PAGE 1
Prospectus for the T. Rowe Price International Stock Fund, dated May 1, 1993,
revised to January 24, 1994, should be inserted here.
INTERNATIONAL
STOCK FUND
PROSPECTUS
May 1, 1993
REVISED TO
JANUARY 24, 1994
T. ROWE PRICE
INTERNATIONAL FUNDS, INC.
TABLE OF CONTENTS
FUND INFORMATION
INVESTMENT OBJECTIVE . . . . . . . . . . . . . . . . . . .2
INVESTMENT PROGRAM . . . . . . . . . . . . . . . . . . . .2
SUMMARY OF FUND FEES AND EXPENSES. . . . . . . . . . . . .3
PER-SHARE DATA AND OTHER
ANNUALIZED RATIOS. . . . . . . . . . . . . . . . . . . .4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . .4
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . .6
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . .8
CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . .8
NAV, PRICING, AND EFFECTIVE DATE . . . . . . . . . . . . .9
RECEIVING YOUR PROCEEDS. . . . . . . . . . . . . . . . . .9
DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . . 10
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . 10
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . 11
EXPENSES AND MANAGEMENT FEE. . . . . . . . . . . . . . . 12
HOW TO INVEST SHAREHOLDER SERVICES . . . . . . . . . . . 13
CONDITIONS OF YOUR PURCHASE. . . . . . . . . . . . . . . 14
COMPLETING THE NEW ACCOUNT FORM. . . . . . . . . . . . . 15
OPENING A NEW ACCOUNT. . . . . . . . . . . . . . . . . . 16
PURCHASING ADDITIONAL SHARES . . . . . . . . . . . . . . 17
EXCHANGING AND REDEEMING SHARES. . . . . . . . . . . . . 18
Investment Summary
The Fund's objective is capital appreciation through investment primarily in
established, non-U.S. companies.
T. Rowe Price
100% No Load. This Fund has no sales charges, no redemption fees, and no 12b-1
fees. 100% of your investment is credited to your account.
Services. T. Rowe Price provides easy access to your money through bank
wires or telephone redemptions and offers easy exchange to other T. Rowe Price
Funds.
Rowe Price-Fleming International, Inc. (Price-Fleming), the Fund's manager,
was founded in 1979 as a joint venture between T. Rowe Price Associates, Inc.
(T. Rowe Price) and Robert Fleming Holdings Limited. Price-Fleming is one of
America's largest international mutual fund asset managers with approximately
$7.5 billion under management in its offices in Baltimore, London, Tokyo, and
Hong Kong.
This prospectus contains information you should know about the Fund before you
invest. Please keep it for future reference. A Statement of Additional
Information for the Fund (dated May 1, 1993, revised to January 24, 1994) has
been filed with the Securities and Exchange Commission and is incorporated by
reference in this prospectus. It is available at no charge by calling:
1-800-638-5660.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a total return on its assets from
long-term growth of capital and income, principally through investments in
common stocks of established, non-U.S. companies. Investments may be made
solely for capital appreciation or solely for income or any combination of
both for the purpose of achieving a higher overall return. Total return
consists of capital appreciation or depreciation, dividend income, and
currency gains or losses.
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Fund should not be relied upon as a complete
investment program, nor used to play short-term swings in the stock or foreign
exchange markets. The Fund is subject to risks unique to international
investing. See extensive discussion under Risk Factors beginning on page 4.
Further, there is no assurance that the favorable trends discussed below will
continue, and the Fund cannot guarantee it will achieve its investment
objective.
INVESTMENT PROGRAM
INVESTING OVERSEAS FOR
GROWTH AND INCOME.
Over the last 30 years, many foreign economies have grown faster than the
United States' economy, and the return from equity investments in these
countries has often exceeded the return on similar investments in the United
States. Moreover, there has normally been a wide and largely unrelated
variation in performance between international equity markets over this
period. Although there can be no assurance that these conditions will
continue, the Fund's investment manager, Rowe Price-Fleming International,
Inc. (Price-Fleming), within the framework of diversification, seeks to
identify and invest in companies participating in the faster growing foreign
economies and markets. Price-Fleming believes that investment in foreign
securities offers significant potential for long-term capital appreciation and
an opportunity to achieve investment diversification.
The Fund intends to diversify investments broadly among countries and to
normally have at least three different countries represented in the portfolio.
The Fund may invest in countries of the Far East and Western Europe as well as
South Africa, Australia, Canada, and other areas (including developing
countries). Under unusual circumstances, however, the Fund may invest
substantially all its assets in one or two countries.
Portfolio Diversification. Today, nearly two-thirds of the world's stock
market value and over half of all fixed-income securities are traded abroad.
Investing overseas can help diversify a portfolio otherwise invested solely in
U.S. securities. Foreign stock and bond markets often do not parallel the
performance of U.S. markets, which means that, over time, diversifying
investments across several countries can help reduce portfolio volatility.
In seeking its objective, the Fund invests primarily in common stocks of
established foreign companies which have the potential for growth of capital
or income or both. In order to increase total return, the Fund may invest up
to 35% of its assets in any other type of security including convertible
securities; preferred stocks and warrants; bonds, notes and other debt
securities (including Eurodollar securities); and obligations of domestic or
foreign governments and their political subdivisions.
Under exceptional economic or market conditions abroad, the Fund may
temporarily invest all or a major portion of its assets in U.S. government
obligations or debt obligations of U.S. companies. The Fund may invest its
reserves in domestic as well as foreign money market instruments. Also, the
Fund may enter into forward foreign currency exchange contracts in order to
protect against uncertainty in the level of future foreign exchange rates.
Please see Investment Policies for a more complete description of the
Fund's investments.
SUMMARY OF
FUND FEES
AND EXPENSES
The Fund is 100% no-load . . . you pay no fees to purchase, exchange, or
redeem shares, nor any ongoing marketing (12b-1) expenses. Lower expenses
benefit you by increasing your investment return from the Fund.
Shown below are all expenses and fees the Fund incurred during its
fiscal year. Where applicable, expenses were restated to reflect current fees.
Expenses are expressed as a percent of average Fund net assets. More
information about these expenses may be found below and under Expenses and
Management Fee and in the Statement of Additional Information under Management
Fee and Limitation on Fund Expenses.
Shareholder Transaction Expenses Annual Fund Expenses
Sales load "charge" on purchases None Management fee 0.70%
Sales load "charge" on reinvested Total other (Shareholder
dividends None servicing, custodial,
Redemption fees None auditing, etc.) 0.35%!
Exchange fees None Distribution fees (12b-1) None
______
Total Fund Expenses 1.05%
! The Fund's bank charges a $5.00 fee for wire redemptions under $5,000,
subject to change without notice.
EXAMPLE OF
FUND EXPENSES.
The following example illustrates the expenses you would incur on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the
end of each period shown. For example, expenses for the first year in the Fund
would be $11. This is an illustration only. Actual expenses and performance
may be more or less than shown.
1 Year-$11 3 Years-$33 5 Years-$58 10 Years-$128
Management Fee. The Fund pays Price-Fleming an investment management fee
consisting of a flat Individual Fund Fee of 0.35% of the Fund's net assets and
a Group Fee, defined on page 12 under Expenses and Management Fee of 0.35% as
of December 31, 1992. Thus, the total combined management fee for the Fund
would be 0.70% of net assets.
Transfer Agent, Shareholder Servicing, and Administrative Costs. The Fund paid
fees to: (i) T. Rowe Price Services, Inc. (TRP Services) for transfer and
dividend disbursing agent functions and shareholder services for all accounts;
(ii) T. Rowe Price Retirement Plan Services, Inc. for subaccounting and
recordkeeping services for certain retirement accounts; and (iii) T. Rowe
Price for calculating the daily share price and maintaining the portfolio and
general accounting records of the Fund. These fees totaled approximately
$2,190,000, $863,000, and $110,000, respectively.
PER-SHARE
DATA AND
OTHER
ANNUALIZED
RATIOS
The following table provides information about the Fund's financial
history. It is based on a single share outstanding throughout each fiscal year
(which ends on the last day of December). The most recent five years of the
table are part of the Fund's financial statements which are included in the
Fund's annual report and incorporated by reference into the Statement of
Additional Information, which is available to shareholders. The financial
statements in the annual report have been audited by Price Waterhouse,
independent accountants, whose unqualified report covers the most recent
five-year period.
<TABLE>
<CAPTION>
Investment Activities Distributions
Net Realized
Net and Total
Asset Net Unrealized from Net
Value, Invest- Gain (Loss) Invest- Invest- Net Total
Year Ended, Beginning ment on ment ment Realized Distri-
December 31! of Year Income Expenses Income Investments Activities Income Gain butions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1983 $ 5.67 $ .15 $ (.07) $ .08 $ 1.51 $ 1.59 $ (.10) - $ (.10)
1984 7.16 .22 (.07) .15 (.56) (.41) (.08) $ (.08) (.16)
1985 6.59 .19 (.08) .11 2.71 2.82 (.15) (.22) (.37)
1986 9.04 .23 (.12) .11 5.23 5.34 (.11) (1.38) (1.49)
1987 12.89 .27 (.15) .12 .74 .86 (.23) (4.98) (5.21)
1988 8.54 .27 (.11) .16 1.36 1.52 (.16) (.93) (1.09)
1989 8.97 .27 (.11) .16 1.94 2.10 (.16) (.67) (.83)
1990 10.24 .33 (.11) .22 (1.13) (.91) (.16) (.36) (.52)
1991 8.81 .25 (.10) .15 1.22 1.37 (.15) (.49) (.64)
1992 9.54 .24 (.10) .14 (.47) (.33) (.16) (.16) (.32)
<CAPTION>
Ratio of Ratio of
Net Expenses Net Shares
Asset to Investment Outstanding
Value, Average Income to Portfolio at End of
Year Ended, End of Net Average Turnover Year (in
December 31! Year Assets Net Assets Rate thousands)
<S> <C> <C> <C> <C> <C>
1983 $ 7.16 1.14% 1.24% 68.7% 18,172
1984 6.59 1.11% 2.29% 37.7% 27,412
1985 9.04 1.11% 1.54% 61.9% 41,690
1986 12.89 1.10% 0.89% 56.4% 61,291
1987 8.54 1.14% 0.93% 76.5% 75,233
1988 8.97 1.16% 1.78% 42.4% 70,214
1989 10.24 1.10% 1.63% 47.8% 94,778
1990 8.81 1.09% 2.16% 47.1% 116,976
1991 9.54 1.10% 1.51% 45.0% 154,677
1992 8.89 1.05% 1.49% 37.8% 219,374
<FN>
! All share and per-share figures reflect the 2-for-1 stock split effective August 31, 1987.
</TABLE>
RISK
FACTORS
Investors should understand and consider carefully the special risks involved
in foreign investing. These risks are often heightened for investments in
emerging or developing countries.
Foreign Currency. Investments in foreign companies will require the Fund to
hold securities and funds denominated in foreign currencies. As a result, the
value of the assets of the Fund as measured in U.S. dollars may be affected
significantly, favorably or unfavorably, by changes in foreign currency
exchange rates, currency restrictions, and exchange control regulations, and
the Fund may incur costs in connection with conversions between various
currencies. Exchange rate movements can be large and endure for extended
periods of time. For example, the Japanese yen has been appreciating against
the U.S. dollar since 1985. This has increased the returns of persons
purchasing Japanese securities with U.S. dollars. However, there is no
guarantee this trend will continue, and its reversal would adversely affect
such returns.
Costs. The expense to individual investors of investing directly in foreign
securities are higher than investing in U.S. securities. While the Fund offers
a very efficient way for individual investors to participate in foreign
markets, its expenses, including advisory and custodial fees, are also higher
than the typical domestic equity mutual fund.
Economic and Trade Factors. The economies of the countries in which the Fund
may invest (portfolio countries) may differ favorably or unfavorably from the
U.S. economy and may be less developed or diverse. Certain of these countries,
for example Japan, are heavily dependent upon international trade.
Accordingly, they have been and may continue to be adversely affected by trade
barriers and other protectionist or retaliatory measures of, as well as
economic conditions in, the U.S. and other countries with which they trade.
Certain countries may be heavily dependent on a limited number of commodities
and thus vulnerable to weaknesses in world prices for these commodities.
Finally, there is no assurance that the pattern of growth exhibited by certain
of the portfolio countries in the past will continue.
Political Factors. The internal politics of certain of the portfolio countries
are not as stable as in the United States. In addition, significant external
political risks, including war, currently affect some of the countries.
Finally, governments in certain of the countries continue to participate to a
substantial degree, through ownership interests or regulation, in their
respective economies and securities markets. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
assets, or imposition of taxes. Any of these actions could have a significant
effect on market prices of securities, the ability of the Fund to repatriate
capital and income, and the value of the Fund's investments.
Market Characteristics. Many of the securities markets of the portfolio
countries have substantially less volume than comparable U.S. markets, and the
securities of some companies in these countries may be less liquid and more
volatile than securities of comparable U.S. companies. In certain markets, for
example in Japan, common stocks may trade at considerably higher valuation
levels than U.S. common stocks. Accordingly, many of these markets may be
subject to a greater volatility, be more influenced by adverse events
generally affecting the market and by large investors trading significant
blocks of securities, than is usual in the United States. The settlement
practices of the portfolio countries may include delays and otherwise differ
from those customary in U.S. markets.
Legal and Regulatory. Certain of the portfolio countries lack uniform
accounting, auditing, and financial reporting standards, may have less
governmental supervision of securities markets, brokers, and issuers of
securities, and less financial information available to investors than is
usual in the United States. For example, there have been revelations that
major broker-dealers in Japan have engaged in a variety of fraudulent and
manipulative practices. Finally, there may be difficulty in enforcing legal
rights outside the United States.
Eastern Europe. The Fund may from time to time invest up to 5% of its assets
in securities of companies located in Eastern Europe and the former Soviet
block. Reforms away from centrally planned economies and state owned
industries are still in their infancy. As a result, investments in such
countries would be highly speculative and could result in losses to the Fund.
