicable law or when otherwise
PAGE 109
determined by the Board of Directors. Each Fund's By-Laws
reflect this policy.
SHAREHOLDER PROPOSALS
If a shareholder wishes to present a proposal to be included
in the Proxy Statement for the next Annual Meeting, and if such
Annual Meeting is held in June, 1995, such proposal must be
submitted in writing and received by the Corporation's Secretary
at its Baltimore office prior to December 26, 1994.
FINANCIAL STATEMENT OF INVESTMENT MANAGER
The audited consolidated balance sheet of T. Rowe Price
which follows is required by the 1940 Act, and should not be
confused with, or mistaken for, the financial statements of T.
Rowe Price Adjustable Rate U.S. Government Fund, Inc., T. Rowe
Price High Yield Fund, Inc., T. Rowe Price New Income Fund, Inc.,
T. Rowe Price Prime Reserve Fund, Inc. and T. Rowe Price Short-
Term Bond Fund, Inc., which are set forth in the Annual Report
for each Fund.
PAGE 110
T. ROWE PRICE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
(in thousands)
ASSETS
Cash and cash equivalents $ 46,218
Accounts receivable 43,102
Investments in sponsored mutual funds
Short-term bond and money market mutual funds
held as trading securities 27,647
Other funds held as available-for-sale securities 69,423
Partnership and other investments 19,606
Property and equipment 39,828
Goodwill and deferred expenses 9,773
Other assets 7,803
________
$263,400
________
________
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses $ 15,111
Accrued retirement and other compensation costs 19,844
Income taxes payable 5,097
Dividends payable 3,784
Debt 12,915
Deferred revenues 1,548
Minority interests in consolidated subsidiaries 9,148
________
Total liabilities 67,447
________
Commitments and contingent liabilities
Stockholders' equity
Common stock, $.20 par value - authorized 48,000,000
shares; issued and outstanding 29,095,039 shares 5,819
Capital in excess of par value 1,197
Unrealized security holding gains 5,345
Retained earnings 183,592
________
Total stockholders' equity 195,953
________
$263,400
________
________
The accompanying notes are an integral part of the consolidated
balance sheet.
PAGE 111
T. ROWE PRICE ASSOCIATES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Associates, Inc. and its consolidated subsidiaries
(the "Company") provide investment advisory and administrative
services to sponsored mutual funds and investment products, and
to private accounts of other institutional and individual
investors.
Basis of preparation
The Company's financial statements are prepared in accordance
with generally accepted accounting principles.
Principles of consolidation
The consolidated financial statements include the accounts of all
majority owned subsidiaries and, by virtue of the Company's
controlling interest, its 50%-owned subsidiary, Rowe Price-
Fleming International, Inc. ("RPFI"). All material intercompany
accounts are eliminated in consolidation.
Cash equivalents
For purposes of financial statement disclosure, cash equivalents
consist of all short-term, highly liquid investments including
certain money market mutual funds and all overnight commercial
paper investments. The cost of these investments is equivalent
to fair value.
Investments in sponsored mutual funds
The Company has historically accounted for its investments in
stock and bond mutual funds at the lower of aggregate cost or
market. On December 31, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which
requires the Company to state its mutual fund investments at fair
value and to classify these holdings as either trading (held for
only a short period of time) or available-for-sale securities.
Unrealized holding gains on available-for-sale securities at
December 31, 1993 are reported net of income tax effects in a
separate component of stockholders' equity.
PAGE 112
T. ROWE PRICE ASSOCIATES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of credit risk
Financial instruments which potentially expose the Company to
concentrations of credit risk as defined by SFAS No. 105 consist
primarily of investments in sponsored money market and bond
mutual funds and accounts receivable. Credit risk is believed to
be minimal in that counterparties to these financial instruments
have substantial assets including the diversified portfolios
under management by the Company which aggregate $54.4 billion at
December 31, 1993.
Partnership and other investments
The Company invests in various partnerships and ventures
including those sponsored by the Company. These investments
which hold equity securities, venture capital investments, debt
securities and real estate are stated at cost adjusted for the
Company's share of the earnings or losses of the investees
subsequent to the date of investment. Because the majority of
these entities carry their investments at fair value and include
unrealized gains and losses in their reported earnings, the
Company's carrying value for these investments approximates fair
value.
