PAGE 1
Registration Nos. 002-65539/811-2958
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Post-Effective Amendment No. 51 / X /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 / X /
Amendment No. 47 / X /
Fiscal Year Ended October 31, 1994
__________________________________________
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
____________________________________________________
(Exact Name of Registrant as Specified in Charter)
100 East Pratt Street, Baltimore, Maryland 21202
__________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 410-547-2000
____________
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
_______________________________________
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering March 1, 1995
______________
It is proposed that this filing will become effective (check
appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)(i)
PAGE 2
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+
______________________________________________
Pursuant to Section 24f-2 of the Investment Company Act of 1940,
the Registrant has registered an indefinite number of securities
under the Securities Act of 1933 and intends to file a 24f-2
Notice by February 28, 1995.
+Not applicable, as no securities are being registered by this
Post-Effective Amendment No. 51 to the Registration Statement.
PAGE 3
The Registration Statement of the T. Rowe Price
International Funds, Inc. on Form N-1A (File No. 2-65539) is
hereby amended under the Securities Act of 1933 to update the
Registrant's financial statements, make other changes in the
Registrant's Prospectus and Statement of Additional Information,
and to satisfy the annual amendment requirement of Rule 8b-16
under the Investment Company Act of 1940.
This Amendment consists of the following:
Cross Reference Sheet
Part A of Form N-1A, Revised Prospectus
Part B of Form N-1A, Statement of Additional Information
Part C of Form N-1A, Other Information
Accountants' Consent
PAGE 4
T. ROWE PRICE INTERNATIONAL STOCK FUND
T. ROWE PRICE INTERNATIONAL DISCOVERY FUND
T. ROWE PRICE EUROPEAN STOCK FUND
T. ROWE PRICE NEW ASIA FUND
T. ROWE PRICE JAPAN FUND
T. ROWE PRICE LATIN AMERICA FUND
CROSS REFERENCE SHEET
N-1A Item No. Location
_____________ ________
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Transaction and Fund
Expenses
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Transaction and
Registrant Fund Expenses; Fund,
Market, and Risk
Characteristics; The
Fund's Organization
and Management;
Understanding Fund
Performance;
Investment Programs
and Practices
Item 5. Management of the Fund Transaction and Fund
Expenses; Fund and
Market
Characteristics; The
Fund's Organization
and Management
Item 6. Capital Stock and Other Capital Stock;
Securities Dividends and
Distributions; Taxes
Item 7. Purchase of Securities Being NAV, Pricing, and
Offered Effective Date;
Shareholder Services;
Conditions of Your
Purchase; Completing
the New Account Form;
Opening a New Account;
Purchasing Additional
Shares
PAGE 5
Item 8. Redemption or Repurchase NAV, Pricing, and
Effective Date;
Receiving Your
Proceeds; Conditions
of Your Purchase;
Exchanging and
Redeeming Shares
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History +
Item 13. Investment Objectives and Investment Objectives
Policies and Policies;
Investment Objectives
and Programs;
Investment
Restrictions; Risk
Factors of Foreign
Investing; Investment
Performance
Item 14. Management of the Registrant Management of Funds
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
Item 16. Investment Advisory and Other Investment Management
Services Services; Custodian;
Legal Counsel;
Independent
Accountants
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Dividends; Capital
Securities Stock
Item 19. Purchase, Redemption and Redemptions in Kind;
Pricing of Securities Being Pricing of Securities;
Offered Net Asset Value Per
Share; Federal and
State Registration of
Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for Funds
Item 22. Calculation of Yield Quotations
of Money Market Funds +
Item 23. Financial Statements Incorporated by
Reference from Annual
Report
PAGE 6
PART C
Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C to this Registration
Statement
___________________________________
+ Not applicable or negative answer
PAGE 7
INTERNATIONAL EQUITY FUNDS
Facts at a Glance
Investment Goal Capital
appreciation through investment in
companies based outside the United
States.
Strategy
International Stock FundR Invests
worldwide primarily in well-
established, non-U.S. companies.
International Discovery FundR
Invests worldwide primarily in
rapidly growing small- and medium-
sized, non-U.S companies.
European Stock Fund Invests
primarily in companies domiciled in
Europe.
Japan Fund Invests primarily in
Japanese companies.
New Asia Fund Invests primarily in
companies in Asia and the Pacific
Basin, excluding Japan.
Latin America Fund Invests
primarily in companies located in
Latin America.
Risk/Reward Each fund's share price
will fluctuate with changes in
market, economic, and foreign
currency exchange conditions.
Generally, funds investing in a
single country, single or multiple
emerging markets, or principally in
smaller companies represent higher
risk and potential reward than those
with greater geographic
diversification and an orientation
toward established companies and
more mature economies and markets.
Investor Profile Those seeking
enhanced appreciation potential over
time and greater diversification for
PAGE 8
their equity investments who can
accept the volatility of stock
prices and the special risks that
accompany international investing.
Fees and Charges 100% no load.
No sales charges; free telephone
exchange; no 12b-1 marketing fees.
Redemption fees on three funds: the
International Discovery, and Latin
America impose a 2% redemption fee,
payable to the funds, on shares held
less than one year.
Investment Manager Rowe Price-
Fleming International, Inc., was
founded in 1979 as a joint venture
between T. Rowe Price Associates,
Inc. and Robert Fleming Holdings
Ltd. As of December 31, 1994, Price-
Fleming managed over $18 billion in
foreign stocks and bonds through its
offices in Baltimore, London, Tokyo,
and Hong Kong.
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. T. Rowe Price
International Funds, Inc.
March 1, 1995
Prospectus
Contents
______________________
1 About the International
Funds
______________________
Transaction and Fund
Expenses
PAGE 9
______________________
Financial Highlights
______________________
Fund, Market, and Risk
Characteristics
______________________
2 About Your Account
______________________
Pricing Shares;
Receiving Sale
Proceeds
______________________
Distributions and Taxes
______________________
Transaction Procedures
and Special Requirements
______________________
3 More About the Funds
______________________
Organization and
Management
______________________
Understanding Fund
Performance
______________________
Investment Policies
and Practices
______________________
4 Investing With T. Rowe
Price
______________________
Meeting Requirements for
New Accounts
______________________
Opening a New Account
______________________
Purchasing Additional
Shares
______________________
Exchanging and Redeeming
______________________
Shareholder Services
______________________
This prospectus
contains information you
PAGE 10
should know before
investing. Please keep
it for future reference.
A Statement of
Additional Information
about the funds, dated
March 1, 1995, has been
filed with the
Securities and Exchange
Commission and is
incorporated by
reference in this
prospectus. To obtain a
free copy, call
1-800-638-5660.
PAGE 11
1 About the International Funds
Transaction and funds' Expenses
These tables should help you understand the
kinds of expenses you will bear directly or
indirectly as a fund shareholder.
The first part of the table,
"Shareholder Transaction Costs," shows that
you pay no sales charges. All the money
you invest in a fund goes to work for you,
subject to the fees explained below.
"Annual Fund Expenses," provides an
estimate of how much it will cost to
operate each fund for a year, based on 1994
fiscal year expenses (and any expense
limitations shown in Table 3). These are
costs you pay indirectly, because they are
deducted from the fund's total assets
before the daily share price is calculated
and before dividends and other
distributions are made. In other words,
you will not see these expenses on your
account statement.
___________________________________________
Fund Expenses
Shareholder Transaction Expenses
Inter-
na-
Inter- tion-
na- al
tion- Dis- Euro- Latin
al cov- pean Ja- New Amer-
Stock ery Stock pan Asia ica
___________________________________________
Sales load
"charge" on
purchasesNone None None None None None
___________________________________________
Sales load
"charge" on
reinvested
dividendsNone None None None None None
___________________________________________
PAGE 12
Redemption
fees None 2%a None None None 2%a
___________________________________________
Exchange
fees None None None None None None
___________________________________________
Annual Fund Expenses Percentage of
Fiscal 1994 Average
Net Assets
Latin
Inter- Ja- Amer-
na- pan ica
Inter- tion- (af- (af-
na- al ter ter
tion- Dis- Euro- Re- Re-
al cov- pean duc- New duc-
Stock ery Stock tion)b Asia tion)bc
___________________________________________
Manage-
ment fee
(after
reduc-
tion) 0.69% 1.13% 0.84% 0.82%b 0.85% 1.09%
___________________________________________
Distri-
bution
fees
(12b-1) None None None None None None
___________________________________________
Total
other
(Share-
holder
servicing,
custodial,
auditing,
etc.) 0.27% 0.37% 0.41% 0.68%0.44%0.10%
___________________________________________
Total
fund
expenses
0.96% 1.50% 1.25% 1.50%b 1.29% 2.00%
___________________________________________
PAGE 13
a On shares purchased and held for
less than 12 months (details on page
__).
b Had Price-Fleming not agreed to
waive management fees and bear
certain expenses in accordance with
expense limitation agreements, fees
for the following funds would have
been higher: the Japan Fund's
management fee and total expense
ratio would have been 0.84% and
1.52%, respectively; the Latin
America Fund's management fee and
total expense ratio would have been
1.10% and 2.34%, respectively. The
International Discovery Fund's
fiscal 1993 expenses were limited to
1.50% of fund average net assets.
In the absence of such limitation,
the fund's expenses would have been
1.54%.
c Organizational expenses will be
charged to the fund over a period
not to exceed 60 months.
Note: The funds charge a $5 fee for
wire redemptions under $5,000,
subject to change without
notice.[/R]
___________________________________________
Table 1
The main types of expenses, which all
mutual funds may charge against fund
assets, are:
o A management fee: the percent of
fund assets paid to the fund's
investment manager. Each fund's fee
comprises both a group fee,
discussed later, and an individual
fund fee, as follows: International
Stock Fund 0.35%; European Stock,
Japan and New Asia Funds 0.50%;
International Discovery and Latin
PAGE 14
America Funds 0.75%. Because the
investment programs of the funds are
more costly to implement and
maintain, their management fees are
higher than those paid by most U.S.
investment companies.
o "Other" administrative expenses:
primarily the servicing of
shareholder accounts, such as
providing statements, reports,
disbursing dividends, as well as
custodial services. For the year
ended October 31, 1994, the funds
paid the fees shown in Table 4 to T.
Rowe Price Services, Inc. for
transfer and dividend disbursing
functions and shareholders services;
T. Rowe Price Retirement Plan
Services, Inc. for recordkeeping
services for certain retirement
plans; and T. Rowe Price for fund
accounting services.
o Marketing or distribution fees: an
annual charge ("12b-1") to existing
shareholders to defray the cost of
selling shares to new shareholders.
T. Rowe Price funds do not levy 12b-
1 fees.
For further details on fund
expenses, please see "The Funds'
Organization and Management."
o Hypothetical example: Assume you
invest $1,000, the fund returns 5%
annually, expense ratios remain as
previously listed, and you close
your account at the end of the time
periods shown. Your expenses per
would be:
_________________________
The table at right is
just an example, and
actual expenses can be
PAGE 15
higher or lower than
those shown. ___________________________________________
Fund 1 Year 3 Years 5 Years 10 Years
___________________________________________
Inter-
national
Stock $10 $32 $56 $124
___________________________________________
Inter-
national
Discovery $16 $49 $84 $183
___________________________________________
European
Stock $14 $43 $74 $162
___________________________________________
Japan $15 $47 $82 $179
___________________________________________
New Asia $13 $41 $71 $156
___________________________________________
Latin
America $20 $63 $108 $233
___________________________________________
Table 2
Table 3 sets forth expense ratio
limitations and the periods for which they
are effective. For each, Price-Fleming has
agreed to waive management fees and bear
certain expenses which would cause the
fund's ratio of expenses to average net
assets to exceed the indicated percentage
limitations. The fees waived and expenses
borne by Price-Fleming are subject to
reimbursement by the fund through the
indicated reimbursement date, but no
reimbursement will be made if it would
result in the fund's expense ratio
exceeding its specified limit.