Although significant uncertainties for investment remain, Price-Fleming
considers the current outlook for certain countries in this region to be
positive and expects the Fund to be in a position to take advantage of
opportunities as they arise.
Foreign Exchanges and Markets. The Fund's portfolio securities from time to
time may be listed on foreign exchanges or traded in foreign markets which
trade on days (such as Saturday) when the Fund does not compute its price or
accept orders for the purchase, redemption or exchange of its shares. As a
result, the net asset value of the Fund may be significantly affected by
trading on days when shareholders cannot make transactions.
INVESTMENT
POLICIES
The Fund's investment program and policies are subject to further restrictions
and risks which are described in the Statement of Additional Information. The
investment objective of the Fund is a fundamental policy and may be changed
only with shareholder approval. The Fund's investment program, unless
otherwise specified, is not a fundamental policy and may be changed without
shareholder approval. Shareholders will be notified of any material change in
the investment program. In addition to the investments described below, the
Fund's investments may include, but are not limited to, American Depository
Receipts (ADRs), European Depository Receipts (EDRs), American Depository
Shares (ADSs), bonds, notes, other debt securities of foreign issuers,
securities of foreign investment funds or trusts (including passive foreign
investment companies), and the investments described under Investment Program.
Cash Reserves. While the Fund will remain primarily invested in common stocks,
it may, for temporary defensive purposes, invest in reserves without
limitation. The Fund may also establish and maintain reserves as Price-Fleming
believes is advisable to facilitate the Fund's cash flow needs (e.g.,
redemptions, expenses, and purchases of portfolio securities). The Fund's
reserves will be invested in domestic and foreign money market instruments
rated within the top two credit categories by a national rating organization
or, if unrated, the T. Rowe Price equivalent.
Convertible Securities, Preferred Stocks, and Warrants. The Fund may invest in
debt or preferred equity securities convertible into or exchangeable for
equity securities. Preferred stocks are securities that represent an ownership
interest in a corporation providing the owner with claims on the company's
earnings and assets before common stock owners, but after bond owners.
Warrants are options to buy a stated number of shares of common stock at a
specified price any time during the life of the warrants (generally, two or
more years).
Foreign Currency Transactions. The Fund will normally conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward contracts to purchase or sell foreign currencies. The Fund will
generally not enter into a forward contract with a term of greater than one
year.
The Fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. First, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when Price-Fleming believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another currency,
it may enter into a forward contract to sell or buy the former foreign
currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Under certain circumstances, the Fund
may commit a substantial portion or the entire value of its portfolio to the
consummation of these contracts. Price-Fleming will consider the effect such a
commitment of its portfolio to forward contracts would have on the investment
program of the Fund and the flexibility of the Fund to purchase additional
securities. Although forward contracts will be used primarily to protect the
Fund from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the Fund's
total return could be adversely affected as a result.
Futures Contracts and Options. The Fund may enter into stock index or currency
futures contracts (or options thereon) to hedge a portion of the Fund's
portfolio, to provide an efficient means of regulating the Fund's exposure to
the equity markets, or as a hedge against changes in prevailing levels of
currency exchange rates. The Fund will not use futures contracts for
speculation. The Fund will limit its use of futures contracts so that no more
than 5% of its total assets would be committed to initial margin deposits or
premiums on such contracts. Such contracts may be traded on U.S. or foreign
exchanges. The Fund may write covered call options and purchase put and call
options on foreign currencies, securities, and stock indices. The aggregate
market value of the Fund's currencies or portfolio securities covering call or
put options will not exceed 25% of the Fund's net assets. Futures contracts
and options can be highly volatile and could reduce the Fund's total return,
and the Fund's attempt to use such investments for hedging purposes may not be
successful. Successful futures strategies require the ability to predict
future movements in securities prices, interest rates and other economic
factors. The Fund's potential losses from the use of futures extends beyond
its initial investment in such contracts. Also, losses from options and
futures could be significant if the Fund is unable to close out its position
due to disruptions in the market or lack of liquidity.
Hybrid Investments. As part of its investment program and to maintain greater
flexibility, the Fund may invest in instruments which have the characteristics
of futures and securities. Such instruments may take a variety of forms, such
as debt instruments with interest or principal payments determined by
reference to the value of a currency or commodity at a future point in time.
The risks of such investments would reflect both the risks of investing in
futures, currencies, and securities, including volatility and illiquidity.
Illiquid Securities. The Fund may acquire illiquid securities (no more than
10% of net assets). Because an active trading market does not exist for such
securities, the sale of such securities may be subject to delay and additional
costs. The Fund will not invest more than 5% of its total assets in restricted
securities (other than securities eligible for resale under Rule 144A of the
Securities Act of 1933).
Lending of Portfolio Securities. As a fundamental policy, for the purpose of
realizing additional income, the Fund may lend securities with a value of up
to 30% of its total assets to broker-dealers, institutional investors, or
other persons. Any such loan will be continuously secured by collateral at
least equal to the value of the security loaned. Such lending could result in
delays in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially.
Repurchase Agreements. The Fund may enter into repurchase agreements with a
well-established securities dealer or a bank which is a member of the Federal
Reserve System. In the event of a bankruptcy or default of certain sellers of
repurchase agreements, the Fund could experience costs and delays in
liquidating the underlying security, which is held as collateral, and the Fund
might incur a loss if the value of the collateral held declines during this
period.
Portfolio Turnover. The Fund will not generally trade in securities for
short-term profits but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The Fund's
portfolio turnover rates for the years 1992, 1991, and 1990, were 37.8%,
45.0%, and 47.1%, respectively.
Fundamental Investment Policies. As a matter of fundamental policy, the Fund
will not, among other things: (1) purchase a security of any issuer if, as a
result, it would: (a) cause the Fund to have more than 25% of its total assets
concentrated in any one industry, provided that, as a matter of operating
policy, the Fund will not invest more than 25% of its total assets in
securities issued by any one foreign government or (b) with respect to 75% of
its assets, cause the Fund's holdings of that issuer to amount to more than 5%
of the Fund's total assets or cause the Fund to own more than 10% of the
outstanding voting securities of the issuer provided that, as an operating
policy, the Fund will not purchase a security if, as a result, more than 10%
of the outstanding voting securities of any issuer would be held by the Fund;
(2) borrow money except temporarily from banks to facilitate redemption
requests in amounts not exceeding 30% of its total assets valued at market; or
(3) in any manner transfer as collateral for indebtedness any security of the
Fund except in connection with permissible borrowings, which in no event will
exceed 30% of the Fund's total assets valued at market.
Other Investment Policies. As a matter of operating policy, the Fund will not,
among other things: (1) purchase a security 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 unseasoned issuers which at the time of purchase have been in
operation for less than three years, including predecessors and unconditional
guarantors; and (2) purchase additional securities when money borrowed exceeds
5% of the Fund's total assets.
PERFORMANCE
INFORMATION
The Fund may advertise total return figures on both a cumulative and
compound average annual basis and compare them to various indices (e.g., the
S&P 500), other mutual funds or other performance measures. (The total return
of the Fund consists of the change in its net asset value per share and the
net income it earns.) Cumulative total return compares the amount invested at
the beginning of a period with the amount redeemed at the end of the period,
assuming the reinvestment of all dividends and capital gain distributions. The
compound average annual total return indicates a yearly compound average of
the Fund's performance, derived from the cumulative total return. The annual
compound rate of return for the Fund may vary from any average. Further
information about the Fund's performance is contained in its annual report
which is available free of charge.
CAPITAL STOCK
The T. Rowe Price International Funds, Inc. (the Corporation) was originally
organized in 1979 as a Maryland corporation. Effective May 1, 1986, the
Corporation converted from a Maryland corporation to a Massachusetts business
trust known as the T. Rowe Price International Trust (Trust). On May 1, 1990,
the Trust converted back to a Maryland corporation. The Corporation is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a diversified, open-end investment company, commonly
known as a "mutual fund." A mutual fund, such as the Fund, enables
shareholders to: (1) obtain professional management of investments, including
Price-Fleming's proprietary research; (2) diversify their portfolio to a
greater degree than would be generally possible if they were investing as
individuals and thereby reduce, but not eliminate risks; and (3) simplify the
recordkeeping and reduce transaction costs associated with investments.
Currently, the Corporation consists of eight series, each representing a
separate class of shares having different objectives and investment policies.
The eight series and the years in which each was established are as follows:
International Stock Fund, 1979; International Bond Fund, 1986; International
Discovery Fund, 1988; European Stock Fund, New Asia Fund, and Global
Government Bond Fund, 1990; Japan Fund, 1991; and Short-Term Global Income
Fund, 1992. The Corporation's Charter provides that the Board of Directors may
issue additional series of shares and/or additional classes of shares for each
series.
Shareholder Rights. All shares of the Corporation have equal rights with
regard to voting, redemptions, dividends, distributions, and liquidations.
Fractional shares have voting rights and participate in any distributions and
dividends. Shareholders have no preemptive or conversion rights; nor do they
have cumulative voting rights. When the Fund's shares are issued, they are
fully paid and nonassessable. All shares of the Corporation may be voted in
the election or removal of directors and on other matters submitted to the
vote of shareholders of the Corporation. On matters affecting an individual
series of the Corporation, a separate vote of the particular series is
required. The individual series of the Corporation do not routinely hold
annual meetings of shareholders. However, if shareholders representing at
least 10% of all votes of the Corporation entitled to be cast so desire, they
may call a special meeting of shareholders of the Corporation for the purpose
of voting on the question of the removal of any director(s). The total
authorized capital stock of the Corporation consists of 1,000,000,000 shares,
each having a par value of $.01. As of December 31, 1992, there were 207,360
shareholders in the Fund and a total of 2,289,341 shareholders in the other 43
T. Rowe Price Funds.
NAV,
PRICING, AND
EFFECTIVE
DATE
Net Asset Value Per Share (NAV). The NAV per share, or share price, for the
Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the New
York Stock Exchange is open. The Fund's share price is calculated by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. Among other things, the Fund's
liabilities include accrued expenses and dividends payable, and its total
assets include portfolio securities valued at market as well as income accrued
but not yet received.
IF YOUR ORDER IS RECEIVED
IN GOOD ORDER BEFORE
4:00 PM ET, YOU WILL
RECEIVE THAT DAY'S NAV.
Purchased shares are priced at that day's NAV if your request is
received before 4:00 pm ET in good order. (See Completing the New Account Form
and Opening a New Account.) If received later than 4:00 pm ET, shares will be
priced at the next business day's NAV.
Redemptions are priced at that day's NAV if your request is received
before 4:00 pm ET in good order at the transfer agent's offices at T. Rowe
Price Account Services, P.O. Box 89000, Baltimore, MD 21289-0220. If received
after 4:00 pm ET, shares will be priced at the next business day's NAV.
Also, we cannot accept requests which specify a particular date for
purchase or redemption or which specify any special conditions. If your
redemption request cannot be accepted, you will be notified and given further
instructions.
Exchanges are normally priced in the same manner as purchases and
redemptions. However, if you are exchanging into a bond or money fund and the
release of your exchange proceeds is delayed for the allowable five business
days (see Receiving Your Proceeds), you will not begin to earn dividends until
the sixth business day after the exchange.
The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the New York Stock Exchange closes at
a time other than 4:00 pm ET or an emergency exists.
RECEIVING
YOUR
PROCEEDS
Redemption proceeds are mailed to the address or sent by wire or ACH
transfer to the bank account designated on your New Account Form. They are
generally sent the next business day after your redemption request is received
in good order. Proceeds sent by bank wire will be credited to your bank
account the next business day and proceeds sent by ACH transfer will be
credited the second day after the sale. In addition, under unusual conditions,
or when deemed to be in the best interests of the Fund, redemption proceeds
may not be sent for up to five business days after your request is received to
allow for the orderly liquidation of securities. Requests by mail for wire
redemptions (unless previously authorized) must have a signature
guarantee.
DIVIDENDS AND
DISTRIBUTIONS
The Fund distributes all net investment income and capital gains to
shareholders. Dividends from net investment income and distributions from
capital gains, if any, are normally declared and paid in December. Dividends
and distributions declared by the Fund will be reinvested unless you choose an
alternative payment option on the New Account Form. Dividends not reinvested
are paid by check or transmitted to your bank account via ACH. If the U.S.
Postal Service cannot deliver your check, or if your check remains uncashed
for six months, the Fund reserves the right to reinvest your distribution
check in your account at the then current NAV and to reinvest all subsequent
distributions in shares of the Fund.
TAXES
FORM 1099-DIV
WILL BE MAILED
TO YOU IN JANUARY.
Dividends and Distributions. In January, the Fund will mail you Form 1099-DIV
indicating the federal tax status of your dividends and capital gain
distributions. Generally, dividends and distributions are taxable in the year
they are paid. However, any dividends and distributions paid in January but
declared during the prior three months are taxable in the year they are
declared. Dividends and distributions are taxable to you regardless of whether
they are taken in cash or reinvested. Dividends and short-term capital gain
distributions are taxable as ordinary income; long-term capital gain
distributions are taxable as long-term capital gains. The capital gain holding
period is determined by the length of time the Fund has held the securities,
not the length of time you have owned Fund shares.
Foreign Transactions. Distributions resulting from the sale of foreign
currencies and debt securities, to the extent of foreign exchange gains, are
taxed as ordinary income or loss. If the Fund pays nonrefundable taxes to
foreign governments during the year, the taxes will reduce the Fund's
dividends but will still be included in your taxable income. However, you may
be able to claim an offsetting credit or deduction on your tax return for your
portion of foreign taxes paid by the Fund.
Shares Sold. A redemption or exchange of Fund shares is treated as a sale for
tax purposes which will result in a short or long-term capital gain or loss,
depending on how long you have owned the shares. In January, the Fund will
mail you Form 1099-B indicating the trade date and proceeds from all sales and
exchanges.