Property and equipment
Property and equipment is stated at cost net of accumulated
depreciation and amortization computed using the straight-line
method. Provisions for depreciation and amortization are based
on the following estimated useful lives: computer and
communications equipment and furniture and other equipment, 3 to
7 years; building, 40 years; leased land, the 50-year lease term;
and leasehold improvements, the shorter of their useful lives or
the remainder of the lease term.
PAGE 113
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
NOTE 1 - INVESTMENTS IN SPONSORED MUTUAL FUNDS
Investments in sponsored money market mutual funds, which are
classified as cash equivalents in the accompanying consolidated
financial statements, aggregate $45,272,000 at December 31, 1993.
The Company's investments in sponsored mutual funds held as
available-for-sale at December 31, 1993 (in thousands) include:
Gross
unrealized Aggregate
Aggregate holding fair
cost gains value
________ _________ _________
Stock funds $ 34,990 $ 7,025 $ 42,015
Bond funds 26,190 1,218 27,408
________ _______ _________
Total $ 61,180 $ 8,243 $ 69,423
________ _______ _________
________ _______ _________
The Company provides investment advisory and administrative
services to the T. Rowe Price family of mutual funds which had
aggregate assets under management at December 31, 1993 of $34.7
billion. All services rendered by the Company are provided under
contracts that set forth the services to be provided and the fees
to be charged. These contracts are subject to periodic review
and approval by each of the funds' boards of directors and, with
respect to investment advisory contracts, also by the funds'
shareholders. Services rendered to the funds accounted for 71%
of 1993 revenues.
Accounts receivable from the sponsored mutual funds aggregated
$21,741,000 at December 31, 1993.
PAGE 114
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1993 (in thousands)
consists of:
Computer and communications equipment $ 31,431
Building and leased land 19,756
Furniture and other equipment 13,889
Leasehold improvements 4,691
_________
69,767
Accumulated depreciation and amortization (29,939)
_________
$ 39,828
_________
_________
NOTE 3 - GOODWILL AND DEFERRED EXPENSES
On September 2, 1992, the Company acquired an investment
management subsidiary of USF&G Corporation and combined six USF&G
mutual funds with aggregate net assets of $.5 billion into the T.
Rowe Price family of funds. The total transaction cost which has
been recognized using the purchase method of accounting was
approximately $11,024,000, including goodwill of $8,139,000 which
is being amortized over 11 years using the straight-line method.
Prepaid non-compete and transition services agreements totaling
$2,500,000 are being amortized over their three-year life.
Accumulated amortization at December 31, 1993 aggregates
$2,216,000.
Goodwill of $1,980,000 from an earlier corporate acquisition is
being amortized over 40 years using the straight-line method.
Accumulated amortization was $1,039,000 at December 31, 1993.
NOTE 4 - DEBT
In June 1991, the Company completed the long-term financing
arrangements for its administrative services facility. Terms of
the $13,500,000 secured promissory note with Confederation Life
Insurance Company include an interest rate of 9.77%, monthly
principal and interest payments totaling $128,000 for 10 years,
and a final principal payment of $9,845,000 in 2001. A
prepayment option is available under the terms of the note;
however, the payment of a substantial premium would have been
required to retire the debt at December 31, 1993. Related debt
issuance costs of $436,000 are included in deferred expenses and
are being amortized over the life of the loan to produce an
effective annual interest rate of 10.14%.
PAGE 115
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
The outstanding principal balance for this note was $12,904,000
at December 31, 1993. A fair value of $16,030,000 was estimated
based on the cost of risk-free assets that could be acquired to
extinguish the obligation at December 31, 1993.
A maximum of $20,000,000 is available to the Company under unused
bank lines of credit at December 31, 1993.
NOTE 5 - INCOME TAXES
Deferred income taxes arise from differences between taxable
income for financial statement and income tax return purposes and
are calculated using the liability method prescribed by SFAS No.
109, "Accounting for Income Taxes."
The net deferred tax liability of $2,596,000 included in income
taxes payable at December 31, 1993 consists of total deferred tax
liabilities of $5,609,000 and total deferred tax assets of
$3,013,000. Deferred tax liabilities include $2,898,000 arising
from unrealized holding gains on available-for-sale securities,
$1,353,000 arising from unrealized capital gains allocated from
the Company's partnership investments, and $677,000 from
differences in the recognition of depreciation expense. Deferred
tax assets include $1,100,000 from differences in the recognition
of the costs of the defined benefit retirement plan and
postretirement benefits.