___________________________________________
Expense Ratio Limitations
Expense Reim-
Limita- Ratio burse-
tion Limita- ment
Period tion Date
___________________________________________
PAGE 16
International
Discov-
ery January 1, 1993- 1.50% December
December 31, 1993 31, 1995
___________________________________________
Japana January 1, 1994- 1.50% October
October 31, 1995 31, 1997
___________________________________________
Latin
AmericaDecember 29, 1993-2.00% October
October 31, 1995 31, 1997
___________________________________________
a The Japan Fund previously operated
under a 1.50% limitation that expired
December 31, 1993. The reimbursement
period for this limitation extends
through December 31, 1995.
___________________________________________
Table 3
___________________________________________
Service Fees Paid
Transfer Subaccounting Accounting
Agent Services
___________________________________________
Interna-
tional
Stock $2,515,000 $4,002,000 $125,000
___________________________________________
Inter-
national
Discov-
ery $ 460,000 $ 301,000 $122,000
___________________________________________
European
Stock $ 338,000 $ 210,000 $100,000
___________________________________________
Japan $ 206,000 $ 313,000 $100,000
___________________________________________
New Asia$2,053,000 $2,172,000 $108,000
___________________________________________
Latin
America $ 240,000 $ 340,000 $ 83,000
___________________________________________
Table 4
Financial Highlights
PAGE 17
The following table provides information
about each fund's financial history. It is
based on a single share outstanding
throughout each fiscal year. The
respective table is part of each fund's
financial statements which are included in
each fund's annual report and are
incorporated by reference into the
Statement of Additional Information. This
document is available to shareholders upon
request. The financial statements in the
annual report have been audited by the
funds' independent accountants whose
respective unqualified reports cover the
periods shown.
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
Stocka
1985 $ 6.59 $.11 $ 2.71 $ 2.82 $(.15) $ (.22)$ (.37)
1986 9.04 .11 5.23 5.34 (.11) (1.38) (1.49)
1987 12.89 .12 .74 .86 (.23) (4.98) (5.21)
1988 8.54 .16 1.36 1.52 (.16) (.93) (1.09)
1989 8.97 .16 1.94 2.10 (.16) (.67) (.83)
1990 10.24 .22 (1.13) (.91) (.16) (.36) (.52)
1991 8.81 .15 1.22 1.37 (.15) (.49) (.64)
1992 9.54 .14 (.47) (.33) (.16) (.16) (.32)
1993n 8.89 .10 2.75 2.85 -- -- --
1994 11.74 .09 1.30 1.39 (.09) (.20) (.29)
_________________________________________________________________
PAGE 18
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End of Reinvested Assets ($ Net age Net over
Ended Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
Stocka
1985 $ 9.04 45.3% $ 376,843 1.11% 1.54% 61.9%
1986 12.89 61.3% 790,020 1.10% 0.89% 56.4%
1987 8.54 8.0% 642,463 1.14% 0.93% 76.5%
1988 8.97 17.9% 630,114 1.16% 1.78% 42.4%
1989 10.24 23.7% 970,214 1.10% 1.63% 47.8%
1990 8.81 (8.9%) 1,030,848 1.09% 2.16% 47.1%
1991 9.54 15.9% 1,476,309 1.10% 1.51% 45.0%
1992 8.89 (3.5%) 1,949,631 1.05% 1.49% 37.8%
1993n 11.74 32.1% 2,746,055 1.01%m 1.52%m 29.8%m
1994 12.84 12.0% 6,205,713 0.96% 1.11% 22.9%
_________________________________________________________________
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
Discovery
1989b $10.00 $ .14c $ 4.03 $4.17 $ (.13) $(.10)$(.23)
1990 13.94 .14c (1.91) (1.77) (.15) (.27) (.42)
1991 11.75 .13c 1.24 1.37 (.13) -- (.13)
1992 12.99 .13c (1.31) (1.18) (.13) -- (.13)
1993n 11.68 .07c 4.41 4.48 -- -- --
1994 16.16 .04 1.52 1.56 (.07) (.02) (.09)
_________________________________________________________________
PAGE 19
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End ofReinvested Assets ($ Net age Net over
Ended PeriodDividends) Thousands) Assets Assets Rate
_________________________________________________________________
Discovery
1989b $13.94 41.8% $ 61,166 1.50%cm 0.76%m 38.3%m
1990 11.75(12.8%) 136,660 1.50%cm 1.10% 44.0%
1991 12.99 11.7% 166,819 1.50%cm 1.03% 56.3%
1992 11.68 (9.1%) 166,362 1.50%cm 1.07% 38.0%
1993n 16.16 38.4% 329,001 1.50%cm 0.81%m 71.8%m
1994 17.63 9.7% 503,442 1.50% 0.38% 57.4%
_________________________________________________________________
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
European Stock
1990d $10.00 $ .24e$ (.56) $ (.32) $(.20) -- $(.20)
1991 9.48 .10 .59 .69 (.08) -- (.08)
1992 10.09 .14 (.70) (.56) (.17) -- (.17)
1993m 9.36 .12 1.89 2.01 -- -- --
1994 11.37 .14 1.26 1.40 (.04) (.01) (.05)
_________________________________________________________________
PAGE 20
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End of Reinvested Assets ($ Net age Net over
Ended Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
European Stock
1990d $9.48 (3.2%) $ 99,447 1.75%em 2.30%m 34.9%m
1991 10.09 7.3% 103,977 1.71% 1.04% 57.7%
1992 9.36 (5.6%) 173,798 1.48% 1.23% 52.0%
1993n 11.37 21.5% 265,784 1.35%m 1.79%m 21.3%m
1994 12.72 12.4 337,498 1.25% 1.19% 24.5%
_________________________________________________________________
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
Japan
1992f $10.00 $(.01)g $ (1.35) $ (1.36) -- -- --
1993m 8.64 (.05)g 2.99 2.94 -- -- --
1994 11.58 (.06)g .97 .91 -- (.85) $(.85)
_________________________________________________________________
PAGE 21
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End of Reinvested Assets ($ Net age Net over
Ended Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
Japan
1992f $ 8.64(13.4%) $45,792 1.50%g (.22)% 41.6%
1993n 11.58 33.7% 87,163 1.50%gm (.58)%m61.4%m
1994 11.64 9.3% 203,303 1.50%g (.68)% 61.5%
_________________________________________________________________
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
New Asiaj
1990h $5.00 $ .04i $ .04 $ .08 $(.04) -- $(.04)
1991 5.04 .10i .87 .97 (.10) -- (.10)
1992 5.91 .10 .56 .66 (.10) $(.13) (.23)
1993n 6.34 .03 3.51 3.54 -- -- --
1994 9.88 .06 .36 .42 (.04) (.19) (.23)
_________________________________________________________________
PAGE 22
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End of Reinvested Assets ($ Net age Net over
Ended Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
New Asiaj
1990h $5.04 1.6% $ 10,986 1.75%im 2.10%m 3.2%m
1991 5.91 19.3% 102,922 1.75%i 1.75% 49.0%
1992 6.34 11.2% 314,504 1.51% 1.64% 36.3%
1993n 9.88 55.8% 1,650,450 1.29%m 1.02%m 40.4%m
1994 10.07 4.1% 2,302,841 1.22% .85% 63.2%
_________________________________________________________________
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
Latin America
1994k $10.00 $(.03) $.29l $.26 -- -- --
_________________________________________________________________
PAGE 23
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End of Reinvested Assets ($ Net age Net over
Ended Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
Latin America
1994k $10.32 3.2% $198,435 1.99%m (.35)%m12.2%m
_________________________________________________________________
a All share and per-share figures reflect the 2-for-1 stock
split effective August 31, 1987.
b For the period December 30, 1988 (commencement of
operations) to December 31, 1989.
c Excludes expenses in excess of a 1.50% voluntary expense
limitation in effect through December 31, 1993.
d For the period February 28, 1990 (commencement of
operations) to December 31, 1990.
e Excludes expenses in excess of a 1.75% voluntary expense
limitation in effect through December 31, 1991.
f For the period December 30, 1991 (commencement of
operations) to December 31, 1992.
g Excludes expenses in excess of a 1.50% voluntary expense
limitation in effect through October 31, 1995.
h For the period September 28, 1990 (commencement of
operations) to December 31, 1990.
i Excludes expenses in excess of a 1.75% voluntary expense
limitation in effect through December 31, 1992.
j All per share figures reflect the 2-for-1 stock split
effective May 27, 1994.
k For the period December 29, 1993 (commencement of
operations) to October 31, 1994.
l The amount presented is calculated pursuant to a methodology
prescribed by the Securities and Exchange Commission for a
share outstanding throughout the period. This amount is
inconsistent with the fund's aggregate gains and losses
because of the timing of sales and redemptions of fund
shares in relation to fluctuating market values for the
investment portfolio.
m Annualized.
n For the ten months ended October 31, 1993. Fiscal year-end
changed from December 31 to October 31.
PAGE 24
_________________________________________________________________
Table 5
Fund, Market, and Risk Characteristics: What to Expect
_________________________
To help you decide
whether an international
equity fund is
appropriate for you, this
section takes a closer
look at the T. Rowe Price
funds' investment
programs and the markets
in which they invest. Why invest internationally?
There are three main reasons:
o Expanded investment opportunities. More
than half of the world's total stock
market capitalization and nearly two-
thirds of global GNP consists of non-U.S.
stocks and companies.
o The potential for higher returns.
Foreign stocks represented by the Morgan
Stanley EAFE Index (Europe, Australia,
Far East) outperformed U.S. stocks
measured by the S&P 500 Stock Index in
every rolling 10-year period from 1981
through 1994.
o Lower overall volatility in your
investment portfolio through increased
diversification. Since foreign stock
markets tend to move independently of the
U.S. market and each other, spreading
investments across a number of markets
can help smooth out fluctuations in the
returns of your total equity holdings.
What are some of the opportunities
represented by major overseas markets?
o Europe: Market deregulation,
privatization, and lower trade barriers
have expanded the range of investment
PAGE 25
opportunities. The emergence of
capitalist economies in Eastern Europe
could, over the long term, open
previously inaccessible markets and also
provide a lower-cost, skilled labor pool,
which may further stimulate European
economies.
o Asia: No longer solely dependent on the
Japanese "engine" for growth, the newly
industrialized countries of the Pacific
Rim are powered by worldwide exports and,
increasingly, by strong inter-regional
demand. In addition, China's move toward
a more capitalistic economy has positive
implications for the entire region's
future.
o Japan: Although its growth rate has
slowed, the longer-term outlook for
Japan's economy is positive. In addition
to its productive labor force,
technological expertise, and commitment
to capital investment, Japan's shift to a
more domestic-oriented economy should
promote future growth and create new
investment opportunities.
o Latin America: After years of stagnation,
some countries here are experiencing
rising growth rates that reflect lower
trade barriers, privatization of
industry, progress on reducing inflation
and restructuring of national debt
burdens.
o Emerging markets: A number of countries
in Latin America, the Far East, Europe,
and Africa are emerging from economic
periods of stagnation and offer the
potential for growth exceeding that of
the United States and other developed
countries. The emerging market countries
initiating market-based economic reforms
are expected to benefit from significant
amounts of capital in-flows.