Undistributed Income and Gains. At the time of purchase, the share price of
the Fund may reflect undistributed income, capital gains or unrealized
appreciation of securities. Any income or capital gains from these amounts
which are later distributed to you are fully taxable.
Corporations. The Fund's dividends will not be eligible for the 70% deduction
for dividends received by corporations if, as expected, none of the Fund's
income consists of dividends paid by U.S. corporations.
Passive Foreign Investment Companies. The Fund may purchase the securities of
certain foreign investment funds or trusts called passive foreign investment
companies. Although the situation could change at any time, such funds are the
only or primary means by which the Fund may invest in Taiwan and India. In
addition to bearing their proportionate share of the fund's expenses
(management fees and operating expenses) shareholders will also indirectly
bear similar expenses of such funds. Capital gains on the sale of such
holdings will be deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition, the Fund may be subject to corporate income
tax and an interest charge on certain dividends and capital gains earned from
these investments, regardless of whether such income and gains are distributed
to shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such gains
will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
Tax-Qualified Retirement Plans. Tax-qualified retirement plans generally will
not be subject to federal tax liability on either distributions from the Fund
or redemption of shares of the Fund. Rather, participants in such plans will
be taxed when they begin taking distributions from the plans.
Tax Consequences of Hedging. Under applicable tax law, the Fund may be
required to limit its gains from hedging in foreign currency forwards, futures
and options. Although it is anticipated the Fund will comply with such limits,
the extent to which these limits apply is subject to tax regulations which
have not yet been issued. Hedging may also result in the application of the
mark-to-market straddle provisions of the Internal Revenue Code. These
provisions could result in an increase (or decrease) in the amount of taxable
dividends paid by the Fund as well as affect whether dividends paid by the
Fund are classified as capital gains or ordinary income.
MANAGEMENT
OF THE FUND
Investment Manager. Price-Fleming is responsible for selection and management
of the Fund's portfolio investments. Price-Fleming's U.S. office is located at
100 East Pratt Street, Baltimore, Maryland 21202.
PRICE-FLEMING HAS OFFICES
IN BALTIMORE, LONDON,
TOKYO AND HONG KONG.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture
between T. Rowe Price and Robert Fleming Holdings Limited (Flemings). Flemings
is a diversified investment organization which participates in a global
network of regional investment offices in New York, London, Zurich, Geneva,
Tokyo, Hong Kong, Manila, Kuala Lumpur, South Korea, and Taiwan.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 1992, T.
Rowe Price and its affiliates managed more than $41.4 billion of assets and
Flemings managed the U.S. equivalent of approximately $45 billion.
Board of Directors. The management of the Fund's business and affairs is the
responsibility of the Fund's Board of Directors.
T. Rowe Price, Flemings, and Jardine Fleming are owners of Price-Fleming. The
common stock of Price-Fleming is 50% owned by a wholly-owned subsidiary of T.
Rowe Price, 25% by a subsidiary of Flemings and 25% by Jardine Fleming Group
Limited (Jardine Fleming). (Half of Jardine Fleming is owned by Flemings and
half by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to
elect a majority of the board of directors of Price-Fleming, and Flemings has
the right to elect the remaining directors, one of whom will be nominated by
Jardine Fleming.
Research and Administration. Certain administrative support is provided by T.
Rowe Price which receives from Price-Fleming a fee of .15% of the market value
of all assets in equity accounts, .15% of the market value of all assets in
active fixed income accounts and .035% of the market value of all assets in
passive fixed income accounts under Price-Fleming's management. Additional
investment research and administrative support for equity investments is
provided to Price-Fleming by Fleming Investment Management Limited (FIM) and
Jardine Fleming Investment Holdings Limited (JFIH) for which each receives
from Price-Fleming a fee of .075% of the market value of all assets in equity
accounts under Price-Fleming's management. FIM and JFIH are wholly-owned
subsidiaries of Flemings and Jardine Fleming, respectively.
Fleming International Fixed Interest Management Limited (FIFIM) provides
Price-Fleming additional investment research and administrative support on
fixed income investments and receives from Price-Fleming a fee of .075% of the
market value of all assets in active fixed income accounts and .0175% of such
market value in passive fixed income accounts under Price-Fleming's
management. FIFIM is owned by Flemings. Certain officers of Price-Fleming are
directors of FIFIM. JFIH receives a fee of .075% of the market value of all
assets in active fixed income accounts and .0175% of such market value in
passive fixed income accounts under Price-Fleming's management.
Portfolio Transactions. Decisions with respect to the purchase and sale of the
Fund's portfolio securities are made by Price-Fleming. The Fund's Board of
Directors has authorized Price-Fleming to utilize affiliates of Flemings and
Jardine Fleming in the capacity of broker in connection with the execution of
the Fund's portfolio transactions if Price-Fleming believes that doing so
would result in an economic advantage (in the form of lower execution costs or
otherwise) being obtained by the Fund.
Investment Services. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the distributor for this Fund as well as all
other T. Rowe Price Funds.
Transfer and Dividend Disbursing Agent, Shareholder Servicing and
Administrative. TRP Services, a wholly-owned subsidiary of T. Rowe Price,
serves the Fund as transfer and dividend disbursing agent. T. Rowe Price
Retirement Plan Services, Inc., a wholly-owned subsidiary of T. Rowe Price,
performs subaccounting and recordkeeping services for shareholder accounts in
certain retirement plans investing in the Price Funds. T. Rowe Price
calculates the daily share price and maintains the portfolio and general
accounting records of the Fund. The address for TRP Services and T. Rowe Price
Retirement Plan Services, Inc. is 100 East Pratt Street, Baltimore, Maryland
21202.
EXPENSES AND
MANAGEMENT
FEE
The Fund bears all expenses of its operations other than those incurred by
Price-Fleming under its Investment Management Agreement with Price-Fleming.
Fund expenses include: the management fee; shareholder servicing fees and
expenses; custodian and accounting fees and expenses; legal and auditing fees;
expenses of preparing and printing prospectuses and shareholder reports;
registration fees and expenses; proxy and annual meeting expenses, if any; and
directors' fees and expenses.
Management Fee. The Fund pays Price-Fleming an investment management fee
consisting of an Individual Fund Fee and a Group Fee. See Summary of Fund Fees
and Expenses for the Individual Fund Fee. The Group Fee varies and is based on
the combined net assets of all mutual funds sponsored and managed by
Price-Fleming and T. Rowe Price, excluding T. Rowe Price Spectrum Fund, Inc.,
and any institutional or private label mutual funds, and distributed by T.
Rowe Price Investment Services, Inc.
The 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 Price Funds.
The table below shows the annual Group Fee rate at various asset levels of the
combined Price Funds:
0.480% First $1 billion 0.350% Next $2 billion
0.450% Next $1 billion 0.340% Next $5 billion
0.420% Next $1 billion 0.330% Next $10 billion
0.390% Next $1 billion 0.320% Next $10 billion
0.370% Next $1 billion 0.310% Thereafter
0.360% Next $2 billion
Based on combined Price Funds' assets of approximately $26.2 billion at
December 31, 1992, the Group Fee was 0.35%.
SHAREHOLDER
SERVICES
The following is a brief summary of services available to shareholders in the
T. Rowe Price Funds, some of which may be restricted or unavailable to
retirement plan accounts. You must authorize most of these services on an
Account Form. Services may be modified or withdrawn at any time without
notice. Please verify all transactions on your confirmation statements
promptly after receiving them. Any discrepancies must be reported to
Shareholder Services immediately.
Automatic Asset Builder. You can have us move $50 or more on the same day each
month from your bank account or invest $50 or more from your paycheck into any
T. Rowe Price Fund.
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
Discount Brokerage Service. You can trade stocks, bonds, options, CDs,
Treasury Bills, and precious metals at substantial savings through our
Discount Brokerage Service. Call Investor Services for more information.
Exchange Service. You can move money from one account to an existing
identically registered account or open a new identically registered account.
Remember that, for tax purposes, an exchange is treated as a redemption and a
new purchase. Exchanges into a state tax-free fund are limited to investors
residing in states where those funds are qualified for sale. Some of the T.
Rowe Price Funds may impose a redemption fee of 1-2%, payable to such Funds,
on shares held for less than one year.
Retirement Plans. For details on IRAs, please call Investor Services. For
details on all other retirement plans, please call our Trust Company at
1-800-492-7670.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Telephone Services. The following services are explained fully in the Services
Guide, which is mailed to new T. Rowe Price investors. If you don't have a
copy, please call Shareholder Services. (All telephone calls to Shareholder
Services and Investor Services are recorded in order to protect you, the Fund,
and its agents.)
24-Hour Service. Tele*Access(registered trademark) provides
information on yields, prices, latest dividends, account balances, and
last transaction as well as the ability to initiate purchase, redemption
and exchange orders (if you have established Telephone Services). Just
call 1-800-638-2587 and press the appropriate codes into your touch-tone
phone. PC*Access(registered trademark) provides the same information as
Tele*Access, but on a personal computer.
Electronic Transfers. We offer three free methods for purchasing or
redeeming Fund shares in amounts of $100 to $100,000 through ACH
transfers between your bank checking and Fund accounts:
- By calling Shareholder Services during business hours
(Tele-Connect(registered trademark));
- By touch-tone phone any day, any time (Tele*Access);
- By personal computer any day, any time (PC*Access).
If your bank checking and fund account are not identically registered,
you will need a signature guarantee to establish this service.
Wire Transfers. Wire transfers can be processed through bank wires (a
$5 charge applies to redemption amounts under $5,000, and your bank may
charge you for receiving wires). While this is usually the quickest
transfer method, the Fund reserves the right to temporarily suspend
wires under unusual circumstances.
CONDITIONS
OF YOUR
PURCHASE
Account Balance. If your account drops below $1,000 for three months or more,
the Fund has the right to close your account, after giving 60 days' notice,
unless you make additional investments to bring your account value to $1,000
or more.
Broker-Dealers. Purchases or redemptions through broker-dealers, banks, and
other institutions may be subject to service fees imposed by those entities.
No such fees are charged by T. Rowe Price Investment Services or the Fund if
shares are purchased or redeemed directly from the Fund.
Excessive Trading and Exchange Limitations. To protect Fund shareholders
against disruptions in portfolio management which might occur as a result of
too frequent buy and sell activity and to minimize Fund expenses associated
with such transaction activity, the Fund prohibits excessive trading in any
account (or group of accounts managed by the same person). Within any 120
consecutive-day period, investors may not exchange between Price Funds more
than twice or buy and sell the Price Funds more than once, if the transactions
involve substantial assets or a substantial portion of the assets in the
account or accounts. This policy is applied on a multi-fund basis. Any
transactions above and beyond these guidelines will be considered to be
excessive trading, and the investor may be prohibited from making additional
purchases or exercising the exchange privilege.
This policy does not apply to exchanges solely between, or purchases and sales
solely of, the Price Money Funds, nor does it apply to simple redemptions from
any Fund.
Nonpayment. If your check, wire or ACH transfer does not clear, or if
payment is not received for any telephone purchase, the transaction will be
cancelled and you will be responsible for any loss the Fund or Investment
Services incurs. If you are already a shareholder, the Fund can redeem shares
from any identically registered account in this Fund or any other T. Rowe
Price Fund as reimbursement for any loss incurred. You may be prohibited or
restricted from making future purchases in any of the T. Rowe Price Funds.
U.S. Dollars. All purchases must be paid for in U.S. dollars, and checks must
be drawn on U.S. banks.
Redemptions in Excess of $250,000. Redemption proceeds are normally paid in
cash. However, if you redeem more than $250,000, or 1% of the Fund's net
assets, in any 90-day period, the Fund may in its discretion: (1) pay the
difference between the redemption amount and the lesser of these two figures
with securities of the Fund or (2) delay the transmission of your proceeds for
up to five business days after your request is received.
Signature Guarantees. A signature guarantee is designed to protect you and the
Fund by verifying your signature. You will need one to:
(1) Establish certain services after the account is opened.
(2) Redeem over $50,000 by written request (unless you have authorized
telephone services).
(3) Redeem or exchange shares when proceeds are: (i) being mailed to
an address other than the address of record, (ii) made payable to
other than the registered owner(s), or (iii) being sent to a bank
account other than the bank account listed on your fund account.
(4) Transfer shares to another owner.
(5) Send us written instructions asking us to wire redemption proceeds
(unless previously authorized).
(6) Establish Electronic Transfers when your bank checking and fund
account are not identically registered.
These requirements may be waived or modified in certain instances.
Acceptable guarantors are all eligible guarantor institutions as
defined by the Securities Exchange Act of 1934 such as: commercial banks which
are FDIC members, trust companies, firms which are members of a domestic stock
exchange, and foreign branches of any of the above. We cannot accept
guarantees from institutions or individuals who do not provide reimbursement
in the case of fraud, such as notaries public.
Telephone Exchange and Redemption. Telephone exchange and redemption are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. The Fund uses
reasonable procedures (including shareholder identity verification) to confirm
that instructions given by telephone are genuine. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the Fund may
be liable for any losses that may result from acting on the instructions
given. All conversations are recorded, and a confirmation is sent within five
business days after the telephone transaction.
Ten-Day Hold. The mailing of proceeds for redemption requests involving any
shares purchased by personal, corporate or government check, or ACH transfer
is generally subject to a 10-day delay to allow the check or transfer to
clear. The 10-day clearing period does not affect the trade date on which your
purchase or redemption order is priced, or any dividends and capital gain
distributions to which you may be entitled through the date of redemption. If
your redemption request was sent by mail or mailgram, proceeds will be mailed
no later than the seventh calendar day following receipt unless the check or
ACH transfer has not cleared. The 10-day hold does not apply to purchases made
by wire, Automatic Asset Builder-Paycheck, or cashier's, treasurer's, or
certified checks.
The Fund and its agents reserve the right to: (1) reject any purchase or
exchange, cancel any purchase due to nonpayment, or reject any exchange or
redemption where the Fund has not received payment; (2) waive or lower the
investment minimums; (3) accept initial purchases by telephone or mailgram;
(4) waive the limit on subsequent purchases by telephone; (5) reject any
purchase or exchange prior to receipt of the confirmation statement; (6)
redeem your account (see Tax Identification Number); (7) modify the conditions
of purchase at any time; and (8) reject any check not made directly payable to
the Fund or T. Rowe Price (call Shareholder Services for more information).