NOTE 6 - COMMON STOCK AND EMPLOYEE STOCK INCENTIVE PLANS
Shares Authorized
At December 31, 1993, the Company had reserved 8,151,315 shares
of its unissued common stock for issuance upon the exercise of
stock options and 420,000 shares for issuance under an employee
stock purchase plan.
Share Repurchases
The Company's board of directors has authorized the future
repurchase of up to 1,432,000 common shares at December 31, 1993.
PAGE 116
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
Executive Stock
At December 31, 1993, there were outstanding 1,226,540 shares of
common stock ("Executive Stock") which were sold to certain
officers of the Company in 1982 at a discount. These shares are
subject to restrictions which require payment of the discount of
$.32 per share to the Company at the earlier of the sale of such
stock or termination of employment.
Stock Incentive Plans
The following table summarizes the status of noncompensatory
stock options granted at market value to certain officers and
directors of the Company.
Options
Unexer- Options Unexer- Exer-
cised Options Granted cised cisable
Options Exer- (Canceled) Options at
Year at Decem- cised During Decem- Decem- Exer-
of ber 31, During ber 31, ber 31, ber 31, cise
Grant 1992 1993 1993 1993 1993 Price
____ ________ ________ ________ ________ ________ ______
1983-4 53,000 (30,600) -- 22,400 22,400 $.67 &
$.75
1987 309,410 (68,064) -- 241,346 241,346 $5.38 &
$9.38
1988 359,000 (66,586) -- 292,414 292,414 $7.94
1989 632,280 (46,288) (5,600) 580,392 312,404 $11.38
1990 681,500 (83,387) (11,800) 586,313 141,313 $7.19 &
$8.50
1991 811,450 (37,000) (14,000) 760,450 283,450 $17.00
1992 926,000 (11,600) (27,400) 887,000 168,600 $18.75
1993 -- -- 1,154,000 1,154,000 -- $28.13
_________ ________ _________ _________ _________
3,772,640 (343,525) 1,095,200 4,524,315 1,461,927
_________ ________ _________ _________ _________
_________ ________ _________ _________ _________
The right to exercise stock options generally vests over the
five-year period following the grant. After the tenth year
following the grant, the right to exercise the related stock
options lapses and the options are canceled.
PAGE 117
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
NOTE 7 - EMPLOYEE RETIREMENT PLANS
The Company sponsors two defined contribution retirement plans:
a profit-sharing plan based on participant compensation and a
401(k) plan.
The Company also has a defined benefit plan covering those
employees whose annual base salaries do not exceed a specified
salary limit. Participant benefits are based on the final
month's base pay and years of service subsequent to January 1,
1987. The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax
purposes. The following table sets forth the plan's funded
status and the amounts recognized in the Company's consolidated
balance sheet (in thousands) at December 31, 1993.
Actuarial present value of
Accumulated benefit obligation for service rendered
Vested $ 780
Non-vested 1,362
______
Total 2,142
Obligation attributable to estimated future compensation
increases 2,594
______
Projected benefit obligation 4,736
Plan assets held in sponsored mutual funds, at fair value 2,594
______
Projected benefit obligation in excess of plan assets 2,142
Unrecognized loss from decreases in discount rate 407
______
Accrued retirement costs $1,735
______
______
Discount rate used in determining actuarial present
values 6.40%
______
______
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a minority partner in the joint venture which owns
the land and building in which the Company leases its corporate
offices. Future minimum rental payments under the Company's
lease agreement are $3,110,000 in 1994 and 1995, $3,220,000 in
PAGE 118
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
1996, $3,769,000 in 1997 and 1998, and $33,755,000 in 1999
through 2006. Other assets at December 31, 1992 includes a
receivable from the venture of $3,485,000 for leasehold
improvements made by the Company and reimbursed by the venture in
1993.
The Company leases office facilities and equipment under other
noncancelable operating leases. Future minimum rental payments
under these leases aggregate $4,621,000 in 1994, $4,123,000 in
1995, $1,776,000 in 1996, $1,259,000 in 1997, $696,000 in 1998,
and $4,806,000 in later years.
At December 31, 1993, the Company had outstanding commitments to
invest an additional $6,757,000 in various investment
partnerships and ventures.
The Company has contingent obligations at December 31, 1993 under
a $500,000 direct pay letter of credit expiring not later than
1999 and a $780,000 standby letter of credit which is renewable
annually.