_________________________
PAGE 26
Each fund's share
price will fluctuate,
when you sell your
shares, you may lose
money. What can I expect in terms of price
volatility?
Like U.S. stock investments, common stocks
of foreign companies offer investors a way
to build capital over time. Nevertheless,
the long-term rise of foreign stock prices
as a group has been punctuated by periodic
declines. As in the U.S., share prices of
even the best managed, most profitable
corporations are subject to market risk,
which means they can fluctuate widely.
In less liquid and well developed stock
markets, such as those in some Asian, and
most Latin American and African countries,
volatility may be heightened by actions of
a few major investors. For example,
substantial increases or decreases in cash
flows of mutual funds investing in these
markets could significantly affect stock
prices and, therefore, share prices.
Risk Factors
What are the major risks associated with
international investing and these funds?
Foreign stock prices are subject to many
of the same influences as U.S. stocks, such
as general economic conditions, company and
industry earnings prospects, and investor
psychology. International investing also
involves additional risks which can
increase the potential for the losses in
the funds. These risks can be significantly
magnified for investments in emerging
markets.
_________________________
Exchange rate movements
can be large and can last
for extended periods. o Currency fluctuations. Transactions in
foreign securities are conducted in local
PAGE 27
currencies, so dollars must be exchanged
for another currency each time a stock is
bought or sold or a dividend is paid.
Likewise, share-price quotations and
total return information reflect
conversion into dollars. Fluctuations in
foreign exchange rates can significantly
increase or decrease the dollar value of
a foreign investment, boosting or
offsetting its local market return. For
example, if a French stock rose 10% in
price during a year, but the U.S. dollar
gained 5% against the French franc during
that time, the U.S. investor's return
would be reduced to 5%. This is because
the franc would "buy" fewer dollars at
the end of the year than at the
beginning, or, conversely, a dollar would
buy more francs.
o Costs. It is more expensive for U.S.
investors to trade in foreign markets
than in the U.S. Mutual funds offer a
very efficient way for individuals to
invest abroad, but the overall expense
ratios of international funds are usually
somewhat higher than those of typical
domestic stock funds.
_________________________
While certain
countries have made
progress in economic
growth, liberalization,
fiscal discipline, and
political and social
stability, there is no
assurance these trends
will continue. o Political and economic factors. The
economies, markets, and political
structures of a number of the countries
in which each fund can invest do not
compare favorably with the United States
and other mature economies in terms of
wealth and stability. Therefore,
investments in these countries will be
riskier and more subject to erratic and
abrupt price movements.
PAGE 28
Some economies are less well developed
and less diverse (for example, Latin
America, Eastern Europe, African and
certain Asian countries), and more
vulnerable to the ebb and flow of
international trade, trade barriers, and
other protectionist or retaliatory
measures (for example, Japan, Southeast
Asia, Latin America and Africa). Some
countries, particularly in Latin America
and Africa, are grappling with severe
inflation and high levels of national
debt. Investments in countries that have
recently begun moving away from central
planning and state-owned industries
toward free markets, such as the Eastern
European, Chinese and African economies,
should be regarded as speculative.
Certain countries have histories of
instability and upheaval (Latin America
and Africa) internal politics that could
cause their governments to act in a
detrimental or hostile manner toward
private enterprise or foreign investment.
Such actions, for example, nationalizing
a company or industry, expropriating
assets, or imposing punitive taxes, could
have a severe effect on security prices
and impair a fund's ability to repatriate
capital or income.
_________________________
For more details on
potential risks of
foreign investments, see
"Investment Programs and
Practices." o Legal, regulatory, and operational.
Many countries lack uniform
accounting, auditing, and financial
reporting standards, have less
governmental supervision of
financial markets than in the U.S.,
do not honor legal rights enjoyed in
the U.S., and have settlement
practices, such as delays, which
could subject the funds to risks of
loss not customary in the U.S.
PAGE 29
o Pricing. Portfolio securities may be
listed on foreign exchanges that are open
on days (such as Saturdays) when the
funds do not compute their prices. As a
result, a fund's net asset value may be
significantly affected by trading on days
when shareholders cannot make
transactions. (For specific information
on the Tokyo Stock Exchange, please see
page __.)
How do fund managers try to reduce risk?
The principal tools are intensive research
and diversification; currency hedging
techniques are used from time to time.
o In addition to conducting on-site
research in portfolio countries and
companies, Rowe Price-Fleming has close
ties with investment analysts based
throughout the world.
o Diversification significantly reduces but
does not eliminate risk. The impact on a
fund's share price from a drop in the
price of a particular stock is reduced
substantially by investing in a portfolio
with dozens of different companies.
Likewise, the impact of unfavorable
developments in a particular country is
reduced in the multi-country funds
because investments are spread among many
countries.
Portfolio managers keep close watch on
individual investments as well as on
political and economic trends in each
country and region. Holdings are adjusted
according to the manager's analysis and
outlook.
o While currency translation does
affect the short-run returns
provided by foreign stocks, its
influence on long-term results has
PAGE 30
been far outweighed by price trends
on local stock exchanges. However,
when foreign exchange rates are
expected to be unfavorable for U.S.
investors, fund managers can hedge
the risk through use of currency
forwards and options. In a general
sense, these tools allow a manager
to exchange currencies in the future
at a rate specified in the present.
(For more details, please see
"Foreign Currency Transactions"
under "Investment Policies and
Practices.") If the manager's
forecast is wrong, the hedge may
cause a loss. Also, it may be
difficult or not practical to hedge
currency risk in many emerging
countries.
_________________________
The fund or funds you
select should not be
relied upon as a complete
investment program, nor
be used for short-term
trading purposes. How can I decide which fund may be most
appropriate for me?
First, be sure that your investment
objective is the same as the fund's:
capital appreciation over time. If you
will need the money you plan to invest in
the near future, none of these funds is
suitable.
Second, your decision should take into
account whether you have any other foreign
stock investments. If not, you may wish to
invest in the most diversified funds to
gain the broadest exposure to opportunities
overseas. If you are supplementing
existing holdings, you may wish to narrow
your focus to a region or country-specific
fund.
Third, consider your risk tolerance and the
risk profile of the various funds.
PAGE 31
Is there additional information about the
six funds to help me make a decision?
Yes. You should review the following
investment objectives and other details
about each fund discussed in this
prospectus and other materials you receive
about the funds.
International Stock Fund. The fund's
objective is long-term growth of capital
through investments primarily in common
stocks of established, non-U.S. companies.
The fund expects to invest substantially
all of its assets outside the U.S. and to
diversify broadly among countries
throughout the world, both developed, newly
industrialized, and emerging.
_________________________
Depending on conditions,
the International
Discovery portfolio
should comprise at least
10 countries and 100
different companies. International Discovery Fund. This fund's
objective is long-term growth of capital
through investment primarily in common
stocks of rapidly growing, small- to
medium-sized non-U.S. companies. Such
companies may be found in both developed
and emerging markets. Traditionally, they
are more dynamic and offer greater growth
potential than larger companies, but they
are often overlooked or undervalued by
investors. Smaller companies are generally
riskier than large because they may have
limited product lines, capital, and
managerial resources. Their securities may
be less liquid, that is, they may trade
less frequently and with greater price
swings.
European Stock Fund. The fund's objective
is long-term growth of capital through
investment primarily in common stocks of
both large and small European companies.
Current income is a secondary objective.
PAGE 32
The fund seeks to take advantage of
opportunities arising from such trends as
privatization, the reduction of trade
barriers, and the potential growth of the
emerging economies of Eastern Europe.
Normally, at least five countries will be
represented in the portfolio, and
investments may be made in any of the
countries listed below, as well as others
as their markets develop.
Primary Emphasis: Others:
France Austria Czech Republic
Germany Belgium Greece
Holland Denmark Hungary
Italy Finland Poland
Spain Ireland Slovakia
Sweden Luxembourg Turkey
Switzerland Norway Russia
United Kingdom Portugal
_________________________
Japanese stocks represent
approximately one-quarter
of the world's stock
market capitalization. Japan Fund. This fund's objective is
long-term growth of capital through
investment in common stocks of large and
small companies domiciled or with primary
operations in Japan. Assets will normally
be invested across a wide range of
industries and companies (both small and
large). While a single-country fund may
normally be considered more risky than a
multi-country fund, Japan has a highly
developed and diverse economy which
accounts for approximately 21% of the
world's output.
Investors should be aware that the U.S.
dollar has fallen in value against the
Japanese yen for many years, increasing
returns on Japanese investments for U.S.
investors. There is no assurance this
currency trend will continue, and its
reversal would adversely affect the fund.
PAGE 33
Note: For special pricing and transaction
information about the Japan fund, please
see "Pricing Shares" on page __.
New Asia Fund. The fund's objective is
long-term growth of capital through
investment in large and small companies
domiciled or with primary operations in
Asia, excluding Japan. The fund may also
invest in Pacific Rim countries such as
Australia and New Zealand.
_________________________
Investors should keep in
mind that recent growth
rates among Southeast
Asian economies and fund
returns may not be
sustainable. Countries in which the fund may invest
include those listed below as well as
others in the region, such as China,
Pakistan, and Indochina, as their markets
become more accessible. Investments will
represent a minimum of five countries.
Australia Philippines
Hong Kong Singapore
India South Korea
Indonesia Taiwan
Malaysia Thailand
New Zealand
Economic growth among the Southeast Asia
economies has outstripped both Europe and
Japan in recent years, and the region's
rising prosperity has been reflected in
generally strong investment returns.
_________________________
The Latin America Fund is
registered as "non-
diversified." This means
that it may invest a
greater portion of assets
in a single company and
own more of the company's
voting securities than is
permissible for a
"diversified" fund. Latin America Fund. The fund's objective is
PAGE 34
long-term growth of capital through
investment primarily in common stocks of
companies domiciled, or with primary
operations, in Latin America. Initially the
fund will focus on Mexico, Brazil, Chile,
Argentina, Venezuela, and Colombia, and the
portfolio is normally expected to invest in
at least four countries. Other countries
will be added as opportunities arise and
conditions permit.
The fund expects to make substantial
investments (at times more than 25% of
total assets) in the telephone companies of
various Latin American countries. These
utilities play a critical role in a
country's economic development, but their
stocks could be adversely affected if
trends favoring development were to be
reversed.
At least initially, the fund expects to
make many Latin American investments
indirectly through purchases of such
vehicles as ADRs (American depositary
receipts) traded in the U.S. Direct
investments will increase gradually as the
local stock markets become more liquid.
Latin American and emerging market
countries in general have less developed
economies than many other regions in which
Price-Fleming invests and may continue to
be subject to the effects of unpredictable
political and economic conditions. A number
of these countries have legacies of
political instability, hyperinflation, and
currency devaluations versus the dollar
(which would adversely affect returns to
U.S. investors).
___________________________________________
International Funds Comparison Chart
Risk
Profile
Type (Relative
Geographic of to Each
PAGE 35
Fund Emphasis Company Other)
___________________________________________
Inter- Worldwide Large, Relatively
national (excluding well- conservative
Stock U.S.) established
___________________________________________
Inter- Worldwide Small to Aggressive
national (excluding medium-
Discovery U.S.) sized
___________________________________________
European Europe All sizes Moderate
Stock (including
Eastern
Europe)
___________________________________________
New Asia Far East All sizes Aggressive
and Pacific
Basin
(excluding
Japan)
___________________________________________
Japan Japan All sizes Moderate
___________________________________________
Latin Currently All sizes Very
America Mexico, aggressive
Brazil,
Chile,
Argentina,
Venezuela,
Colombia
___________________________________________
Table 6
What securities can the funds invest in
other than common stocks?