COMPLETING
THE NEW ACCOUNT FORM
Tax Identification Number. We must have your correct social security or
corporate tax identification number and a signed New Account Form or W-9 Form.
Otherwise, federal law requires the Fund to withhold a percentage (currently
31%) of your dividends, capital gain distributions, and redemptions, and may
subject you to a fine. You also will be prohibited from opening another
account by exchange. If this information is not received within 60 days after
your account is established, your account may be redeemed, priced at the NAV
on the date of redemption.
YOU MUST PROVIDE YOUR
TAX ID NUMBER AND SIGN
THE NEW ACCOUNT FORM.
Unless you otherwise request, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to those shareholders who have requested that their accounts be
combined with someone else's for financial reporting.
Account Registration. If you own other T. Rowe Price Funds, make certain the
registration (name and account type) is identical to your other funds for easy
exchange. Remember to sign the form exactly as the name appears in the
registration section.
Services. By signing up for services on the New Account Form, rather than
after the account is opened, you will avoid having to complete a separate form
and obtain a signature guarantee (see Conditions of Your Purchase).
OPENING A NEW
ACCOUNT
Minimum initial investment: $2,500 ($1,000 for retirement plans and UGMA/UTMA
accounts; $50 per month for Automatic Asset Builder Accounts - see Shareholder
Services)
CHECKS PAYABLE TO
T. ROWE PRICE FUNDS.
By Mail Send your New Account Form and check to:
Regular Mail Mailgram, Express, Registered,
or Certified Mail
T. Rowe Price Account T. Rowe Price Account
Services Services
P.O. Box 17300 10090 Red Run Boulevard
Baltimore, MD 21298-9353 Owings Mills, MD 21117
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
By Wire Call Investor Services for an account number and use Wire Address
below. Then, complete the New Account Form and mail it to one of
the addresses above. (Not applicable to retirement plans.)
Wire Address Morgan Guaranty Trust Company
of New York
(to give to your bank): ABA #021000238
T. Rowe Price (fund name)/
AC-00153938
Account name(s) and account
number
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Exchange Call Shareholder Services. The new account will have the same
registration as the account from which you are exchanging.
Services for the new account may be carried over by telephone
request if preauthorized on the existing account. See Excessive
Trading and Exchange Limitations under Conditions of Your
Purchase.
In Person Drop off your New Account Form and obtain a receipt at a T. Rowe
Price Investor Center:
101 East Lombard Street T. Rowe Price Financial Center
First Floor First Floor
Baltimore MD 10090 Red Run Boulevard
Owings Mills, MD
Farragut Square ARCO Tower
First Floor 31st Floor
900 17th Street, NW 515 South Flower Street
Washington, DC Los Angeles, CA
PURCHASING
ADDITIONAL
SHARES
Minimum: $100 ($50 for retirement plans)
By Wire Call Shareholder Services or use the Wire Address in Opening a
New Account.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Mail Indicate your account number and the Fund name on your check.
Mail it to us at the address below with the stub from a statement
confirming a prior transaction or a note stating that you want to
purchase shares in that Fund and giving us the account number.
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD 21289-1500
By ACH Use Tele*Access, PC*Access or call Shareholder Services (if you
have established Transfer Telephone Services) for ACH transfers.
By Automatic Fill out the Automatic Asset Builder section on the New Account
or Shareholder Services Asset Builder Form.
Minimum: $5,000
By Phone Call Shareholder Services.
EXCHANGING
AND REDEEMING
SHARES
By Phone Call Shareholder Services. If you find our phones busy during
unusually volatile markets, please consider placing your order by
express mail, mailgram, Tele*Access or PC*Access if you have
authorized telephone services. For exchange policy, see Excessive
Trading and Exchange Limitations under Conditions of Your
Purchase.
Redemptions proceeds can be mailed, sent by Electronic Transfer,
or wired to your bank. The Fund charges a $5.00 fee for wire
redemptions under $5,000, subject to change without notice. Your
bank may also charge you for receiving wires.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Mail Indicate account name(s) and numbers, fund name(s), and exchange
or redemption amount. For exchanges, indicate the accounts you
are exchanging from and to along with the amount. We require the
signature of all owners exactly as registered, and possibly a
signature guarantee (see Signature Guarantees under Conditions of
Your Purchase).
T. ROWE PRICE
TRUST COMPANY
1-800-492-7670
1-410-625-6585
Note: Distributions from retirement accounts, including IRAs,
must be in writing. Please call Shareholder Services to obtain an
IRA Distribution Request Form. For employer-sponsored retirement
accounts, call T. Rowe Price Trust Company or your plan
administrator for instructions. Shareholders holding previously
issued certificates must conduct transactions by mail. If you
lose a stock certificate, you may incur an expense to replace it.
Call Shareholder Services for further information.
Mailing addresses:
Regular Mail Mailgram, Express, Registered,
or Certified Mail
Non-Retirement
and IRA Accounts All Accounts
________________ ____________
T. Rowe Price Account T. Rowe Price Account
Services Services
P.O. Box 89000 10090 Red Run Boulevard
Baltimore, MD 21289-0220 Owings Mills, MD 21117
Employer-Sponsored
Retirement Accounts
___________________
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price International Funds, Inc. (the "Corporation")
International Stock Fund
(the "Fund")
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Fund's prospectus dated May 1, 1993, revised
to January 24, 1994, which may be obtained from T. Rowe Price Investment
Services, Inc., 100 East Pratt Street, Baltimore, Maryland 21202.
The date of this Statement of Additional Information is May 1, 1993,
revised to January 24, 1994.
PAGE 3
TABLE OF CONTENTS
Page Page
Call and Put Options . . . . . 6 Investment Objective and Policies . .2
Capital Stock. . . . . . . . .45 Investment Performance. . . . . . . 26
Custodian. . . . . . . . . . .38 Investment Program. . . . . . . . . .3
Dealer Options . . . . . . . .11 (page 2 in Prospectus)
Distributor for Fund . . . . .38 Investment Restrictions . . . . . . 23
Dividends. . . . . . . . . . .44 Legal Counsel . . . . . . . . . . . 47
Federal and State Registration Lending of Portfolio Securities . . 17
of Shares . . . . . . . . . .47 Management of Fund. . . . . . . . . 33
Foreign Currency Transactions.18 Net Asset Value Per Share . . . . . 43
Foreign Futures and Options. .17 Portfolio Transactions. . . . . . . 39
Futures Contracts. . . . . . .12 Pricing of Securities . . . . . . . 42
Hybrid Commodity and Security Principal Holders of Securities . . 35
Instruments . . . . . . . . .21 Repurchase Agreements . . . . . . . 22
Illiquid Securities. . . . . .22 Risk Factors of Foreign Investing . .4
Independent Accountants. . . .47 Tax Status. . . . . . . . . . . . . 44
Investment Management Services35 (pages 10 and 11 in Prospectus)
(pages 11 and 12 in Prospectus) Taxation of Foreign Shareholders. . 45
Investment Objective . . . . . 2
(page 2 in Prospectus)
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages 2 and 6 through 8 of the
prospectus. Unless otherwise specified, the investment program and
restrictions of the Fund are not fundamental policies. The operating policies
of the Fund are subject to change by its Board of Directors without
shareholder approval. However, shareholders will be notified of a material
change in an operating policy. The fundamental policies of the Fund may not
be changed without the approval of at least a majority of the outstanding
shares of the Fund or, if it is less, 67% of the shares represented at a
meeting of shareholders at which the holders of 50% or more of the shares are
represented.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a total return on its assets
from long-term growth of capital and income principally through investments in
common stocks of established, non-U.S. companies. Investments may be made
solely for capital appreciation or solely for income or any combination of
both for the purpose of achieving a higher overall return.
The Fund's investment manager, Rowe Price-Fleming International, Inc.
("Price-Fleming"), one of America's largest managers of no-load international
mutual fund assets, regularly analyzes a broad range of international equity
and fixed income markets in order to assess the degree of risk and level of
return that can be expected from each market. Based upon its current
assessment, Price-Fleming believes long-term growth of capital may be achieved
by investing in marketable securities of non-United States companies which
have the potential for growth of capital. Of course, there can be no
assurance that Price-Fleming's forecasts of expected return will be reflected
in the actual returns achieved by the Fund.
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Fund should not be relied upon as a
PAGE 4
complete investment program, nor used to play short-term swings in the stock
or foreign exchange markets. The Fund is subject to risks unique to
international investing. See discussion under "Risk Factors of Foreign
Investing" beginning on page 4. Further, there is no assurance that the
favorable trends discussed below will continue, and the Fund cannot guarantee
it will achieve its objective.
INVESTMENT PROGRAM
It is the present intention of Price-Fleming to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Western Europe (for example, United Kingdom,
Germany, Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, and such other areas and countries as Price-Fleming may
determine from time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, Price-Fleming ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Price-Fleming ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which
the Fund invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future
years as earnings increase.
It is expected that the Fund's investments will ordinarily be traded on
exchanges located at least in the respective countries in which the various
issuers of such securities are principally based.
Today, more investment opportunities may exist abroad than in the U.S.
In 1970, two-thirds of the world's equity capitalization (the total market
value of the world's equity securities traded on stock exchanges) was
attributable to U.S. securities. Now practically the opposite is true. And
over the last ten years, the EAFE Index, a widely accepted index of European,
Australian and Far Eastern equity securities, has outperformed the Standard &
Poor's 500 Index. Although the EAFE Index may not be representative of the
Fund's portfolio, Price-Fleming believes it may be a useful indicator of the
opportunities in foreign equity investing.
Risk Factors of Foreign Investing
There are special risks in investing in the Fund. Certain of these
risks are inherent in any international mutual fund while others relate more
to the countries in which the Fund will invest ("Portfolio Companies"). Many
of the risks are more pronounced for investments in developing or emerging
countries. Although there is no universally accepted definition, a developing
country is generally considered to be a country which is in the initial stages
of its industrialization cycle with a per capita gross national product of
less than $5,000.
PAGE 5
General. Investors should understand that all investments have a risk
factor. There can be no guarantee against loss resulting from an investment
in the Fund, and there can be no assurance that the Fund's investment policies
will be successful, or that its investment objective will be attained. The
Fund is designed for individual and institutional investors seeking to
diversify beyond the United States in an actively researched and managed
portfolio, and is intended for long-term investors who can accept the risks
entailed in investment in foreign securities.
Political and Economic Factors. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. The internal politics of certain foreign countries are not
as stable as in the United States. For example, the Philippines' National
Assembly was dissolved in 1986 following a period of intense political unrest
and the removal of President Marcos. During the 1960's, the high level of
communist insurgency in Malaysia paralyzed economic activity, but by the
1970's these communist forces were suppressed and normal economic activity
resumed. In 1991, the existing government in Thailand was overthrown in a
military coup. In addition, significant external political risks currently
affect some foreign countries. Both Taiwan and China still claim sovereignty
of one another and there is a demilitarized border between North and South
Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
Currency Fluctuations. The Fund will invest in securities denominated
in the currencies specified elsewhere herein. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of the Fund's assets denominated
in that currency. Such changes will also affect the Fund's income.
Generally, when a given currency appreciates against the dollar (the dollar
weakens) the value of the Fund's securities denominated in that currency will
use. When a given currency depreciates against the dollar (the dollar
strengthens). The value of the Fund's securities denominated in that currency
would be expected to decline.
Investment and Repatriation of Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude
investment in certain of such countries and may increase the cost and expenses
of the Fund. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Fund invests. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. Although these
restrictions may in the future make it undesirable to invest in these
countries, Price-Fleming does not believe that any current repatriation
restrictions would affect its decision to invest in these countries.
PAGE 6
Market Characteristics. It is contemplated that most foreign
securities will be purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal offices of the
issuers of the various securities are located, if that is the best available
market. Foreign stock markets are generally not as developed or efficient as,
and may be more volatile than, those in the United States. While growing in
volume, they usually have substantially less volume than U.S. markets and the
Fund's portfolio securities may be less liquid and more volatile than
securities of comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable United States securities and
such levels may not be sustainable. Fixed commissions on foreign stock
exchanges are generally higher than negotiated commissions on United States
exchanges, although the Fund will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States
markets, and may include delays beyond periods customary in the United States.
Investment Funds. The Fund may invest in investment funds which have
been authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Fund's investment in these funds
is subject to the provisions of the 1940 Act discussed below. If the Fund
invests in such investment funds, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Investment Manager), but also will bear
indirectly similar expenses of the underlying investment funds. In addition,
the securities of these investment funds may trade at a premium over their net
asset value.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and
ratings that are published about companies in the United States. Foreign
companies are also generally not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to United States companies.
Taxes. The dividends and interest payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction for U.S. federal income tax purposes for his or her proportionate
share of such foreign taxes paid by the Fund. (See "Tax Status," page 44.)
Costs. Investors should understand that the expense ratio of the Fund
can be expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Fund are higher.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of the Fund,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Apart from the matters described herein, the Fund is not aware at this
time of the existence of any investment or exchange control regulations which
might substantially impair the operations of the Fund as described in the
prospectus and this Statement of Additional Information. It should be noted,
however, that this situation could change at any time.
PAGE 7
Eastern Europe. Changes occurring in Eastern Europe and Russia today
could have long-term potential consequences. As restrictions fall, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in
the countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend
away from centrally-planned economies and state owned industries. In many of
the countries of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have government
exchange controls, currencies with no recognizable market value relative to
the established currencies of western market economies, little or no
experience in trading in securities, no financial reporting standards, a lack
of a banking and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property. In addition,
these countries may have national policies which restrict investments in
companies deemed sensitive to the country's national interest. Further, the
governments in such countries may require governmental or quasi-governmental
authorities to act as custodian of the Fund's assets invested in such
countries and these authorities may not qualify as a foreign custodian under
the Investment Company Act of 1940 and exemptive relief from such Act may be
required. All of these considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern Europe and
Russia. The Fund will only invest in a company located in, or a government
of, Eastern Europe and Russia, if it believes the potential return justifies
the risk. To the extent any securities issued by companies in Eastern Europe
and Russia are considered illiquid, the Fund will be required to include such
securities within its 10% restriction on investing in illiquid securities.