Consolidated stockholders' equity at December 31, 1993 includes
$32,635,000 which is restricted as to use under various
regulations and agreements to which the Company and its
subsidiaries are subject in the ordinary course of business.
From time to time, the Company is a party to various employment-
related claims, including claims of discrimination, before
federal, state and local administrative agencies and courts. The
Company vigorously defends itself against these claims. In the
opinion of management, after consultation with counsel, it is
unlikely that any adverse determination in one or more pending
employment-related claims would have a material adverse effect on
the Company's financial position.
PAGE 119
REPORT OF INDEPENDENT ACCOUNTANTS
_________________________________
To the Stockholders and Board of Directors
of T. Rowe Price Associates, Inc.
In our opinion, the accompanying consolidated balance sheet
presents fairly, in all material respects, the financial position
of T. Rowe Price Associates, Inc. and its subsidiaries at
December 31, 1993 in conformity with generally accepted
accounting principles. This financial statement is the
responsibility of the Company's management; our responsibility is
to express an opinion on this financial statement based on our
audit. We conducted our audit in accordance with generally
accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
January 25, 1994
[/TEXT]
[/DOCUMENT]
</DOCUMENT
PAGE 4
T. ROWE PRICE (LOGO) PROXY
_______________________________________________________________
INSTRUCTIONS:
1. Cast your vote by checking the appropriate boxes on the
reverse side. If you do not check a box, your vote will be
cast FOR that proposal.
2. Sign and date the card below.
3. Please return the signed card promptly using the enclosed
postage paid envelope, even if you will be attending the
meeting.
4. Please do not enclose checks or any other correspondence.
Please fold and detach card at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
T. ROWE PRICE HIGH YIELD FUND, INC.
MEETING: 10:30 A.M. EASTERN TIME
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints James S. Riepe and Richard S.
Swingle, as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote,
as designated below, all shares of stock of the Fund, which the
undersigned is entitled to vote at the Annual Meeting of
Shareholders to be held on Wednesday, June 8, 1994, at the time
indicated above, at the offices of the Fund, 100 East Pratt
Street, Baltimore, Maryland 21202, and at any and all
adjournments thereof, with respect to the matters set forth below
and described in the Notice of Annual Meeting and Proxy Statement
dated April 22, 1994, receipt of which is hereby acknowledged.
Please sign exactly as name
appears. Only authorized officers
should sign for corporations. For
information as to the voting of
stock registered in more than one
name, see page 3 of the Notice of
Annual Meeting and Proxy Statement.
Dated: __________________, 1994
___________________________________
___________________________________
Signature(s)
CUSIP#741841105/fund#057
(Front)
PAGE 5
T. ROWE PRICE (LOGO) WE NEED YOUR PROXY VOTE BEFORE JUNE 8, 1994
_________________________________________________________________
Please refer to the Proxy Statement discussion of each of these
matters.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE SHAREHOLDER. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR ALL PROPOSALS.
Please fold and detach card at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Election of FOR all nominees / /WITHHOLD AUTHORITY / /1.
directors. listed below (except to vote for all
as marked to the nominees listed below
contrary)
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL
NOMINEE STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST
BELOW.)
Robert P. Black Calvin W. Burnett George J. Collins
Anthony W. Deering F. Pierce Linaweaver James S. Riepe
John G. Schreiber Richard S. Swingle Anne Marie Whittemore
2. Approve changes to the Fund's fundamental policies.
FOR each policy / / ABSTAIN / / 2.
listed below (except as
marked to the contrary)
If you do NOT wish to approve a policy change, please check the
appropriate box below:
/ / (A) Borrowing / / (K) Single Issuer
/ / (B) Lending / / (L) Voting Securities
/ / (C) Purchasing on Margin / / (M) Control
/ / (D) Real Estate / / (N) Investment Companies
/ / (E) Senior Securities / / (O) Oil and Gas
/ / (F) Industry Concentration / / (P) Options
/ / (G) Pledging Assets / / (Q) Ownership of Securities
/ / (H) Commodities & Futures / / (R) Illiquid Securities
/ / (I) Equity Securities / / (S) Unseasoned Issuers
3. Ratify the selection of Price Waterhouse as independent
accountants. FOR / / AGAINST / / ABSTAIN / / 3.
PAGE 6
I authorize the Proxies, in their discretion, to vote upon such
other business as may properly come before the meeting.
CUSIP#741841105/fund#057
(BACK)