Each of the funds expects to invest
substantially all of its assets in common
stocks. However, the funds may also invest
in a variety of other equity- related
securities, such as preferred stocks,
warrants and convertible securities, as
well as corporate and governmental debt
securities, when considered consistent with
the funds' investment objectives and
program. The funds may also engage in a
variety of investment management practices,
PAGE 36
such as buying and selling futures and
options. Under normal market conditions,
the funds' investments in securities other
than common stocks is limited to no more
than 35% of total assets. However, for
temporary defensive purposes, the funds may
invest all or a significant portion of
their assets in U.S. Government and
corporate debt obligations. The funds will
not purchase any debt security which at the
time of purchase is rated below investment
grade. This would not prevent a fund from
retaining a security downgraded to below
investment grade after purchase.
Where can I find more details about the
funds' policies and practices?
Be sure to review "Investment Policies
and Practices" in Section 3, which
discusses the following: Types of Portfolio
Securities (common and preferred stocks,
convertible securities and warrants, fixed-
income securities, hybrid instruments,
passive foreign investment companies,
private placements); and Types of Fund
Management Practices (cash position,
borrowing money and transferring assets,
foreign currency transactions, futures and
options, lending of portfolio securities,
and portfolio turnover).
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
_________________________
The various ways you can
buy, sell, and exchange
shares are explained at
the end of this
prospectus and on the New
Account Form. Here are some procedures you should know
when investing in a fund.
How and when shares are priced
The share price (also called "net asset
value" or NAV per share) for each fund,
PAGE 37
except the Japan Fund, is calculated at 4
p.m. ET each day the New York Stock
Exchange is open for business. The share
price for the Japan Fund is calculated at 4
p.m. ET each day the New York Stock
Exchange and the Tokyo Stock Exchange are
both open for business. To calculate the
NAV, a fund's assets are priced and
totaled, liabilities are subtracted, and
the balance, called net assets, is divided
by the number of shares outstanding.
The calculation of each 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 each 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.
_________________________
When filling out the New
Account Form, you may
wish to give yourself the
widest range of options
for receiving proceeds
from a sale. How your purchase, sale, or exchange price
is determined
If we receive your request in correct form
before 4 p.m. ET, your transaction will be
priced at that day's NAV. If we receive it
after 4 p.m., it will be priced at the next
business day's NAV.
We cannot accept orders that request a
particular day or price for your
transaction or any other special
conditions.
PAGE 38
Note: The time at which transactions are
priced and until which orders are accepted
may be changed in case of an emergency or
if the New York Stock Exchange closes at a
time other than 4 p.m. ET.
Japan fund: Pricing and Transactions. The
fund will not process orders on any day
when either the New York or Tokyo Stock
Exchange is closed. Orders received on
such days will be priced on the next day
the fund computes its net asset value. As
such, you may experience a delay in
purchasing or redeeming fund shares.
Exchanges. If you wish to exchange into
the Japan fund on a day when the New York
Stock Exchange is open but the Tokyo Stock
Exchange is closed, the exchange out of the
other T. Rowe Price fund will be processed
on that day but Japan fund shares will not
be purchased until the day the Japan fund
reopens. If you wish to exchange out of
the Japan fund on a day when the New York
Stock Exchange is open but the Tokyo Stock
Exchange is closed, the exchange will be
delayed until the Japan fund reopens.
The Tokyo Stock Exchange is scheduled to
be closed on the following weekdays: In
1995--January 2, 3, 16; March 21; May 3, 4,
5; September 15; October 10; and November
3, 23. In 1996--January 1, 2, 3, 15;
February 12; March 20; April 29; May 3, 6;
September 16, 23; October 10; November 4;
and December 23, 31. If the Tokyo Stock
Exchange closes on dates not listed, the
fund will not be priced on those dates.
How you can receive the proceeds from a
sale
_________________________
If for some reason we
cannot accept your
request to sell shares,
we will contact you. If your request is received by 4 p.m. ET
in correct form, proceeds are usually sent
on the next business day. Proceeds can be
PAGE 39
sent to you by mail, or to your bank
account by ACH transfer or bank wire.
Proceeds sent by bank wire should be
credited to your account the next business
day, and proceeds sent by ACH transfer
should be credited the second day after the
sale. ACH (Automated Clearing House) is an
automated method of initiating payments
from and receiving payments in your
financial institution account. ACH is a
payment system supported by over $20,000
banks, savings and credit unions, which
electronically exchanges the transactions
primarily through the Federal Reserve
Banks.
Exception:
o Under certain circumstances and when
deemed to be in the fund's best interest,
your proceeds may not be sent for up to
five business days after receiving your
sale or exchange request. If you were
exchanging into a bond or money fund,
your new investment would not begin to
earn dividends until the sixth business
day.
Contingent Redemption Fees (Latin
America Fund, and International Discovery
Fund). The funds can experience
substantial price fluctuations and are
intended for long-term investors. Short-
term "market timers" who engage in frequent
purchases and redemptions can disrupt the
funds' investment programs and create
additional transaction costs that are borne
by all shareholders. For these reasons,
these funds each assess a 2% fee on
redemptions (including exchanges) of fund
shares held for less than one year. Shares
owned in the International Discovery fund
as of February 27, 1994, are exempt from
the fee.
Redemption fees will be paid to the fund to
help offset transaction costs. The funds
PAGE 40
will use the "first-in, first-out" (FIFO)
method to determine the 12-month holding
period. Under this method, the date of the
redemption or exchange will be compared
with the earliest purchase date of shares
held in the account. If this holding
period is less than 1 year, the fee will be
assessed.
In determining "one year" the funds will
use the anniversary date of a transaction.
Thus, shares purchased on March 1, 1995,
for example, will be subject to the fee if
they are redeemed on or prior to March 1,
1996. If they are redeemed on or after
March 1, 1996, they will not be subject to
the fee.
The fee does not apply to any shares
purchased through reinvestment of dividends
or capital gain distributions, or to shares
held in retirement plans such as 401(k),
403(b), 457, profit sharing, and money
purchase pension accounts. The fee does
apply to shares held in IRA and SEP-IRA
accounts and to shares purchased through
automatic investment plans (described under
"Shareholder Services").
Useful Information on Distributions and
Taxes
_________________________
The funds distribute all
net investment income and
realized capital gains to
shareholders. Dividends and other distributions
Dividend and capital gain distributions are
reinvested in additional fund shares in
your account unless you select another
option on your New Account Form. The
advantage of reinvesting distributions
arises from compounding; that is, you
receive interest and capital gain
distributions on a rising number of shares.
PAGE 41
Dividends not reinvested are paid by check
or transmitted to your bank account via
ACH. If the Post Office cannot deliver your
check, or if your check remains uncashed
for six months, a fund reserves the right
to reinvest your distribution check in your
account at the then current NAV and to
reinvest all subsequent distributions in
shares of the fund.
Income dividends
o The funds declare and pay dividends (if
any) annually.
o The dividends of each fund will not be
eligible for the 70% deduction for
dividends received by corporations, if,
as expected, none of the funds' income
consists of dividends paid by U.S.
corporations.
Capital gains
o A capital gain or loss is the difference
between the purchase and sale price of a
security.
o If the fund has net capital gains for
the year (after subtracting any capital
losses), they are usually declared and
paid in December to shareholders of
record on a specified date that month.
Tax information
_________________________
The funds send timely
information for your tax
filing needs. You need to be aware of the possible tax
consequences when:
o the fund makes a distribution to your
account, or
o you sell fund shares, including an
exchange from one fund to another.
Taxes on fund redemptions.
When you sell shares in any fund, you may
realize a gain or loss. An exchange from
PAGE 42
one fund to another is still a sale for tax
purposes.
In January, the funds will send you Form
1099-B, indicating the date and amount of
each sale you made in the fund during the
prior year. This information will also be
reported to the IRS. We will also tell you
the average cost of the shares you sold
during the year. Average cost information
is not reported to the IRS, and you do not
have to use it. You may calculate the cost
basis using other methods acceptable to the
IRS, such as "specific identification."
To help you maintain accurate records,
we send you a confirmation immediately
following each transaction (except for
systematic purchases and redemptions) you
make and a year-end statement detailing all
your transactions in each fund account
during the year.
Taxes on fund distributions.
_________________________
Distributions are
taxable whether
reinvested in additional
shares or received
in cash. The following summary does not apply to
retirement accounts, such as IRAs which are
tax-deferred until you withdraw money from
them.
In January, the funds will send you Form
1099-DIV indicating the tax status of any
dividend and capital gain distribution made
to you. This information will also be
reported to the IRS. All distributions made
by these funds are taxable to you for the
year in which they were paid. The only
exception is that distributions declared
during the last three months of the year
and paid in January are taxed as though
they were paid by December 31. Dividends
and distributions are taxable to you
regardless of whether they are taken in
PAGE 43
cash or reinvested. The funds will send
you any additional information you need to
determine your taxes on fund distributions,
such as the portion of your dividend, if
any, that may be exempt from state income
taxes.
Short-term capital gains are taxable as
ordinary income and long-term gains are
taxable at the applicable long-term gain
rate. The gain is long or short term
depending on how long the fund held the
securities, not how long you held shares in
the fund.
Distributions resulting from the sale of
certain 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 you tax return for
your portion of foreign taxes paid by the
fund.
Tax effect of buying shares before a
capital gain distribution. If you buy
shares near or on the "record date" -- the
date that establishes you as the person to
receive the upcoming distribution -- you
will receive, in the form of a taxable
distribution, a portion of the money you
just invested. Therefore, you may wish to
find out the fund's record date(s) before
investing. Of course, the fund's share
price may, at any time, reflect
undistributed capital gains or unrealized
appreciation. When these amounts are
eventually distributed, they are taxable.
(Note: For information on the tax
consequences of passive foreign investment
companies and hedging, please see
"Investment Policies and Practices.")
PAGE 44
Transaction Procedures and Special
Requirements
_________________________
Following these
procedures helps assure
timely and accurate
transactions. Purchase Conditions
Nonpayment. If your payment is not received
or you pay with a check or ACH transfer
that does not clear, your purchase will be
cancelled. You will be responsible for any
losses or expenses incurred by the fund or
transfer agent, and the fund can redeem
shares you own in this or another
identically registered T. Rowe Price fund
as reimbursement. The fund and its agents
have the right to reject or cancel any
purchase, exchange, or redemption due to
nonpayment.
U.S. Dollars. All purchases must be paid
for in U.S. dollars; checks must be drawn
on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you
just purchased and paid for by check or ACH
transfer, the fund will redeem your shares
at the price on the day the request is
received, but will generally delay sending
you the proceeds for up to 10 calendar days
to allow the check or transfer to clear. If
you requested a redemption by mail or
mailgram, the proceeds will be mailed no
later than the seventh day following
receipt unless the check or ACH transfer
has not cleared. (The 10-day hold does not
apply to purchases paid for by: bank wire;
cashier's, certified, or treasurer's
checks; or automatic purchases through your
paycheck.)
Telephone transactions. Telephone
exchange and redemption are established
automatically when you sign the New Account
Form unless you check the box which states
PAGE 45
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 a 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 promptly after the
telephone transaction.