In addition to the investments described in the Fund's prospectus, the
Fund may invest in the following:
Writing Covered Call Options
The Fund may write (sell) "covered" call options and purchase options
to close out options previously written by the Fund. In writing covered call
options, the Fund expects to generate additional premium income which should
serve to enhance the Fund's total return and reduce the effect of any price
decline of the security or currency involved in the option. Covered call
options will generally be written on securities or currencies which, in
Price-Fleming's opinion, are not expected to any major price increases or
moves in the near future but which, over the long term, are deemed to be
attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price), at expiration
of the option (European style) or at any time until a certain date (the
expiration date) (American style). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by
repurchasing an option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the case of a
call option, a writer is required to deposit in escrow the underlying security
or currency or other assets in accordance with the rules of a clearing
corporation. The Fund will write only covered call options. This means that
the Fund will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid
PAGE 8
high-grade debt obligations having a value equal to the fluctuating market
value of the optioned securities or currencies. In order to comply with the
requirements of the securities or currencies laws in several states, the Fund
will not write a covered call option if, as a result, the aggregate market
value of all portfolio securities or currencies covering call or put options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should the Fund obtain a waiver of their application, the Fund
reserves the right to increase this percentage. In calculating the 25% limit,
the Fund will offset, against the value of assets covering written calls and
puts, the value of purchased calls and puts on identical securities or
currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is
a conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security or currency during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security or currency. The Fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the
option period. Once the decision to write a call option has been made,
Price-Fleming, in determining whether a particular call option should be
written on a particular security or currency, will consider the reasonableness
of the anticipated premium and the likelihood that a liquid secondary market
will exist for those options. The premium received by the Fund for writing
covered call options will be recorded as a liability of the Fund. This
liability will be adjusted daily to the option's current market value, which
will be the latest sale price at the time at which the net asset value per
share of the Fund is computed (close of the New York Stock Exchange), or, in
the absence of such sale, the latest asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option
in a closing transaction, or delivery of the underlying security or currency
upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the Fund will be able to
PAGE 9
effect such closing transactions at a favorable price. If the Fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the Fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security or currency from its portfolio. In
such cases, additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security or currency, any loss resulting from the repurchase of
a call option is likely to be offset in whole or in part by appreciation of
the underlying security or currency owned by the Fund.
Writing Covered Put Options
Although the Fund has no current intention in the foreseeable future of
writing American or European style covered put options and purchasing put
options to close out options previously written by the Fund, the Fund reserves
the right to do so. A put option gives the purchaser of the option the right
to sell, and the writer (seller) has the obligation to buy, the underlying
security or currency at the exercise price during the option period (American
style) or at the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an exercise notice by
the broker-dealer through whom such option was sold, requiring him to make
payment of the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" options at all times while
the put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where Price-Fleming wishes to purchase the underlying security
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
PAGE 10
could be substantial and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. In order to comply with the requirements of several states, the
Fund will not write a covered put option if, as a result, the aggregate market
value of all portfolio securities or currencies covering put or call options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should the Fund obtain a waiver of their application, the Fund
reserves the right to increase this percentage. In calculating the 25% limit,
the Fund will offset, against the value of assets covering written puts and
calls, the value of purchased puts and calls on identical securities or
currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put options. As the
holder of a put option, the Fund has the right to sell the underlying security
or currency at the exercise price at any time during the option period. The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided below.
The Fund may purchase a put option on an underlying security or
currency (a "protective put") owned by the Fund as a defensive technique in
order to protect against an anticipated decline in the value of the security
or currency. Such hedge protection is provided only during the life of the
put option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where Price-Fleming deems it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Fund seeks to benefit from a decline
in the market price of the underlying security or currency. If the put option
is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, the Fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund
obtain a waiver of their application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The premium paid by
the Fund when purchasing a put option will be recorded as an asset of the
Fund. This asset will be adjusted daily to the option's current market value,
which will be the latest sale price at the time at which the net asset value
per share of the Fund is computed (close of New York Stock Exchange), or, in
the absence of such sale, the latest bid price. This asset will be terminated
PAGE 11
upon expiration of the option, the selling (writing) of an identical option in
a closing transaction, or the delivery of the underlying security or currency
upon the exercise of the option.
Purchasing Call Options
The Fund may purchase American or European style call options. As the
holder of a call option, the Fund has the right to purchase the underlying
security or currency at the exercise price at any time during the option
period (American style) or at the expiration of the option (European style).
The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase call
options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also
purchase call options in order to acquire the underlying securities or
currencies. Examples of such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the Fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the Fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option
to expire, incurring a loss only to the extent of the premium paid for the
option.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund
obtain a waiver of their application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it owns in order
to protect unrealized gains on call options previously written by it. A call
option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction.
Call options may also be purchased at times to avoid realizing losses.
Dealer Options
The Fund may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the option
to perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
PAGE 12
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event
of insolvency of the contra party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund.
For example, since the Fund must maintain a secured position with respect to
any call option on a security it writes, the Fund may not sell the assets
which it has segregated to secure the position while it is obligated under the
option. This requirement may impair the Fund's ability to sell portfolio
securities at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as
liquid if the dealer agrees that the Fund may repurchase the OTC option it has
written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Accordingly, the Fund will treat dealer options as subject to the
Fund's limitation on unmarketable securities. If the SEC changes its position
on the liquidity of dealer options, the Fund will change its treatment of such
instrument accordingly.
Futures Contracts
Transactions in Futures
The Fund may enter into financial futures contracts, including stock
index, interest rate and currency futures ("futures or futures contracts");
however, the Fund has no current intention of entering into interest rate
futures. The Fund, however, reserves the right to trade in financial futures
of any kind.
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for Price-Fleming to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Fund may,
however, purchase or sell futures contracts with respect to any stock index
whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national
or foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board
of Trade. Futures exchanges and trading in the United States are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
PAGE 13
("CFTC"). Futures are traded in London at the London International Financial
Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Fund's
objectives in these areas.
Regulatory Limitations
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, yield enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the
CFTC, and not for speculation.
The Fund may not enter into futures contracts or options thereon if
immediately thereafter the sum of the amounts of initial margin deposits on
the Fund's existing futures and premiums paid for options on futures would
exceed 5% of the market value of the Fund's total assets; provided, however,
that in the case of an option that is in-the-money at the time of purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
In instances involving the purchase of futures contracts or call
options thereon or the writing of put options thereon by the Fund, an amount
of cash, U.S. government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be deposited in a segregated
account with the Fund's custodian to cover the position, or alternative cover
will be employed thereby insuring that the use of such futures contracts and
options is unleveraged.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
Trading in Futures
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, U.S. government securities, suitable money market instruments, or
liquid, high-grade debt securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
PAGE 14
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date.
Closing out an open futures contract purchase or sale is effected by entering
into an offsetting futures contract purchase or sale, respectively, for the
same aggregate amount of the identical securities and the same delivery date.
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, one contract in the Financial Times Stock Exchange 100
Index future is a contract to buy 25 pounds sterling multiplied by the level
of the UK Financial Times 100 Share Index on a given future date. Settlement
of a stock index futures contract may or may not be in the underlying
security. If not in the underlying security, then settlement will be made in
cash, equivalent over time to the difference between the contract price and
the actual price of the underlying asset at the time the stock index futures
contract expires.
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
the market and interest rates, which in turn are affected by fiscal and
monetary policies and national and international policies and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
PAGE 15
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, the Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
futures contract, the Fund earmarks to the futures contract money market
instruments equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its futures
positions at any time prior to their expiration. The Fund would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. The Fund may close its positions by
taking opposite positions which would operate to terminate the Fund's position
in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
Fund, and the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by the Fund of
futures contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the futures contracts
and movements in the prices of the underlying instruments which are the
subject of the hedge. Price-Fleming will, however, attempt to reduce this
risk by entering into futures contracts whose movements, in its judgment, will
have a significant correlation with movements in the prices of the Fund's
underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to Price-Fleming's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices, or
underlying instruments on which the futures are written might advance and the
value of the underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments.
However, while this might occur to a certain degree, Price-Fleming believes
that over time the value of the Fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
PAGE 16
movements of the underlying instruments sought to be hedged. It is also
possible that if the Fund were to hedge against the possibility of a decline
in the market (adversely affecting the underlying instruments held in its
portfolio) and prices instead increased, the Fund would lose part or all of
the benefit of increased value of those underlying instruments that it has
hedged, because it would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash, it might have
to sell underlying instruments to meet daily variation margin requirements.
Such sales of underlying instruments might be, but would not necessarily be,
at increased prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be disadvantageous
to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements
of futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of the imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by Price-Fleming might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Alternatively, settlement may be made totally in
cash. Purchasers of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on
stock index futures, the Fund may write or purchase call and put options on
stock indices. Such options would be used in a manner similar to the use of
options on futures contracts. From time to time, a single order to purchase
or sell futures contracts (or options thereon) may be made on behalf of the
Fund and other T. Rowe Price Funds. Such aggregated orders would be allocated
among the Fund and the other T. Rowe Price Funds in a fair and non-
discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The Fund may seek to close out an option position by writing or buying
an offsetting option covering the same index, underlying instruments, or
PAGE 17
contract and having the same exercise price and expiration date. The ability
to establish and close out positions on such options will be subject to the
maintenance of a liquid secondary market. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options, or underlying
instruments; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on the exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms. There is no assurance that
higher than anticipated trading activity or other unforeseen events might not,
at times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in financial
futures or option transactions other than those described above, it reserves
the right to do so. Such futures or options trading might involve risks which
differ from those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, customers who trade foreign
futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from customers for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time your order is placed and the time it is liquidated, offset or
exercised.
Lending of Portfolio Securities
For the purpose of realizing additional income, the Fund may make
secured loans of portfolio securities amounting to not more than 30% of its
total assets. This policy is a fundamental policy. Securities loans are made
to broker-dealers, institutional investors, or other persons pursuant to
PAGE 18
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market
on a daily basis. The collateral received will consist of cash, U.S.
government securities, letters of credit or such other collateral as may be
permitted under its investment program. While the securities are being lent,
the Fund will continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the investment of
the collateral or a fee from the borrower. The Fund has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Fund will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to persons deemed by Price-Fleming to be
of good standing and will not be made unless, in the judgment of Price-
Fleming, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission, the Fund
may make loans to, or borrow funds from, other mutual funds sponsored or
advised by Price-Fleming or T. Rowe Price Associates, Inc. (collectively,
"Price Funds"). The Fund has no current intention of engaging in these
practices at this time.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The Fund will generally enter into forward foreign currency exchange
contracts under two circumstances. First, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for a fixed
amount of dollars, of the amount of foreign currency involved in the
underlying security transactions, the Fund will be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date on which
payment is made or received.
Second, when Price-Fleming believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Fund's portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
PAGE 19
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short- term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under certain circumstances, the Fund may
commit a substantial portion or the entire value of its assets to the
consummation of these contracts. Price-Fleming will consider the effect a
substantial commitment of its assets to forward contracts would have on the
investment program of the Fund and the flexibility of the Fund to purchase
additional securities. Other than as set forth above, and immediately below,
the Fund will also not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. The Fund, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess
of the value of the Fund's portfolio securities or other assets to which the
forward contracts (including accrued interest to the maturity of the forwards
on such securities) provided the excess amount is "covered" by liquid,
high-grade debt securities, denominated in any currency, at least equal at all
times to the amount of such excess. For these purposes, "the securities as
other assets to which the forward contracts relate" may be securities or
assets denominated in a single currency, or where proxy forwards are used,
securities denominated in more than one currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall
diversification strategies. However, Price-Fleming believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds
the amount of foreign currency the Fund is obligated to deliver. However, as
noted, in order to avoid excessive transactions and transaction costs, the
Fund may use liquid, high-grade debt securities, denominated in any currency,
to cover the amount by which the value of a forward contract exceeds the value
of the securities to which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
PAGE 20
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by Price-Fleming. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
PAGE 21
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
or securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income.
In order to avoid realizing excessive gains on securities or currencies held
less than three months, the Fund may be required to defer the closing out of
option, futures or foreign forward exchange contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on Section 1256 option, futures and foreign forward exchange contracts,
which have been open for less than three months as of the end of the Fund's
fiscal year and which are recognized for tax purposes, will not be considered
gains on securities or currencies held less than three months for purposes of
the 30% test.
Hybrid Commodity and Security Instruments
Recently, instruments have been developed which combine the elements of
futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid
Instruments are indexed to the price of a commodity or particular currency.
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity at a future
point in time, preferred stock with dividend rates determined by reference to
the value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of
futures on page 12 and forward contracts on page 18 for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity
or currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instrument,
the creditworthiness of the contra party to the transaction would be a risk
factor which the Fund would have to consider. Hybrid Instruments also may not
be subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
Repurchase Agreements
The Fund may enter into repurchase agreements through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price
Associates, Inc. ("T. Rowe Price") approved list and have a credit rating with
respect to its short-term debt of at least A1 by Standard & Poor's
Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating
by T. Rowe Price. At that time, the bank or securities dealer agrees to
PAGE 22
repurchase the underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time, often less
than a week. The Fund will not enter into a repurchase agreement which does
not provide for payment within seven days if, as a result, more than 10% of
the value of its net assets would then be invested in such repurchase
agreements. The Fund will only enter into repurchase agreements where (i) the
underlying securities are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase directly, (ii) the
market value of the underlying security, including interest accrued, will be
at all times equal to or exceed the value of the repurchase agreement, and
(iii) payment for the underlying security is made only upon physical delivery
or evidence of book-entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of
a repurchase agreement, the Fund could experience both delays in liquidating
the underlying securities and losses, including: (a) possible decline in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of enforcing its
rights.
Illiquid Securities
The Fund may not invest in illiquid securities including repurchase
agreements which do not provide for payment within seven days, if as a result,
they would comprise more than 10% of the value of the Fund's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Board of Directors. If through the appreciation of illiquid
securities or the depreciation of liquid securities, the Fund should be in a
position where more than 10% of the value of its net assets are invested in
illiquid assets, including restricted securities, the Fund will take
appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. Price-Fleming, under the supervision
of the Fund's Board of Directors, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Fund's restriction of
investing no more than 10% of its assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question
of fact. In making this determination Price-Fleming will consider the trading
markets for the specific security taking into account the unregistered nature
of a Rule 144A security. In addition, Price-Fleming could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential
purchasers, (3) dealer undertakings to make a market, (4) and the nature of
the security and of market place trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of transfer).
The liquidity of Rule 144A securities would be monitored and, if as a result
of changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 10% of its assets in illiquid securities. Investing in Rule
PAGE 23
144A securities could have the effect of increasing the amount of a Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
INVESTMENT RESTRICTIONS
Fundamental policies of the Fund may not be changed without the
approval of the lesser of (1) 67% of a Fund's shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of a Fund's outstanding
shares. Other restrictions, in the form of operating policies, are subject to
change by the Fund's Board of Directors without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money, except 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 (see page 7 of the prospectus).
Interest paid on any such borrowings will reduce net investment
income. The Fund may enter into futures contracts as set forth in
(3) below;
(2) Commodities. Purchase or sell commodities or commodity contracts;
except that the Fund may (i) enter into futures contracts and
options on futures contracts, subject to (3) below; (ii) enter into
forward foreign currency exchange contracts (although the Fund does
not consider such contracts to be commodities); and (iii) invest in
instruments which have the characteristics of both futures
contracts and securities;
(3) Futures Contracts. Enter into a futures contract or an option
thereon, although the Fund may enter into financial and currency
futures contracts or options on financial and currency futures
contracts;
(4) Industry Concentration. 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 other than
obligations issued or guaranteed by the U.S. Government or any
foreign government, their agencies or instrumentalities, provided
that, as matter of operating policy, the Fund will not invest more
than 25% of its total assets in securities issued by any one
foreign government;
(5) Loans. 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
PAGE 24
may be made if, as a result, the aggregate of such loans would
exceed 30% of the value of the Fund's total assets;
(6) Margin. 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 (3) above;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for
indebtedness except as may be necessary in connection with
permissible borrowings 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;
(8) Percent Limit on Assets Invested in Any One Issuer. Purchase a
security if, as a result, with respect to 75% of the value of the
Fund's total assets, more than 5% of the value of its total assets
would be invested in the securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities);
(9) Percent Limit on Share Ownership of Any One Issuer. Purchase a
security if, as a result, with respect to 75% of the value of the
Fund's total assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) provided that, as an operating
policy, the Fund will not purchase a security if, as a result, more
than 10% of the outstanding voting securities of any issuer would
be held by the Fund;
(10) Real Estate. Purchase or sell real estate or real estate limited
partnerships (although it may purchase securities secured by real
estate or interests therein, or issued by companies or investment
trusts which invest in real estate or interests therein);
(11) Senior Securities. Issue senior securities;
(12) Short Sales. Effect short sales of securities; and
(13) Underwriting. Underwrite securities issued by other persons,
except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase and sale of its portfolio securities
in the ordinary course of pursuing its investment program.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result, more
than 10% of its net assets would be invested in illiquid
securities, including repurchase agreements which do not provide
for payment within seven days, provided that the Fund will not
invest more than 5% of its total assets in restricted securities
(other than securities eligible for resale under Rule 144A under
the Securities Act of 1933);
PAGE 25
(3) Investment Companies. Purchase securities of open-end or
closed-end investment companies except in compliance with the
Investment Company Act of 1940 and applicable state law. Duplicate
fees may result from such purchases;
(4) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to oil, gas, other
mineral exploration or development programs;
(5) Options, Etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except that the Fund may invest in or commit
its assets to purchasing and selling call and put options to the
extent permitted by the prospectus and Statement of Additional
Information;
(6) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and directors of
the Fund, and of its investment manager, who each owns beneficially
more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities;
(7) Unseasoned Issuers. Purchase a security (other than obligations
issued or guaranteed by the U.S. Government or any foreign
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); and
(8) Warrants. Invest in warrants, except that the Fund may invest,
hold, or sell warrants or other rights ("warrants") where the
grantor of the warrants is the issuer of the underlying securities,
provided that the Fund will not purchase a warrant if, as a result
thereof, more than 2% of the value of the total assets of the Fund
would be invested in warrants which are not listed on the New York
Stock Exchange, the American Stock Exchange, or a recognized
foreign exchange, or more than 5% of the value of the total assets
of the Fund would be invested in warrants whether or not so listed.
For purposes of these percentage limitations, the warrants will be
valued at the lower of cost or market.
Under the 1940 Act, the Fund may not invest in any securities of any
issuer which, in its most recent fiscal year, derived more than 15% of its
gross revenues from "securities related activities", as defined by rules of
the 1940 Act, unless certain conditions are met. As a result of these
restrictions, the Fund may not invest in the securities of certain banks,
broker-dealers and other companies in foreign countries. If the Fund finds
that this restriction prevents it from pursuing its investment objective, it
may apply to the Securities and Exchange Commission for an order which would
permit it to acquire such securities, but no assurance can be given that any
such order will be granted. It is also possible the law in this area will
change, in which case the Fund could have greater flexibility in the purchase
of the securities of foreign banks, broker-dealers, and other companies.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as Passive Foreign
Investment Companies. The Fund is subject to certain percentage limitations
PAGE 26
under the 1940 Act and certain states relating to the purchase of securities
of investment companies, and may be subject to the limitation that no more
than 10% of the value of the Fund's total assets may be invested in such
securities.
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the percentage change
between the beginning value of a static account in the Fund and the ending
value of that account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual
compound rate of return is derived from the cumulative performance of the Fund
over the time period specified. The annual compound rate of return for the
Fund over any other period of time will vary from the average.
Cumulative Performance Percentage Change
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/92+ 12/31/92 12/31/92 12/31/92++
_________ ________ ___________ __________
International Stock -3.47% 48.68% 355.50% 455.85%
Fund
S&P 500 7.61 109.02 347.36 591.81
Dow Jones Industrial 7.37 103.85 367.48 611.94
Average
Lipper International-5.05 34.74 274.95 326.84+++
Funds Average
EAFE Index -11.85 8.51 385.31 420.82+++
CPI 2.90 22.96 45.39 75.19
Financial Times -5.13 37.70 N/A N/A
Actuaries World
Index++++
Total Return
Capital Dividend Total
Change Income Return
_______ ________ ______
12/31/91-12/31/92 -5.14% 1.67% -3.47%
12/31/87-12/31/92 37.08 11.60 48.68
12/31/82-12/31/92 286.73 68.77 355.50%
05/09/80-12/31/92 341.62 114.23 455.85
PAGE 27
Average Annual Compound Rates of Return
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/92+ 12/31/92 12/31/92 12/31/92++
_________ ________ ____________ __________
International Stock -3.47% 8.26% 16.37% 14.53%
Fund
S&P 500 7.61 15.89 16.16 16.52
Dow Jones Industrial 7.37 15.31 16.67 16.79
Average
Lipper International -5.05 5.90 13.83 12.05+++
Funds Average
EAFE Index -11.85 1.65 17.11 14.10+++
CPI 2.90 4.22 3.81 4.53
Financial Times -5.13 6.61 N/A N/A
Actuaries World
Index++++
+ If you invested $1,000 at the beginning of 1992, the total return on
December 31, 1992 would be $965.30 ($1,000 x 0.9653).
++ Assumes purchase of one share of International Stock Fund at the
public offering price of $5.00 on May 9, 1980. Over this time, stock
prices in general have risen.
+++ 06/30/80-12/31/91
++++ The inception date of this index is 12/31/85.
Price-Fleming believes that foreign economies have performed well, and
emerging economies are significantly better than the world average, as shown
in the chart below.
GDP Growth Rates
1979 1980 1981 1982 1983 1984 1985 1986
____ ____ ____ ____ ____ ____ ____ ____
World 3.70 2.20 1.70 0.30 2.40 4.90 3.80 2.80
Industrialized 3.30 1.30 1.50 -0.20 2.70 4.90 3.60 2.80
Developing (Asia) 3.80 5.90 6.10 5.70 8.00 7.50 7.30 5.80
DEV/WLD 103% 268% 359% !!! 333% 153% 192% 207%
DEV/IND 115% 454% 407% !!! 296% 153% 203% 207%
10 Year
1987 1988 1989 Sample Average
____ ____ ____ _________________
World 3.60 4.40 !!! 2.98
Industrialized 3.50 4.50 3.50 2.79
Developing (Asia) 6.90 8.60 !!! 6.56
DEV/WLD 194% 0% !!! 220%
DEV/IND 206% 0% !!! 235%
Source: International Monetary Fund 1990 Yearbook
!!! 1989 figures for developing Asia (and therefore the World) are not yet
available
From time to time, in reports and promotional literature: (1) the
Fund's total return performance or P/E ratio may be compared to any one or
combination of the following: (i) the Standard & Poor's 500 Stock Index and
Dow Jones Industrial Average so that you may compare the Fund's results with
those of a group of unmanaged securities widely regarded by investors as
PAGE 28
representative of the U.S. stock market in general; (ii) other groups of
mutual funds, including T. Rowe Price Funds, tracked by: (A) Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; (B)
Morningstar, Inc., another widely used independent research firm which ranks
mutual funds; or (C) other financial or business publications, such as
Business Week, Money Magazine, Forbes and Barron's, which provide similar
information; (iii) The Financial Times (a London based international financial
newspaper)-Actuaries World Indices, including Europe and sub indices
comprising this Index (a wide range of comprehensive measures of stock price
performance for the major stock markets as well as for regional areas, broad
economic sectors and industry groups); (iv) Morgan Stanley Capital
International Indices, including the EAFE Index, Pacific Basin Index and
Pacific Ex Japan Index which is a widely-recognized series of indices in
international market performance; (v) Baring International Investment
Management Limited (an international securities trading, research, and
investment management firm), as a source for market capitalization, GDP and
GNP; (vi) the International Finance Corporation (an affiliate of the World
Bank established to encourage economic development in less developed
countries), World Bank, OECD (Organization for Economic Co-Operation and
Development) and IMF (International Monetary Fund) as a source of economic
statistics; (vii) indices of stocks comparable to those in which the Fund
invests; and (viii) the performance of U.S. government and corporate bonds,
notes and bills. (The purpose of these comparisons would be to illustrate
historical trends in different market sectors so as to allow potential
investors to compare different investment strategies.); (2) the Consumer Price
Index (measure for inflation) may be used to assess the real rate of return
from an investment in the Fund; (3) other U.S. or foreign government
statistics such as GNP, and net import and export figures derived from
governmental publications, e.g. The Survey of Current Business, may be used to
illustrate investment attributes of the Fund or the general economic,
business, investment, or financial environment in which the Fund operates; (4)
the effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general, may be illustrated by graphs, charts, etc. where such
graphs or charts would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (5) the sectors or
industries in which the Fund invests may be compared to relevant indices or
surveys (e.g. S&P Industry Surveys) in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector. In connection with (4) above, information derived from
the following chart may be used:
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and 28%
tax bracket.
Year Taxable Tax Deferred
____ _______ ____________
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is to accumulate
personal savings for retirement. Due to the long-term nature of the
investment, even slight differences in performance will result in
PAGE 29
significantly different assets at retirement. Mutual funds, with their
diversity of choice, can be used for IRA investments. Generally, individuals
may need to adjust their underlying IRA investments as their time to
retirement and tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available. These currently
include: the Asset Mix Worksheet which is designed to show shareholders how to
reduce their investment risk by developing a diversified investment plan: the
College Planning Guide which discusses various aspects of financial planning
to meet college expenses and assists parents in projecting the costs of a
college education for their children; the Retirement Planning Kit (also
available in a PC version) which includes a detailed workbook to determine how
much money you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggest how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
presentation of historical returns of various investments using published
indices. An example of this is shown on the next page.
Historical Returns for Different Investments
Annualized Returns for Periods Ended 12/31/92
50 Years 25 Years 10 Years 5 Years
Small company stocks 16.3% 12.4% 11.6% 13.6%
Large company stocks 12.6 10.6 16.2 15.9
Foreign stocks N/A N/A 17.1 1.6
Long-term corporate bonds 5.4 8.8 13.1 12.5
Intermediate-Term U.S.
Gov't. bonds 5.6 9.0 11.0 10.3
Treasury bills 4.6 7.2 6.9 6.3
U.S. inflation 4.3 5.9 3.8 4.2
Source: Ibbotson Associates. Foreign stocks reflect performance of The
Morgan Stanley Capital International EAFE Index, which includes some 1,000
companies representing the stock markets of Europe, Australia, New Zealand,
and the Far East. This chart is for illustrative purposes only and should not
be considered as performance for any T. Rowe Price Fund. Past performance
does not guarantee future results.
Also included will be various portfolios demonstrating how these historical
indices would have performed in various combinations over a specified time
period in terms of return. An example of this is shown on the next page.
PAGE 30
Performance of Retirement Portfolios*
Asset Mix Annualized Returns Number of Value of
20 Years Years with $10,000
Ending 12/31/92 Negative Investment
Returns After
Period
___________________ _____________________ ________ ________
Best Worst
Portfolio Growth Income Safety Average Year Year
I. Low
Risk 15% 35% 50% 9.0% 19.0% -0.2% 1 $ 56,451
II. Moderate
Risk 55% 30% 15% 10.4% 25.7% -7.5% 2 $ 72,918
III. High
Risk 85% 15% 0% 11.2% 34.5% -16.2% 5 $ 83,382
Source: T. Rowe Price Associates; data supplied by Ibbotson Associates.