Redemptions over $250,000. Large sales can
adversely affect a portfolio manager's
ability to implement a fund's investment
strategy by causing the premature sale of
securities that would otherwise be held. If
in any 90-day period, you redeem (sell)
more than $250,000, or your sale amounts to
more than 1% of the fund's net assets, the
fund has the right to delay sending your
proceeds for up to five business days after
receiving your request, or to pay the
difference between the redemption amount
and the lesser of the two previously
mentioned figures with securities from the
fund.
_________________________
T. Rowe Price may bar
excessive traders from
purchasing shares. Excessive Trading
Frequent trades involving either
substantial fund assets or a substantial
portion of your account or accounts
controlled by you, can disrupt management
of the fund and raise its expenses. We
define "excessive trading" as exceeding one
purchase and sale involving the same fund
within any 120-day period.
For example, you are in fund A. You can
move substantial assets from fund A to fund
B, and, within the next 120 days, sell your
shares in fund B to return to fund A or
move to fund C.
PAGE 46
If you exceed the number of trades
described above, you may be barred
indefinitely from further purchases of T.
Rowe Price funds.
Three types of transactions are exempt from
excessive trading guidelines: (1) trades
solely between money market funds, (2)
redemptions that are not part of exchanges,
and (3) systematic purchases or redemptions
(See "Shareholder Services").
Keeping Your Account Open
Due to the relatively high cost to the
funds of maintaining small accounts, we ask
you to maintain an account balance of at
least $1,000. If your balance is below
$1,000 for three months or longer, the fund
has the right to close your account after
giving you 60 days in which to increase
your balance.
Signature Guarantees
You may need to have your signature
guaranteed in certain situations, such as:
_________________________
A signature guarantee is
designed to protect you
and the fund from fraud
by verifying your
signature.
o Written requests 1) to redeem over
$50,000 or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any
person, address, or bank account not on
record.
o Transferring redemption proceeds to a T.
Rowe Price fund account with a different
registration from yours.
o Establishing certain services after the
account is opened.
PAGE 47
You can obtain a signature guarantee from
most banks, savings institutions,
broker/dealers and other guarantors
acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or
organizations that do not provide
reimbursement in the case of fraud.
3 More About the funds
The Funds' Organization and Management
_________________________
Shareholders benefit
from T. Rowe Price's 58
years of investment
management
experience. How are the funds organized?
The T. Rowe Price International Funds,
Inc. currently consists of ten series, each
representing a separate class of shares and
having different objectives and investment
policies. The ten 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, Global
Government Bond Fund, 1990; Japan Fund,
1991; Short-Term Global Income Fund, 1992;
Latin America Fund, 1993; and Emerging
Markets Bond Fund, 1994. (The Short-Term
Global Income, Global Government Bond,
International Bond, and Emerging Markets
Bond Funds are described in a separate
prospectus.) 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. Although each fund offers only its
own shares, a fund might become liable for
any misstatement in the prospectus about
another fund. The funds' Board has
considered this factor in approving the use
of combined prospectuses.
PAGE 48
What is meant by "shares"?
As with all mutual funds, investors
purchase "shares" when they invest in a
fund. These shares are part of a fund's
authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles
the shareholder to:
o receive a proportional interest in a
fund's capital gain distributions;
o cast one vote per share on certain fund
matters, including the election of fund
directors, changes in fundamental
policies, or approval of changes in a
fund's management contract.
Does each fund have an annual
shareholder meeting?
The funds are not required to hold meetings
but will do so when certain matters, such
as a change in a fund's fundamental
policies, are to be decided. In addition,
shareholders representing at least 10% of
all eligible votes may call a special
meeting if they wish for the purpose of
voting on the removal of any fund director.
If a meeting is held and you cannot attend,
you can vote by proxy. Before the meeting,
the fund will send you proxy materials that
explain the issues to be decided and
include a voting card for you to mail
back.
_________________________
All decisions regarding
the purchase and sale of
fund investments are made
by Price-Fleming--
specifically by the
funds' portfolio
managers. Who runs the funds?
General Oversight. The funds are governed
by a Board of Directors that meets
regularly to review the fund's investments,
performance, expenses, and other business
affairs. The Board elects the funds'
officers. The policy of each fund is that a
PAGE 49
majority of Board members will be
independent of Price-Fleming.
Investment Manager. Price-Fleming is
responsible for selection and management of
each 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, 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.
Portfolio Management. Each fund has an
Investment Advisory Group that has day-to-
day responsibility for managing the
portfolio and developing and executing each
fund's investment program. The members of
each advisory group are listed below.
PAGE 50
International Stock and International
Discovery Funds. Martin G. Wade,
Christopher D. Alderson, Peter B. Askew,
Richard J. Bruce, Mark J. T. Edwards, John
R. Ford, Robert C. Howe, James B. M.
Seddon, Benedict R. F. Thomas, and David J.
L. Warren.
European Stock Fund. Martin G. Wade,
Richard J. Bruce, Mark J. T. Edwards, John
R. Ford, and James B. M. Seddon.
Japan Fund. Martin G. Wade, Christopher D.
Alderson, and David J. L. Warren.
New Asia Fund. Martin G. Wade, Robert C.
Howe, Benedict R. F. Thomas, and David J.
L. Warren.
Latin America Fund. Martin G. Wade, Mark
J. T. Edwards, and John R. Ford.
Martin Wade joined Price-Fleming in 1979
and has 25 years of experience with the
Fleming Group in research, client service
and investment management. (Fleming Group
includes Robert Fleming and/or Jardine
Fleming.) Christopher Alderson joined
Price-Fleming in 1988, and has eight years
of experience with the Fleming Group in
research and portfolio management. Peter
Askew joined Price-Fleming in 1988 and has
19 years of experience managing multi-
currency fixed-income portfolios. Richard
Bruce joined Price-Fleming in 1991 and has
six years of experience in investment
management with the Fleming Group in Tokyo.
Mark Edwards joined Price-Fleming in 1986
and has 13 years of experience in financial
analysis. John Ford joined Price-Fleming
in 1982 and has 14 years of experience with
the Fleming Group in research and portfolio
management. Robert Howe joined Price-
Fleming in 1986 and has 13 years of
experience in economic research, company
research and portfolio management.
Benedict Thomas joined Price-Fleming in
PAGE 51
1988 and has five years of portfolio
management experience. David Warren joined
Price-Fleming in 1984 and has 14 years of
experience in equity research, fixed-income
research and portfolio management.
Portfolio Transactions. Decisions with
respect to the purchase and sale of a
fund's portfolio securities on behalf of
each fund are made by Price-Fleming. The
funds' 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 a 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.
Marketing. T. Rowe Price Investment
Services, Inc., a wholly-owned subsidiary
of T. Rowe Price, distributes (sells)
shares of these and all other T. Rowe Price
funds.
Shareholder Services. T. Rowe Price
Services, Inc., another wholly-owned
subsidiary, acts as the funds' transfer and
dividend disbursing agent and provides
shareholder and administrative services.
Services for certain types of retirement
plans are provided by T. Rowe Price
Retirement Plan Services, Inc., also a
wholly-owned subsidiary. The address for
each is 100 East Pratt St., Baltimore, MD
21202.
How are fund expenses determined?
The management agreement spells out the
expenses to be paid by the fund. In
addition to the management fee, the fund
pays for the following: shareholder service
expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing
PAGE 52
prospectuses and reports sent to
shareholders; registration fees and
expenses; proxy and annual meeting expenses
(if any); and director/trustee fees and
expenses.
The Management Fee. This fee has two
parts--an "individual fund fee" (discussed
on page __) which reflects the fund's
particular investment management costs, and
a "group fee." The group fee, which
reflects the benefits each fund derives
from sharing the resources of the T. Rowe
Price investment management complex, is
calculated monthly based on the net
combined assets of all T. Rowe Price funds
(except Equity Index and both Spectrum
Funds and any institutional or private
label mutual funds). The group fee
schedule (shown below) is graduated,
declining as the asset total rises, so
shareholders benefit from the overall
growth in mutual fund assets.
0.480% First $1 billion
0.450% 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
The funds' portion of the group fee is
determined by the ratio of its daily net
assets to the daily net assets of all the
Price funds described above. Based on
combined Price funds' assets of
approximately $35.5 billion at December 31,
1994, the Group Fee was 0.34%.
Research and Administration. Certain
administrative support is provided by T.
Rowe Price which receives from Price-
PAGE 53
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.
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.
Understanding Performance Information
This section should help you understand the
terms used to describe the funds'
performance. You will come across them in
shareholder reports you receive from us
four times a year, in our newsletters,
"Insights" reports, in T. Rowe Price
advertisements, and in the media.
Total Return
_________________________
Total return is the most
widely used performance
measure. Detailed
performance information
is included in the funds'
annual reports and
quarterly shareholder
reports. This tells you how much an investment in
a fund has changed in value over a given
time period. It reflects any net increase
or decrease in the share price and assumes
that all dividends and capital gains (if
PAGE 54
any) paid during the period were reinvested
in additional shares. Including reinvested
distributions means that total return
numbers include the effect of compounding,
i.e., you receive income and capital gain
distributions on a rising number of
shares.
Advertisements for the fund may include
cumulative or compound average annual total
return figures, which may be compared with
various indices, other performance
measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an
investment for a specified period. A
cumulative return does not indicate how
much the value of the investment may have
fluctuated between the beginning and the
end of the period specified.
Average Annual Total Return
This is always hypothetical. Working
backward from the actual cumulative return,
it tells you what constant year-by-year
return would have produced the actual,
cumulative return. By smoothing out all the
variations in annual performance, it gives
you an idea of the investment's annual
contribution to your portfolio provided you
held it for the entire period in question.
Investment Policies and Practices
This section takes a detailed look at some
of the types of securities the funds may
hold in their portfolios and the various
kinds of investment practices that may be
used in day-to-day portfolio management.
The funds' investment programs are subject
to further restrictions and risks described
in the "Statement of Additional
Information."
_________________________
Fund managers have
considerable leeway in
PAGE 55
choosing investment
strategies and selecting
securities they believe
will help the funds
achieve their objectives. Shareholder approval is required to
substantively change a fund's objective
(stated on page __) and certain investment
restrictions noted in the following section
as "fundamental policies." The managers
also follow certain "operating policies"
which can be changed without shareholder
approval. However, significant changes are
discussed with shareholders in fund
reports. The funds adhere to applicable
investment restrictions and policies at the
time it makes an investment. A later change
in circumstances will not require the sale
of an investment if it was proper at the
time it was made.
The fund's holdings of certain kinds of
investments cannot exceed maximum
percentages of total assets, which are set
forth herein. For instance, each fund is
not permitted to invest more than 10% of
total assets in hybrid instruments. While
these restrictions provide a useful level
of detail about the fund's investment
program, investors should not view them as
an accurate gauge of the potential risk of
such investments. For example, in a given
period, a 5% investment in hybrid
securities could have significantly more
than a 5% impact on the fund's share price.
The net effect of a particular investment
depends on its volatility and the size of
its overall return in relation to the
performance of all the fund's other
investments.
Changes in the fund's holdings, the fund's
performance, and the contribution of
various investments are discussed in the
shareholder reports we send each
quarter.
PAGE 56
Types of Portfolio Securities
In seeking to meet its investment
objective, the funds may invest in any type
of security whose investment
characteristics are consistent with the
fund's investment program. These and some
of the other investment techniques the
funds may use are described in the
following pages.
Fundamental Policy. With the exception
of Latin America Fund, a fund will not
purchase a security if, as a result, with
respect to 75% of its total assets, more
than 5% of its total assets would be
invested in securities of the issuer or
more than 10% of the outstanding voting
securities of the issuer would be held by
one fund.
Non-Diversified Status - Latin America
Fund. The fund is registered as a non-
diversified mutual fund. This means that
the fund may invest a greater portion of
its assets in, and own a greater amount of
the voting securities of, a single company
than a diversified fund which may subject
the fund to greater risk with respect to
its portfolio securities. However, because
the fund intends to qualify as a "regulated
investment company" under the Internal
Revenue Code, it must invest so that, with
respect to 50% of its total assets, not
more than 5% of its assets are invested in
the securities of a single issuer.
Common and Preferred Stocks. Stocks
represent shares of ownership in a company.
Generally, preferred stock has a specified
dividend and ranks after bonds and before
common stocks in its claim on income for
dividend payments and on assets should the
company be liquidated. After other claims
are satisfied, common stockholders
participate in company profits on a pro
rata basis; profits may be paid out in
PAGE 57
dividends or reinvested in the company to
help it grow. Increases and decreases in
earnings are usually reflected in a
company's stock price, so common stocks
generally have the greatest appreciation
and depreciation potential of all corporate
securities. While most preferred stocks
pay a dividend, the funds may purchase
preferred stock where the issuer has
omitted, or is in danger of omitting,
payment of its dividend. Such investments
would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The
funds may invest in debt or preferred
equity securities convertible into or
exchangeable for equity securities.
Traditionally, convertible securities have
paid dividends or interest at rates higher
than common stocks but lower than non-
convertible securities. They generally
participate in the appreciation or
depreciation of the underlying stock into
which they are convertible, but to a lesser
degree. In recent years, convertibles have
been developed which combine higher or
lower current income with options and other
features. Warrants are options to buy a
stated number of shares of common stock at
a specified price any time during the life
of the warrants (generally, two or more
years).
Fixed Income Securities. The funds may
invest in any type of investment-grade
security. Such securities would be
purchased in companies which meet the
investment criteria for the fund. The
price of a bond fluctuates with changes in
interest rates, rising when interest rates
fall and falling when interest rates rise.
Hybrid Instruments. These instruments can
combine the characteristics of securities,
futures and options. For example, the
principal amount, redemption or conversion
PAGE 58
terms of a security could be related to the
market price of some commodity, currency or
securities index. Such securities may bear
interest or pay dividends at below market
(or even relatively nominal) rates. Under
certain conditions, the redemption value of
such an investment could be zero. Hybrids
can have volatile prices and limited
liquidity and their use by a fund may not
be successful.
Operating Policy. Each fund may invest up
to 10% of its total assets in hybrid
instruments.
Passive Foreign Investment Companies. Each
fund may purchase the securities of certain
foreign investment funds or trusts called
passive foreign investment companies. Such
trusts have been the only or primary way to
invest in certain countries. In addition
to bearing their proportionate share of the
trust's expenses (management fees and
operating expenses) shareholders will also
indirectly bear similar expenses of such
trusts. Capital gains on the sale of such
holdings are considered ordinary income
regardless of how long the fund held 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, each T.
Rowe Price fund intends to treat these
securities as sold on the last day of its
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.
PAGE 59
Private Placements. These securities are
sold directly to a small number of
investors, usually institutions. Unlike
public offerings, such securities are not
registered with the SEC. Although certain
of these securities may be readily sold,
for example, under Rule 144A, the sale of
others may involve substantial delays and
additional costs.
Operating Policy. Each fund will not invest
more than 15% of its net assets in illiquid
securities, and no more than 5% in certain
restricted securities.
Types of Management Practices
_________________________
Cash reserves provide
flexibility and serve as
a short-term defense
during periods of unusual
market volatility. Cash Position. Each fund will hold a
certain portion of its assets in U.S. and
foreign dollar denominated money market
securities, including repurchase
agreements, in the two highest rating
categories, maturing in one year or less.
For temporary, defensive purposes, a fund
may invest without limitation in such
securities. This reserve position provides
flexibility in meeting redemptions,
expenses, and the timing of new
investments, and serves as a short-term
defense during periods of unusual market
volatility.
Borrowing Money and Transferring Assets.
Each fund can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the funds'
investment objectives and program. Such
borrowings may be collateralized with fund
assets, subject to restrictions.
PAGE 60
Fundamental Policy. Borrowings may not
exceed 33 1/3% of a fund's total fund
assets.
Operating Policies. Each fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of the fund's total
assets. A fund may not purchase additional
securities when borrowings exceed 5% of
total assets.
Foreign Currency Transactions. The funds
will normally conduct their 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 funds will generally not
enter into a forward contract with a term
of greater than one year.
The funds will generally enter into forward
foreign currency exchange contracts only
under two circumstances. First, when a
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, a fund may commit a
substantial portion or the entire value of
its portfolio to the consummation of these
contracts. Price-Fleming will consider the
PAGE 61
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 a fund's total return could
be adversely affected as a result.
There are certain markets where it is
not possible to engage in effective foreign
currency hedging. This may be true, for
example, for the currencies of various
Latin American countries and other emerging
markets where the foreign exchange markets
are not sufficiently developed to permit
hedging activity to take place.
_________________________
Futures are used to
manage risk; options give
the investor the option
to buy or sell an asset
at a predetermined price
in the future. Futures and Options. Futures (a types of
derivative) are often used to manage risk,
because they enable the investor to buy or
sell an asset in the future at an agreed
upon price. Options (another type of
derivative) give the investor the right,
but not the obligation, to buy or sell an
asset at a predetermined price in the
future. The funds may buy and sell futures
contracts (and options on such contracts)
to manage its exposure to changes in
securities prices and foreign currencies
and as an efficient means of adjusting
overall exposure to certain markets. The
funds may purchase, sell, or write call and
put options on securities, financial
indices, and foreign currencies.
Futures Contracts and Options may not
always be successful hedges; their prices
can be highly volatile; using them could
PAGE 62
lower a fund's total return; and the
potential loss from the use of futures can
exceed a fund's initial investment in such
contracts.
Operating Policies. Futures: Initial margin
deposits and premiums on options used for
non-hedging purposes will not equal more
than 5% of a fund's net asset value.
Options on securities: The total market
value of securities against which a fund
has written call or put options may not
exceed 25% of its total assets. A fund
will not commit more than 5% of its total
assets to premiums when purchasing call or
put options.
Tax Consequences of Hedging. Under
applicable tax law, the funds may be
required to limit their gains from hedging
in foreign currency forwards, futures and
options. Although the funds are expected
to comply with such limits, the extent to
which these limits apply is subject to tax
regulations as yet unissued. Hedging may
also result in the application of the mark-
to-market and 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 funds and could affect whether
dividends paid by the funds are classified
as capital gains or ordinary income.
Lending of Portfolio Securities. Like other
mutual funds, the funds may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
insolvency of the broker-dealer or other
borrower. In this event, the funds could
experience delays in recovering securities
and possibly capital losses.
Fundamental Policy. The value of loaned
securities may not exceed 33 1/3% of a
fund's total assets.
PAGE 63
Portfolio Transactions. Turnover is an
indication of
frequency. ____________________________
The funds Portfolio Turnover Rates
will not
generally 1992 1993 1994
trade in ____________________________
securities Interna-
for short-term tional
profits, but Stock Fund37.8% 29.8%*22.9%
when circum- ____________________________
stances Interna-
warrant, tional
securities Discovery
may be Fund 38.0% 71.8%*57.4%
purchased ____________________________
and sold European
without regard Stock Fund52.0% 21.3%*24.5%
to the length ____________________________
of time held. Japan Fund41.6% 61.4%*61.5%
The funds' ____________________________
portfolio New Asia
turnover rates Fund 36.3% 40.4%*63.2%
for the ____________________________
previous three Latin
years are America
shown in Fund ** ** 12.2%*
Table 7. ____________________________
*Annualized.
**Prior to commencement of
fund operations.
____________________________
Table 7
European, Japan, New Asia and Latin America
funds
Location of Company. In determining the
domicile or nationality of a company, the
funds would primarily consider the
following factors: whether the company is
organized under the laws of a particular
country; or, whether the company derives a
significant proportion (at least 50%) of
its revenues or profits from goods produced
or sold, investments made, or services
PAGE 64
performed in the country or has at least
50% of its assets situated in that country.
Each of these funds will invest at least
65% of its total assets in companies
located (as defined above) in the
respective countries or regions indicated.
4 Investing with T. Rowe Price
________________________
Always verify your
transactions by carefully
reviewing the
confirmation we send
you. Please report any
discrepancies to
Shareholder Services. 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 funds
to withhold a percentage (currently 31%) of
your dividends, capital gain distributions,
and redemptions, and may subject you to an
IRS fine. You will also 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.
Unless you request otherwise, one
shareholder report will be mailed to
multiple account owners with the same tax
identification number and same zip code and
to shareholders who have requested that
their account be combined with someone
else's for financial reporting.
Opening a New Account: $2,500 minimum
initial investment; $1,000 for retirement
or gifts or transfers to minors (UGMA/UTMA)
accounts
Account Registration
If you own other T. Rowe Price funds, be
PAGE 65
sure to register any new account just like
your existing accounts so you can exchange
among them easily. (The name and account
type would have to be identical.)
________________________
Regular Mail
T. Rowe Price
Account Services
P.O. Box 17300
Baltimore, MD
21298-9353
Mailgram, Express,
Registered, or Certified
Mail
T. Rowe Price
Account Services
10090 Red Run Blvd.
Owings Mills, MD 21117 By Mail
Please make your check payable to T. Rowe
Price Funds otherwise it will be returned
(we do not accept third party checks to
open new accounts) and send it together
with the New Account Form to the address at
left.
By Wire
o Call Investor Services for an account
number and give the following wire
address to your bank: Morgan Guaranty
Trust Co. of New York, ABA# 021000238,
T. Rowe Price [fund name], AC-00153938.
Provide fund name, account name(s), and
account number.
o Complete a New Account Form and mail it
to one of the appropriate addresses
listed at left.
Note: No services will be established and
IRS penalty withholding may occur until a
signed New Account Form is received.
Also, retirement plans cannot be opened
by wire.
By Exchange
Call Shareholder Services. The new account
will have the same registration as the
PAGE 66
account from which you are exchanging.
Services for the new account may be carried
over by telephone request if preauthorized
on the existing account. (See explanation
of "Excessive Trading " under "Transaction
Procedures.")
In Person
Drop off your New Account Form at any of
the locations listed below and obtain a
receipt.
Drop-off locations:
101 East Lombard St. T. Rowe Price
Baltimore, MD Financial Center
10090 Red Run. Blvd.
Owings Mills, MD
Farragut Square ARCO Tower
900 17th St., N.W. 31st Floor
Washington, D.C. 515 South Flower St.
Los Angeles, CA
Note: The fund and its agents reserve the
right to waive or lower investment
minimums; to accept initial purchases by
telephone or mailgram; cancel or rescind
any purchase or exchange upon notice to the
shareholder within five business days of
the trade or if the written confirmation
has not been received by the shareholder,
whichever is sooner (for example, if an
account has been restricted due to
excessive trading or fraud); to otherwise
modify the conditions of purchase or any
services at any time; or to act on
instructions believed to be genuine.
Purchasing Additional Shares: $100 minimum
purchase; $50 minimum for retirement plans
and Automatic Asset Builder; $5,000 minimum
for telephone purchases.
By ACH Transfer
Use Tele*Access(registered trademark),
PC*Access(registered trademark) or call
PAGE 67
Investor Services if you have established
electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire
address in "Opening a New Account."