* Based on actual performance of stocks (Wilshire 5000), Lehman Brothers
Government/Corporate Bond Index, and Treasury bills from January 1973
through December 1992. Past performance does not guarantee future
results. Figures include changes in principal value and reinvested
dividends. This Exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price Fund.
From time to time, Insights, a T. Rowe Price publication of reports on
specific investment topics and strategies, may be included in the Fund's
fulfillment kit. Such reports may include information concerning:
calculating taxable gains and losses on mutual fund transactions, coping with
stock market volatility, benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds, growth stock
investing, conservative stock investing, value investing, investing in small
companies, tax-free investing, fixed income investing, investing in mortgage-
backed securities, as well as other topics and strategies.
Redemptions in Kind
In the unlikely event a shareholder of the Fund were to receive an in
kind redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for securities or assets
other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment objective and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
PAGE 31
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's directors who
are considered "interested persons" of T. Rowe Price or the Fund as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are noted with an
number sign (*). These directors are referred to as inside directors by
virtue of their officership, directorship, and/or employment with T. Rowe
Price.
*M. DAVID TESTA, Chairman of the Board--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe
Price Trust Company; Chartered Financial Analyst
*MARTIN G. WADE, President and Director--President, Price-Fleming; Director,
Robert Fleming Holdings Limited; Address: 25 Copthall Avenue, London, EC2R
7DR, England
LEO C. BAILEY, Director--Retired; Address: 3396 South Placita Fabula, Green
Valley, Arizona 85614
ANTHONY W. DEERING, Director--Director, President and Chief Operating Officer,
The Rouse Company, real estate developers, Columbia, Maryland; Advisory
Director, Kleinwort, Benson (North America) Corporation, a registered
broker-dealer; Address: 10275 Little Patuxent Parkway, Columbia, Maryland
21044
DONALD W. DICK, JR., Director--Partner, Overseas Partners, Inc., a financial
investment firm; formerly (6/65-3/89) Director and Vice President-Consumer
Products Division, McCormick & Company, Inc., international food
processors; Director, Waverly Press, Inc., Baltimore, Maryland; Address:
375 Park Avenue, Suite 3505, New York, New York 10152
ADDISON LANIER, Director--Financial management; President and Director, Thomas
Emery's Sons, Inc., and Emery Group, Inc.; Director, Scinet Development and
Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio 45202-
2913
DAVID P. BOARDMAN, Executive Vice President--Executive Vice President, Price-
Fleming
CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-Fleming
PETER B. ASKEW, Vice President--Vice President, Price-Fleming
RICHARD J. BRUCE, Vice President--Vice President of Price-Fleming; formerly
(1985-1990) Investment Manager, Jardine Fleming Advisers, Tokyo
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe
Price-Fleming International Inc.; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New York, New
York
MARK J. T. EDWARDS, Vice President--Vice President, Price-Fleming
JOHN R. FORD, Vice President--Executive Vice President, Price-Fleming
HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming and T. Rowe
Price Retirement Plan Services, Inc.; Managing Director, T. Rowe Price;
Vice President and Director, T. Rowe Price Investment Services, Inc.,
T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
ROBERT C. HOWE, Vice President--Vice President, Price-Fleming and T. Rowe
Price
STEPHEN ILOTT, Vice President--Employee, Price-Fleming; formerly (1988-1991)
portfolio management, Fixed Income Portfolios Group, Robert Fleming
Holdings Limited, London
GEORGE A. MURNAGHAN, Vice President--Vice President, Price-Fleming, T. Rowe
Price, T. Rowe Price Trust Company, and T. Rowe Price Investment Services,
Inc.
JAMES S. RIEPE, Vice President--Managing Director, T. Rowe Price; Chairman of
the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan
Services, Inc. and T. Rowe Price Trust Company; President and Director, T.
Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
PAGE 32
CHRISTOPHER ROTHERY, Vice President--Employee, Price-Fleming; formerly
(1987-1989) employee of Robert Fleming Holdings Limited, London
CHARLES H. SALISBURY, JR., Vice President--Vice President and Director,
Price-Fleming; Managing Director, T. Rowe Price; President, Trust Officer
and Director, T. Rowe Price Trust Company; Director, T. Rowe Price
Retirement Plan Services, Inc.
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice
President, Rowe Price-Fleming International, Inc.
BENEDICT R. F. THOMAS, Vice President--Vice President, Price-Fleming
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price; Vice
President, Rowe Price-Fleming International, Inc.
DAVID J. L. WARREN, Vice President--Executive Vice President, Price-Fleming
WILLIAM F. WENDLER, II, Vice President--Vice President, Price-Fleming, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price, Rowe Price-
Fleming International, Inc. and T. Rowe Price Trust Company
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
ANN B. CRANMER, Assistant Vice President--Vice President, Price-Fleming
ROGER L. FIERY, Assistant Vice President--Vice President, Rowe Price-Fleming
International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
The Fund's Executive Committee, comprised of Messrs. Testa and Wade,
has been authorized by the Board of Directors to exercise all of 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.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, Price-Fleming provides the Fund with
discretionary investment services. Specifically, Price-Fleming is responsible
for supervising and directing the investments of the Fund in accordance with
the Fund's investment objective, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. Price-Fleming is
also responsible for effecting all security transactions on behalf of the
Fund, including the negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these services,
Price-Fleming provides the Fund with certain corporate administrative
services, including: maintaining the 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 Fund; maintaining liaison with the agents employed by the Fund such as the
Fund's custodian and transfer agent; assisting the Fund in the coordination of
such agents' activities; and permitting Price-Fleming's employees to serve as
officers, directors, and committee members of the Fund without cost to the
Fund.
PAGE 33
The Management Agreement also provides that Price-Fleming, 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.
Under the Management Agreement, Price-Fleming is permitted to utilize
the services or facilities of others to provide it or the Fund with
statistical and other factual information, advice regarding economic factors
and trends, advice as to occasional transactions in specific securities, and
such other information, advice or assistance as Price-Fleming may deem
necessary, appropriate, or convenient for the discharge of its obligations
under the Management Agreement or otherwise helpful to the Fund.
Certain administrative support is provided by T. Rowe Price which
receives from Price-Fleming a fee of .15% of the market value of all assets in
equity accounts, .15% of the market value of all assets in active fixed income
accounts and .035% of the market value of all assets in passive fixed income
accounts under Price-Fleming's management.
Price-Fleming has entered into separate letters of agreement with
Fleming Investment Management Limited ("FIM"), Fleming International Fixed
Interest Management Limited ("FIFIM"), and Jardine Fleming Investment Holdings
Limited ("JFIH"), wherein FIM, FIFIM, and JFIH have agreed to render
investment research and administrative support to Price-Fleming. FIM and
FIFIM are wholly-owned subsidiaries of Robert Fleming Asset Management Limited
which is a wholly-owned subsidiary of Robert Fleming Holdings Limited ("Robert
Fleming Holdings"). JFIH is an indirect wholly-owned subsidiary of Jardine
Fleming Group Limited. Under the letters of agreement, these companies will
provide Price-Fleming with research material containing statistical and other
factual information, advice regarding economic factors and trends, advice on
the allocation of investments among countries and as between debt and equity
classes of securities, and research and occasional advice with respect to
specific companies. For these services, FIM and JFIH each receives a fee
.075% of the market value of all assets in equity accounts under
Price-Fleming's management. FIFIM and JFIH each receives a fee of .075% of
the market value of all assets in active fixed income accounts and .0175% of
such market value in passive fixed income accounts under Price-Fleming's
management.
Robert Fleming personnel have extensive research resources throughout
the world. A strong emphasis is placed on direct contact with companies in
the research universe. Robert Fleming personnel, who frequently speak the
local language, have access to the full range of research products available
in the market place and are encouraged to produce independent work dedicated
solely to portfolio investment management, which adds value to that generally
available.
Management Fee
The Fund pays Price-Fleming a fee ("Fee") which consists of two
components: a Group Management Fee ("Group Fee") and an Individual Fund Fee
("Fund Fee"). The Fee is paid monthly to Price-Fleming on the first business
day of the next succeeding calendar month and is calculated as described
below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily
Group Fee accruals ("Daily Group Fee Accruals") for each month. The Daily
Group Fee Accrual for any particular day is computed by multiplying the Price
Funds' group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily Price Funds'
Group Fee Accrual for any particular day is calculated by multiplying the
PAGE 34
fraction of one (1) over the number of calendar days in the year by the
annualized Daily Price Funds' Group Fee Accrual for that day as determined in
accordance with the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
_________________________________
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the Price Funds include
all the mutual funds distributed by T. Rowe Price Investment Services, Inc.
(excluding T. Rowe Price Spectrum Fund, Inc. and any institutional or private
label mutual funds). For the purpose of calculating the Daily Price Funds'
Group Fee Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund
Fee accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the Fund Fee Rate of 0.35%
and multiplying this product by the net assets of the Fund for that day, as
determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for business.
The management fees paid by the Fund for the years 1992, 1991, and
1990, were $12,522,000, $9,233,000, and $7,645,000, respectively.
Limitation on Fund Expenses
The Management Agreement between the Fund and Price-Fleming provides
that the Fund will bear all expenses of its operations not specifically
assumed by Price-Fleming. However, in compliance with certain state
regulations, Price-Fleming will reimburse the Fund for certain expenses which
in any year exceed the limits prescribed by any state in which the Fund's
shares are qualified for sale. Presently, the most restrictive expense ratio
limitation imposed by any state is 2.5% of the first $30 million of a Fund's
average daily net assets, 2% of the next $70 million of the average daily net
assets, and 1.5% of net assets in excess of $100 million. For the purpose of
determining whether the 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.
T. Rowe Price Spectrum Fund, Inc.
The Fund is a party to a Special Servicing Agreement ("Agreement")
between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum Fund"), T. Rowe
Price, T. Rowe Price Services, Inc. and various other T. Rowe Price funds
which, along with the Fund, are funds in which Spectrum Fund invests
(collectively all such funds "Underlying Price Funds").
PAGE 35
The Agreement provides that, if the Board of Directors/Trustees of any
Underlying Price Fund determines that such Underlying Fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly
in the Underlying Price Funds and the resulting reduction in shareholder
servicing costs. Although such cost savings are not certain, the estimated
savings to the Underlying Price Funds generated by the operation of Spectrum
Fund are expected to be sufficient to offset most, if not all, of the expenses
incurred by Spectrum Fund.
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Fund's distributor. Investment Services is registered as
a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. The offering of the
Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
The Underwriting Agreement provides that Investment Services will pay
all fees and expenses in connection with: printing and distributing
prospectuses and reports for use in offering and selling Fund shares;
preparing, setting in type, printing, and mailing all sales literature and
advertising; Investment Services' federal and state registrations as a
broker-dealer; and offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services' expenses are
paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with
the sale of its shares in all states in which the shares are qualified and in
which Investment Services is qualified as a broker-dealer. Under the
Underwriting Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the custodian for
the Fund's securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Bank has entered into a Sub-Custodian Agreement with
The Chase Manhattan Bank, N.A., London, pursuant to which portfolio securities
which are purchased outside the United States are maintained in the custody of
various foreign branches of The Chase Manhattan Bank and such other
PAGE 36
custodians, including foreign banks and foreign securities depositories, in
accordance with regulations under the Investment Company Act of 1940. The
Bank's main office is at 225 Franklin Street, Boston, Massachusetts 02110.
The address for The Chase Manhattan Bank, N.A., London is Woolgate House,
Coleman Street, London, EC2P 2HD, England.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund is made by Price-Fleming. Price-Fleming is also
responsible for implementing these decisions, including the allocation of
portfolio brokerage and principal business and the negotiation of commissions.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is Price-
Fleming's policy to obtain quality execution at the most favorable prices
through responsible broker-dealers and, in the case of agency transactions, at
competitive commission rates where such rates are negotiable. 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, their
expertise in particular markets and the brokerage and research services they
provide to Price-Fleming or the Fund. It is not the policy of Price-Fleming
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.
Transactions on stock exchanges involve the payment of brokerage
commissions. In transactions on stock exchanges in the United States, these
commissions are negotiated. Traditionally, commission rates have generally
not been negotiated on stock markets outside the United States. In recent
years, however, an increasing number of overseas stock markets have adopted a
system of negotiated rates, although a number of markets continue to be
subject to an established schedule of minimum commission rates. It is
expected that equity securities will ordinarily be purchased in the primary
markets, whether over-the-counter or listed, and that listed securities may be
purchased in the over-the-counter market if such market is deemed the primary
market. In the case of securities traded on the over-the-counter markets,
there is generally no stated commission, but the price usually includes an
undisclosed commission or markup. In underwritten offerings, the price
includes a disclosed, fixed commission or discount.
Fixed Income Securities
For fixed income securities, it is expected that purchases and sales
will ordinarily be transacted with the issuer, or issuer's underwriter, or
with a primary market maker acting as principal on a net basis, with no
brokerage commission being paid by the Fund. However, the price of the
securities generally includes compensation which is not disclosed separately.
Transactions placed though dealers who are serving as primary market makers
reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, Price-Fleming may
effect principal transactions on behalf of the Fund with a broker or dealer
PAGE 37
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 prices the Fund pays to
underwriters of newly-issued securities usually include a concession paid by
the issuer to the underwriter.
Price-Fleming may cause the Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission for executing a transaction
that is in excess of the commission another broker-dealer would have received
for executing the transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or research services
which have been provided. In some cases, research services are generated by
third parties but are provided to Price-Fleming by or through broker-dealers.
Descriptions of Research Services Received from Brokers and Dealers
Price-Fleming receives a wide range of research services from brokers
and dealers covering investment opportunities throughout the world, including
information on the economies, industries, groups of securities, individual
companies, statistics, political developments, technical market action,
pricing and appraisal services, and performance analyses of all the countries
in which the Fund's portfolio is likely to be invested. Price-Fleming cannot
readily determine the extent to which commissions charged by brokers reflect
the value of their research services, but brokers occasionally suggest a level
of business they would like to receive in return for the brokerage and
research services they provide. To the extent that research services of value
are provided by brokers, Price-Fleming may be relieved of expenses which it
might otherwise bear. In some cases, research services are generated by third
parties but are provided to Price-Fleming by or through brokers.
Commissions to Brokers who Furnish Research Services
Certain broker-dealers which provide quality execution services also
furnish research services to Price-Fleming. Price-Fleming 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
its clients to pay a broker which furnishes brokerage or research services a
higher commission than that which might be charged by another broker which
does not furnish brokerage or research services, or which furnishes brokerage
or research services deemed to be of lesser value, if such commission is
deemed reasonable in relation to the brokerage and research services provided
by the broker, viewed in terms of either that particular transaction or the
overall responsibilities of the adviser with respect to the accounts as to
which it exercises investment discretion. Accordingly, Price-Fleming may
assess the reasonableness of commissions in light of the total brokerage and
research services provided by each particular broker.
Miscellaneous
Research services furnished by brokers through which Price-Fleming
effects securities transactions may be used in servicing all accounts managed
by Price-Fleming, Conversely, research services received from brokers which
execute transactions for the Fund will not necessarily be used by Price-
Fleming exclusively in connection with the management of the Fund.
Some of Price-Fleming's other clients have investment objectives and
programs similar to those of the Fund. Price-Fleming 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
PAGE 38
securities. It is Price-Fleming's policy not to favor one client over another
in making recommendations or in placing orders. Price-Fleming 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. Price-Fleming 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.
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.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
Price-Fleming, Price-Fleming 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 Price-Fleming will often place orders for the Fund's portfolio
transactions with broker-dealers through the trading desks of certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming"), an affiliate
of Price-Fleming. Robert Fleming, through Copthall Overseas Limited, a
wholly-owned subsidiary, owns 25% of the common stock of Price-Fleming. Fifty
percent of the common stock of Price-Fleming 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 Jardine Fleming Group
Limited ("JFG"). JFG is 50% owned by Robert Fleming and 50% owned by Jardine
Matheson Holdings Limited. The affiliates through whose trading desks such
orders may be placed include Fleming Investment Management Limited ("FIM"),
Fleming International Fixed Interest Management Limited ("FIFIM"), and Robert
Fleming & Co. Limited ("RF&Co."). FIM, FIFIM and RF&Co. are wholly-owned
subsidiaries of Robert Fleming. These trading desks will operate under strict
instructions from the Fund's portfolio manager with respect to the terms of
such transactions. Neither Robert Fleming, JFG, nor their affiliates will
receive any commission, fee, or other remuneration for the use of their
trading desks, although orders for the Fund's portfolio transactions may be
placed with affiliates of Robert Fleming and JFG who may receive a commission.
The Board of Directors of the Fund has authorized Price-Fleming to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of each Fund's portfolio transactions,
provided that Price-Fleming believes that doing so will result in an economic
advantage (in the form of lower execution costs or otherwise) being obtained
for each Fund. These affiliates include Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, RF&Co., Jardine Fleming Australia
Securities Limited, and Robert Fleming, Inc. (a New York brokerage firm).
The above-referenced authorization was made in accordance with
Section 17(e) of the Investment Company Act of 1940 (the "1940 Act") and
Rule 17e-1 thereunder which require the Fund's independent directors to
approve the procedures under which brokerage allocation to affiliates is to be
made and to monitor such allocations on a continuing basis. Except with
respect to tender offers, it is not expected that any portion of the
commissions, fees, brokerage, or similar payments received by the affiliates
of Robert Fleming in such transactions will be recaptured by the Fund. The
directors have reviewed and from time to time may continue to review whether
PAGE 39
other recapture opportunities are legally permissible and available and, if
they appear to be, determine whether it would be advisable for the Fund to
seek to take advantage of them.
During the year 1992, the Fund paid JFS and RF&Co. $601,000 and $2,000,
respectively, in total brokerage commissions in connection with their
portfolio transactions. The brokerage commissions paid to JFS and RF&Co.
represented 14%, and 1%, respectively, of the Fund's aggregate brokerage
commissions paid during 1992. The aggregate dollar amount of transactions
effected through JFS and RF&Co., involving the payment of commissions,
represented 10% and 1%, respectively, of the aggregate dollar amount of all
transactions involving the payment of commissions during 1992. In accordance
with the written procedures adopted pursuant to Rule 17e-1, the independent
directors of the Fund reviewed the 1992 transactions with affiliated brokers
and determined that such transactions resulted in an economic advantage to the
Fund either in the form of lower execution costs or otherwise.
Other
For the years 1992, 1991, and 1990, the total brokerage commissions
paid by the Fund, including the discounts received by securities dealers in
connection with underwritings, were $4,052,000, $3,119,000, and $2,169,000,
respectively. Of these commissions, approximately 85%, 90%, and 87%,
respectively, were paid to firms which provided research, statistical, or
other services to Price-Fleming in connection with the management of the Fund
or, in some cases, to the Fund.
The portfolio turnover rate of the Fund for each of the last three
years has been as follows: 1992--37.8%, 1991--45.0%, and 1990--47.1%.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors or by persons delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost in local currency which,
when combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors.
Trading in the portfolio securities of the Fund may take place in
various foreign markets on certain days (such as Saturday) when the Fund is
not open for business and does not calculate its net asset value. In
addition, trading in the Fund's portfolio securities may not occur on days
PAGE 40
when the Fund is open. The calculation of the Fund's net asset value normally
will not take place contemporaneously with the determination of the value of
the Fund's portfolio securities. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
time the Fund's net asset value is calculated will not be reflected in the
Fund's net asset value unless Price-Fleming, under the supervision of the
Fund's Board of Directors, determines that the particular event should be
taken into account in computing the Fund's net asset value.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting its liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Fund is calculated as of
the close of trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale, redemption
and repurchase of shares) for the Fund may be suspended at times (a) during
which the NYSE is closed, other than customary weekend and holiday closings,
(b) during which trading on the NYSE is restricted (c) during which an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or (d) during which
a governmental body having jurisdiction over the Fund may by order permit such
a suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
DIVIDENDS
Unless you elect otherwise, dividends and capital gain distributions
will be reinvested on the reinvestment date using the NAV per share of that
date. The reinvestment date normally precedes the payment date by about 10
days although the exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
Dividends and distributions paid by the Fund are not eligible for the
dividends-received deduction for corporate shareholders, if as expected, none
of the Fund's income consists of dividends paid by United States corporations.
Capital gain distributions paid from the Fund are never eligible for this
deduction. For tax purposes, it does not make any difference whether
dividends and capital gain distributions are paid in cash or in additional
shares. The Fund must declare dividends equal to at least 98% of ordinary
income (as of December 31) and capital gains (as of October 31) in order to
avoid a federal excise tax and distribute 100% of ordinary income and capital
gains as of December 31 to avoid federal income tax.
PAGE 41
Foreign currency gains and losses, including the portion of gain or
loss on the sale of debt securities attributable to foreign exchange rate
fluctuations are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the Fund will be increased; if
the result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments, to reflect these gains and losses will be made at the end of the
Fund's taxable year.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation or
depreciation of securities held by the Fund. A subsequent distribution to you
of such amounts, although constituting a return of your investment, would be
taxable either as dividends or capital gain distributions. For federal income
tax purposes, the Fund is permitted to carry forward its net realized capital
losses, if any, for eight years, and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute
such gains. On March 31, 1993, the books of the Fund indicated that the
Fund's aggregate net assets included undistributed net income of $15,857,420,
net realized capital losses of $2,492,666, and unrealized appreciation of
$143,012,343.
Income received by the Fund from sources within various foreign
countries will be subject to foreign income taxes withheld at the source.
Under the Code, if more than 50% of the value of the Fund's total assets at
the close of its taxable year comprise securities issued by foreign
corporations, the Fund may file an election with the Internal Revenue Service
to "pass through" to the Fund's shareholders the amount of any foreign income
taxes paid by the Fund. Pursuant to this election, shareholders will be
required to: (i) include in gross income, even though not actually received,
their respective pro rata share of foreign taxes paid by the Fund; (ii) treat
their pro rata share of foreign taxes as paid by them; and (iii) either deduct
their pro rata share of foreign taxes in computing their taxable income, or
use it as a foreign tax credit against U.S. income taxes (but not both). No
deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions.
The Fund intends to meet the requirements of the Code to "pass through"
to its shareholders foreign income taxes paid, but there can be no assurance
that the Fund will be able to do so. Each shareholder will be notified within
60 days after the close of each taxable year of the Fund, if the Fund will
"pass through" foreign taxes paid for that year, and, if so, the amount of
each shareholder's pro rata share (by country) of (i) the foreign taxes paid,
and (ii) the Fund's gross income from foreign sources. Of course,
shareholders who are not liable for federal income taxes, such as retirement
plans qualified under Section 401 of the Code, will not be affected by any
such "pass through" of foreign tax credits.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income without deduction
for dividends or other distributions to shareholders; (ii) the Fund's
distributions to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital gain
dividends), and may qualify for the 70% deduction for dividends received by
corporations; and (iii) foreign tax credits would not "pass through" to
shareholders.
Taxation of Foreign Shareholders
The Code provides that dividends from net income (which are deemed to
include for this purpose each shareholder's pro rata share of foreign taxes
paid by the Fund - see discussion of "pass through" of the foreign tax credit
PAGE 42
to U.S. shareholders), will be subject to U.S. tax. For shareholders who are
not engaged in a business in the U.S., this tax would be imposed at the rate
of 30% upon the gross amount of the dividend in the absence of a Tax Treaty
providing for a reduced rate or exemption from U.S. taxation. Distributions
of net long-term capital gains realized by the Fund are not subject to tax
unless the foreign shareholder is a nonresident alien individual who was
physically present in the U.S. during the tax year for more than 182 days.
CAPITAL STOCK
The T. Rowe Price International Funds, Inc. (the "Corporation") was
originally organized in 1979 as a Maryland corporation under the name T. Rowe
Price International Fund, Inc. ("the Old Corporation"). Pursuant to the
Annual Meeting of Shareholders held on April 22, 1986, an Agreement and Plan
of Reorganization and Liquidation was adopted in order to convert the Old
Corporation from a Maryland corporation to a Massachusetts Business Trust,
named the T. Rowe Price International Trust ("the Trust"). This conversion
became effective on May 1, 1986. Pursuant to the Annual Meeting of
Shareholders held on April 19, 1990, an Agreement and Plan of Reorganization
and Liquidation was adopted in order to convert the Trust from a Massachusetts
Business Trust to a Maryland corporation. This conversion become effective
May 1, 1990. The Corporation is registered with the Securities and Exchange
Commission under the 1940 Act as a diversified, open-end investment company,
commonly known as a "mutual fund."
Currently, the Corporation consists of eight series, each of which
represents a separate class of the Corporation's shares and has different
objectives and investment policies. The International Bond Fund was added as
a separate series of the Trust in 1986, and the designation of the existing
series of the Trust was, at that time, changed to the International Stock
Fund. In 1988 and 1990, respectively, the International Discovery and
European Stock Funds were added as separate series of the Trust. Effective
May 1, 1990, all series of the Trust became series of the Corporation. In the
same year, after the May 1, 1990 reorganization, the New Asia and Global
Government Bond Funds were added as separate series of the Corporation. The
Japan and Short-Term Global Income Funds were added as separate series of the
Corporation in 1991 and 1992, respectively. The Charter also provides that
the Board of Directors may issue additional series of shares.
The Fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions, as
shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. The Board of Directors may
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the Fund has authorized to issue
without shareholder approval.
Each share of each series has equal voting rights with every other
share of every other series, and all shares of all series vote as a single
group except where a separate vote of any class or series is required by the
1940 Act, the laws of the State of Maryland, the Corporation's Articles of
Incorporation, the By-Laws of the Corporation, or as the Board of Directors
may determine in its sole discretion. Where a separate vote is required with
PAGE 43
respect to one or more classes or series, then the shares of all other classes
or series vote as a single class or series, provided that, as to any matter
which does not affect the interest of a particular class or series, only the
holders of shares of the one or more affected classes or series is entitled to
vote. The preferences, rights, and other characteristics attaching to any
series of shares, including the present series of capital stock, might be
altered or eliminated, or the series might be combined with another series, by
action approved by the vote of the holders of a majority of all the shares of
all series entitled to be voted on the proposal, without any additional right
to vote as a series by the holders of the capital stock or of another affected
series.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the Corporation, a special meeting
of shareholders of the Corporation shall be called by the Secretary of the
Corporation on the written request of shareholders entitled to cast at least
10% of all the votes of the Corporation, entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of the meeting.
The Corporation, however, will otherwise assist the shareholders seeking to
hold the special meeting in communicating to the other shareholders of the
Corporation to the extent required by Section 16(c) of the 1940 Act.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the Securities Act of
1933, and the Fund or its shares are registered under the laws of all states
which require registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, whose address is 919 Third
Avenue, New York, New York 10022, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland
21202, are independent accountants to the Fund. The financial statements of
the Fund for the year ended December 31, 1992, and the report of independent
accountants are included in the Fund's Annual Report for the year ended
December 31, 1992, on pages 7-17. A copy of the Annual Report accompanies
this Statement of Additional Information. The following financial statements
and the report of independent accountants appearing in the Annual Report for
the year ended December 31, 1992, are incorporated into this Statement of
Additional Information by reference:
PAGE 44
Annual Report
Page
_______________
Report of Independent Accountants 17
Statement of Net Assets, December 31, 1992 7-11
Statement of Operations, year ended
December 31, 1992 12
Statement of Changes in Net Assets, years ended
December 31, 1992 and December 31, 1991 13
Notes to Financial Statements
December 31, 1992 14-15
Per Share and Other Information 16