________________________
Regular Mail
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD
21289-1500 By Mail
o Provide your account number and the fund
name on your check.
o Mail the check to us at the address shown
at left either with a reinvestment slip
or a note indicating the fund and account
number in which you wish to purchase
shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder
section on the New Account or Shareholder
Services Form ($50 minimum).
By Phone
Call Shareholder Services to lock in that
day's closing price; payment is due within
five days ($5,000 minimum). Note: The
current collected balance in your fund
account must equal at least 25% of your
telephone purchase for additional shares.
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our
phones busy during unusually volatile
markets, please consider placing your order
by Tele*Access, PC*Access or mailgram (if
you have previously authorized telephone
services), or by express mail. For exchange
policies, please see "Transaction
Procedures and Special Requirements -
Excessive Trading."
PAGE 68
Redemption proceeds can be mailed to your
account address, sent by ACH transfer, or
wired to your bank. For charges, see
"Electronic Transfers - By Wire" on page
__.
___________________
Mailgram, Express,
Registered, or
Certified Mail
(See page __.) By Mail
Provide account name(s) and numbers, fund
name(s), and exchange or redemption amount.
For exchanges, mail to the appropriate
address below or at left, indicate the fund
you are exchanging from and the fund(s) you
are exchanging into. T. Rowe Price requires
the signatures of all owners exactly as
registered, and possibly a signature
guarantee (see "Transaction Procedures and
Special Requirements--Signature
Guarantees").
Regular Mail
For non-retirement For employer-sponsored
and IRA accounts: retirement accounts:
T. Rowe Price T. Rowe Price Trust
Account Services Company
P.O. Box 89000 P.O. Box 89000
Baltimore, MD Baltimore, MD
21289-0220 21289-0300
___________________
T. Rowe Price Trust
Company
1-800-492-7670
1-410-625-6585 Note: Redemptions 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.
_______________________
Shareholder Services
1-800-225-5132
1-410-625-6500 Shareholder Services
PAGE 69
Many services are available to you as a T.
Rowe Price shareholder; some you receive
automatically and others you must authorize
on the New Account Form. By signing up for
services on the New Account Form rather
than later, you avoid having to complete a
separate form and obtain a signature
guarantee. This section reviews some of the
principal services currently offered. Our
Services Guide contains detailed
descriptions of these and other services.
If you are a new T. Rowe Price investor,
you will receive a Services Guide with our
Welcome Kit. Note: Corporate and other
institutional accounts require an original
or certified resolution to establish
services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for
individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs,
Keoghs (profit sharing, money purchase
pension), 401(k), and 403(b)(7). For
information on IRAs, call Investor
Services. For information on all other
retirement plans, please call our Trust
Company at 1-800-492-7670.
__________________
Investor Services
1-800-638-5660
1-410-547-2308 Exchange Service
You can move money from one account to an
existing identically registered account, or
open a new identically registered account.
Remember, exchanges are purchases and sales
for tax purposes. (Exchanges into a state
tax-free fund are limited to investors
living in states where the funds are
registered.) Some of the T. Rowe Price
funds may impose a redemption fee of .50%
to 2%, payable to such funds, on shares
held for less than one year, or in some
funds, six months.
PAGE 70
Note: Shares purchased by telephone may
not be exchanged to another fund until
payment for the original purchase has been
received.
Automated Services
Tele*Access. 24-hour service via toll-free
number provides information such as yields,
prices, dividends, account balances, and
your latest transaction as well as the
ability to request prospectuses and account
forms and initiate purchase, redemption and
exchange orders in your accounts (see
"Electronic Transfers" below).
PC*Access. 24-hour service via dial-up
modem provides the same information as
Tele*Access, but on a personal computer.
Please call Investor Services for an
information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling
one of our service representatives or by
visiting one of our four investor center
locations. For Investor Center addresses,
see "Drop-off locations" on page __.
Electronic Transfers
By ACH. With no charges to pay, you can
initiate a purchase or redemption for as
little as $100 or as much as $100,000
between your bank account and fund account
using the ACH network. Enter instructions
via Tele*Access, PC*Access or call
Shareholder Services.
By Wire. Electronic transfers can also be
conducted via bank wire. There is currently
a $5 fee for wire redemptions under $5,000,
and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Automatic Investing ($50 minimum) You can
invest automatically in several different
ways, including:
PAGE 71
o Automatic Asset Builder. You instruct us
to move $50 or more once a month or less
often from your bank account, or you can
instruct your employer to send all or a
portion of your paycheck to the fund or
funds you designate.
o Automatic Exchange. Enables you to set up
systematic investments from one fund
account into another, such as from a
money fund into a stock fund.
Discount Brokerage
You can trade stocks, bonds, options,
precious metals and other securities at a
substantial savings over regular commission
rates. Call Investor Services for
information.
Note: If you buy or sell T. Rowe Price
Funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you
may be charged transaction or service fees
by those institutions. No such fees are
charged by T. Rowe Price Investment
Services or the fund for transactions
conducted directly with the fund.
PAGE 72
Prospectus
To Open an Account
Investor Services International
1-800-638-5660 Equity Funds
1-410-547-2308
For Existing Accounts To help you ______________
Shareholder Services achieve your A choice of
1-800-225-5132 financial goals, T. Rowe Price worldwide and
1-410-625-6500 T. Rowe Price International regional stock
offers a wide Funds, Inc. funds for
For Yields & Prices range of stock, March 1, investors
Tele*Access(registered bond, and money 1995 seeking to
trademark) market diversify
1-800-638-2587 investments, as beyond U.S.
1-410-625-7676 well as borders.
24 hours, 7 days convenient
services and
timely,
Investor Centers informative
reports.
101 East Lombard St.
Baltimore, MD
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD
Farragut Square
900 17th Street, N.W.
Washington, D.C.
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA T. Rowe Price
Invest With
Confidence
(registered
trademark)
PAGE 73
INTERNATIONAL STOCK FUND
Facts at a Glance
Investment Goal
To provide capital appreciation
through investment primarily in
established companies based outside
the United States.
Strategy
Invests worldwide primarily in well-
established, non-U.S. companies.
Risk/Reward
The fund's share price will
fluctuate with changes in market,
economic, and foreign currency
exchange conditions. High potential
risk and reward.
Investor Profile
Those seeking enhanced appreciation
potential over time and greater
diversification for their equity
investments who can accept the
volatility of stock prices and the
special risks that accompany
international investing.
Fees and Charges 100% no load. No
sales charges; free telephone
exchange; no 12b-1 marketing fees.
Investment Manager Rowe Price-
Fleming International, Inc., was
founded in 1979 as a joint venture
between T. Rowe Price Associates,
Inc. and Robert Fleming Holdings
Ltd. As of December 31, 1994, Price-
Fleming managed over $18 billion in
foreign stocks and bonds through its
offices in Baltimore, London, Tokyo,
and Hong Kong.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE
PAGE 74
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. T. Rowe Price
International Funds, Inc.
March 1, 1995
Prospectus
Contents
______________________
1 About the Fund
______________________
Transaction and Fund
Expenses
______________________
Financial Highlights
______________________
Fund, Market, and Risk
Characteristics
______________________
2 About Your Account
______________________
Pricing Shares;
Receiving Sale
Proceeds
______________________
Distributions and Taxes
______________________
Transaction Procedures
and Special Requirements
______________________
3 More About the Fund
______________________
Organization and
Management
______________________
Understanding Fund
Performance
______________________
Investment Policies
and Practices
______________________
PAGE 75
4 Investing With T. Rowe
Price
______________________
Meeting Requirements for
New Accounts
______________________
Opening a New Account
______________________
Purchasing Additional
Shares
______________________
Exchanging and Redeeming
______________________
Shareholder Services
______________________
This prospectus
contains information you
should know before
investing. Please keep
it for future reference.
A Statement of
Additional Information
about the fund, dated
March 1, 1995, has been
filed with the
Securities and Exchange
Commission and is
incorporated by
reference in this
prospectus. To obtain a
free copy, call
1-800-638-5660.
PAGE 76
1 About the Fund
Transaction and fund Expenses
These tables should help you understand the
kinds of expenses you will bear directly or
indirectly as a fund shareholder.
In Table 1 below, "Shareholder
Transaction Costs," shows that you pay no
sales charges. All the money you invest in
a fund goes to work for you, subject to the
fees explained below. "Annual Fund
Expenses," provides an estimate of how much
it will cost to operate the fund for a
year, based on 1994 fiscal year expenses
These are costs you pay indirectly, because
they are deducted from the fund's total
assets before the daily share price is
calculated and before dividends and other
distributions are made. In other words,
you will not see these expenses on your
account statement.
_______________________________________
Shareholder Transaction Expenses
___________________________________________
Sales charge "load" on
purchases None
___________________________________________
Sales charge "load" on
reinvested
dividends None
__________________________________________
Redemption fees None
___________________________________________
Exchange fees None
___________________________________________
Percentage of Fiscal
Annual Fund 1994 Average Net
Expenses Assets
___________________________________________
Management fee 0.69%
(after reduction)
___________________________________________
Marketing fees
(12b-1) None
PAGE 77
___________________________________________
Total other (Shareholder
servicing, custodial,
auditing, etc.) 0.27%
___________________________________________
Total fund
expenses (after
reduction) 0.96%
___________________________________________
Note: The fund charges a $5 fee for wire
redemptions under $5,000, subject to change
without notice.
___________________________________________
Table 1
The main types of expenses, which all
mutual funds may charge against fund
assets, are:
o A management fee: the percent of
fund assets paid to the fund's
investment manager. The fund's fee
comprises both a group fee,
discussed later, and an individual
fund fee of 0.35%.
o "Other" administrative expenses:
primarily the servicing of
shareholder accounts, such as
providing statements, reports,
disbursing dividends, as well as
custodial services.
_________________________
For the fiscal year
ended October 31, 1994,
fees paid by the fund
included the following:
$2,515,000 to T. Rowe
Price Services, Inc. for
transfer and dividend
disbursing functions and
shareholder services;
$4,002,000 to T. Rowe
Price Retirement Plan
Services, Inc. for
recordkeeping services
PAGE 78
for certain retirement
plans; and $125,000 to T.
Rowe Price for accounting
services. o Marketing or distribution fees: an
annual charge ("12b-1") to existing
shareholders to defray the cost of
selling shares to new shareholders.
T. Rowe Price funds do not levy 12b-
1 fees.
For further details on fund
expenses, please see "The Funds'
Organization and Management."
o Hypothetical example: Assume you
invest $1,000, the fund returns 5%
annually, expense ratios remain as
previously listed, and you close
your account at the end of the time
periods shown. Your expenses would
be:
_________________________
The table at right is
just an example, and
actual expenses can be
higher or lower than
those shown. ___________________________________________
1 Year 3 Years 5 Years 10 Years
___________________________________________
$10 $32 $56 $124
__________________________________________
Table 2
Financial Highlights
The following table provides information
about the fund's financial history. It is
based on a single share outstanding
throughout each fiscal year. The
respective table is part of the fund's
financial statements which are included in
the fund's annual report and are
incorporated by reference into the
Statement of Additional Information. This
document is available to shareholders upon
request. The financial statements in the
PAGE 79
annual report have been audited by Price
Waterhouse, LLP, whose unqualified report
covers the periods shown.
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
1985 $ 6.59 $ .11 $ 2.71 $ 2.82$ (.15) $ (.22)$ (.37)
1986 9.04 .11 5.23 5.34 (.11) (1.38) (1.49)
1987 12.89 .12 .74 .86 (.23) (4.98) (5.21)
1988 8.54 .16 1.36 1.52 (.16) (.93) (1.09)
1989 8.97 .16 1.94 2.10 (.16) (.67) (.83)
1990 10.24 .22 (1.13) (.91) (.16) (.36) (.52)
1991 8.81 .15 1.22 1.37 (.15) (.49) (.64)
1992 9.54 .14 (.47) (.33) (.16) (.16) (.32)
1993a 8.89 .10 2.75 2.85 -- -- --
1994 11.74 .09 1.30 1.39 (.09) (.20) (.29)
_________________________________________________________________
PAGE 80
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End of Reinvested Assets ($ Net age Net over
Ended Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
1985 $ 9.04 45.3% $ 376,843 1.11% 1.54% 61.9%
1986 12.89 61.3% 790,020 1.10% 0.89% 56.4%
1987 8.54 8.0% 642,463 1.14% 0.93% 76.5%
1988 8.97 17.9% 630,114 1.16% 1.78% 42.4%
1989 10.24 23.7% 970,214 1.10% 1.63% 47.8%
1990 8.81 (8.9%) 1,030,848 1.09% 2.16% 47.1%
1991 9.54 15.9% 1,476,309 1.10% 1.51% 45.0%
1992 8.89 (3.5%) 1,949,631 1.05% 1.49% 37.8%
1993a 11.74 32.1% 2,746,055 1.01%b 1.52%b 29.8%b
1994 12.84 12.0% 6,205,713 0.96% 1.11% 22.9%
_________________________________________________________________
a For the ten months ended October 31, 1993. Fiscal year-end
changed from December 31 to October 31.
b Annualized.
_________________________________________________________________
Table 3
Fund, Market, and Risk Characteristics: What to Expect
To help you decide whether the fund is
appropriate for you, this section takes a
closer look at its investment objective and
approach.
Why invest internationally?
There are three main reasons:
o Expanded investment opportunities. More
than half of the world's total stock
market capitalization and nearly two-
thirds of global GNP consists of non-U.S.
stocks and companies.
PAGE 81
o The potential for higher returns.
Foreign stocks represented by the Morgan
Stanley EAFE Index (Europe, Australia,
Far East) outperformed U.S. stocks
measured by the S&P 500 Stock Index in
every rolling 10-year period from 1981
through 1994.
o Lower overall volatility in your
investment portfolio through increased
diversification. Since foreign stock
markets tend to move independently of the
U.S. market and each other, spreading
investments across a number of markets
can help smooth out fluctuations in the
returns of your total equity holdings.
What are some of the opportunities
represented by major overseas markets?
o Europe: Market deregulation,
privatization, and lower trade barriers
have expanded the range of investment
opportunities. The emergence of
capitalist economies in Eastern Europe
could, over the long term, open
previously inaccessible markets and also
provide a lower-cost, skilled labor pool,
which may further stimulate European
economies.
o Asia: No longer solely dependent on the
Japanese "engine" for growth, the newly
industrialized countries of the Pacific
Rim are powered by worldwide exports and,
increasingly, by strong inter-regional
demand. In addition, China's move toward
a more capitalistic economy has positive
implications for the entire region's
future.
o Japan: Although its growth rate has
slowed, the longer-term outlook for
Japan's economy is positive. In addition
to its productive labor force,
technological expertise, and commitment
to capital investment, Japan's shift to a
PAGE 82
more domestic-oriented economy should
promote future growth and create new
investment opportunities.
o Latin America: After years of stagnation,
some countries here are experiencing
rising growth rates that reflect lower
trade barriers, privatization of
industry, progress on reducing inflation
and restructuring of national debt
burdens.
o Emerging markets: A number of
countries in Latin America, the Far
East, Europe, and Africa are
emerging from economic periods of
stagnation and offer the potential
for growth exceeding that of the
United States and other developed
countries. The emerging market
countries initiating market-based
economic reforms are expected to
benefit from significant amounts of
capital in-flows.
_________________________
The fund's share price
will fluctuate, when you
sell your shares, you may
lose money. What can I expect in terms of price
volatility?
Like U.S. stock investments, common stocks
of foreign companies offer investors a way
to build capital over time. Nevertheless,
the long-term rise of foreign stock prices
as a group has been punctuated by periodic
declines. As in the U.S., share prices of
even the best managed, most profitable
corporations are subject to market risk,
which means they can fluctuate widely.
In less liquid and well developed stock
markets, such as those in some Asian, and
most Latin American and African countries,
volatility may be heightened by actions of
a few major investors. For example,
substantial increases or decreases in cash
PAGE 83
flows of mutual funds investing in these
markets could significantly affect stock
prices and, therefore, share prices.
Risk Factors
What are the major risks associated with
international investing and this fund?
Foreign stock prices are subject to many
of the same influences as U.S. stocks, such
as general economic conditions, company and
industry earnings prospects, and investor
psychology. International investing also
involves additional risks which can
increase the potential for the losses in
the fund. These risks can be significantly
magnified for investments in emerging
markets.
_________________________
Exchange rate movements
can be large and can last
for extended periods. o Currency fluctuations. Transactions in
foreign securities are conducted in local
currencies, so dollars must be exchanged
for another currency each time a stock is
bought or sold or a dividend is paid.
Likewise, share-price quotations and
total return information reflect
conversion into dollars. Fluctuations in
foreign exchange rates can significantly
increase or decrease the dollar value of
a foreign investment, boosting or
offsetting its local market return. For
example, if a French stock rose 10% in
price during a year, but the U.S. dollar
gained 5% against the French franc during
that time, the U.S. investor's return
would be reduced to 5%. This is because
the franc would "buy" fewer dollars at
the end of the year than at the
beginning, or, conversely, a dollar would
buy more francs.
o Costs. It is more expensive for U.S.
investors to trade in foreign markets
than in the U.S. Mutual funds offer a
PAGE 84
very efficient way for individuals to
invest abroad, but the overall expense
ratios of international funds are usually
somewhat higher than those of typical
domestic stock funds.
_________________________
While certain
countries have made
progress in economic
growth, liberalization,
fiscal discipline, and
political and social
stability, there is no
assurance these trends
will continue. o Political and economic factors. The
economies, markets, and political
structures of a number of the countries
in which each fund can invest do not
compare favorably with the United States
and other mature economies in terms of
wealth and stability. Therefore,
investments in these countries will be
riskier and more subject to erratic and
abrupt price movements.
Some economies are less well developed
and less diverse (for example, Latin
America, Eastern Europe, African and
certain Asian countries), and more
vulnerable to the ebb and flow of
international trade, trade barriers, and
other protectionist or retaliatory
measures (for example, Japan, Southeast
Asia, Latin America and Africa). Some
countries, particularly in Latin America
and Africa, are grappling with severe
inflation and high levels of national
debt. Investments in countries that have
recently begun moving away from central
planning and state-owned industries
toward free markets, such as the Eastern
European, Chinese and African economies,
should be regarded as speculative.
Certain countries have histories of
instability and upheaval (Latin America
and Africa) and internal politics that
PAGE 85
could cause their governments to act in a
detrimental or hostile manner toward
private enterprise or foreign investment.
Such actions, for example, nationalizing
a company or industry, expropriating
assets, or imposing punitive taxes, could
have a severe effect on security prices
_________________________ and impair the fund's ability to
For more details on repatriate capital or income.
potential risks of
foreign investments, see
"Investment Policies and
Practices."[/R] o Legal, regulatory, and operational.
Many countries lack uniform
accounting, auditing, and financial
reporting standards, have less
governmental supervision of
financial markets than in the U.S.,
do not honor legal rights enjoyed in
the U.S., and have settlement
practices, such as delays, which
could subject the fund to risks of
loss not customary in the U.S.
o Pricing. Portfolio securities may be
listed on foreign exchanges that are open
on days (such as Saturdays) when the
funds do not compute their prices. As a
result, a fund's net asset value may be
significantly affected by trading on days
when shareholders cannot make
transactions. (For specific information
on the Tokyo Stock Exchange, please see
page ___.)
How do fund managers try to reduce risk?
The principal tools are intensive research
and diversification; currency hedging
techniques are used from time to time.
o In addition to conducting on-site
research in portfolio countries and
companies, Rowe Price-Fleming has close
ties with investment analysts based
throughout the world.
PAGE 86
o Diversification significantly reduces but
does not eliminate risk. The impact on a
fund's share price from a drop in the
price of a particular stock is reduced
substantially by investing in a portfolio
with dozens of different companies.
Likewise, the impact of unfavorable
developments in a particular country is
reduced in the multi-country funds
because investments are spread among many
countries.
Portfolio managers keep close watch on
individual investments as well as on
political and economic trends in each
country and region. Holdings are adjusted
according to the manager's analysis and
outlook.
o While currency translation does
affect the short-run returns
provided by foreign stocks, its
influence on long-term results has
been far outweighed by price trends
on local stock exchanges. However,
when foreign exchange rates are
expected to be unfavorable for U.S.
investors, fund managers can hedge
the risk through use of currency
forwards and options. In a general
sense, these tools allow a manager
to exchange currencies in the future
at a rate specified in the present.
(For more details, please see
"Foreign Currency Transactions"
under "Investment Policies and
Practices.") If the manager's
forecast is wrong, the hedge may
cause a loss. Also, it may be
difficult or not practical to hedge
currency risk in many emerging
countries.
_________________________
The fund should not be
relied upon as a complete
investment program, nor
PAGE 87
be used for short-term
trading purposes. How can I decide if the fund may be
appropriate for me?
First, be sure that your investment
objective is the same as the fund's:
capital appreciation over time. If you
will need the money you plan to invest in
the near future, the fund is not suitable.
Second, your decision should take into
account whether you have any other foreign
stock investments.
Third, consider your risk tolerance and the
risk profile of the fund.
Is there additional information about the
fund to help me make a decision?
Yes. You should review the following
details about the fund discussed in this
prospectus and other materials you receive
about the fund.
The fund's objective is long-term growth of
capital through investments primarily in
common stocks of established, non-U.S.
companies.
The fund expects to invest substantially
all of its assets outside the U.S. and to
diversify broadly among countries
throughout the world, both developed, newly
industrialized, and emerging.
The fund expects to invest substantially
all of its assets in common stocks.
However, the funds may also invest in a
variety of other equity- related
securities, such as preferred stocks,
warrants and convertible securities, as
well as corporate and governmental debt
securities, when considered consistent with
the funds' investment objectives and
program. The funds may also engage in a
variety of investment management practices,
such as buying and selling futures and
PAGE 88
options. Under normal market conditions,
the funds' investments in securities other
than common stocks is limited to no more
than 35% of total assets. However, for
temporary defensive purposes, the funds may
invest all or a significant portion of
their assets in U.S. Government and
corporate debt obligations. The funds will
not purchase any debt security which at the
time of purchase is rated below investment
grade. This would not prevent a fund from
retaining a security downgraded to below
investment grade after purchase.
Where can I find more details about the
fund's policies and practices?
Be sure to review "Investment Policies
and Practices" in Section 3, which
discusses the following: Types of Portfolio
Securities (common and preferred stocks,
convertible securities and warrants, fixed-
income securities, hybrid instruments,
passive foreign investment companies,
private placements); and Types of Fund
Management Practices (cash position,
borrowing money and transferring assets,
foreign currency transactions, futures and
options, lending of portfolio securities,
and portfolio turnover).
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
_________________________
The various ways you can
buy, sell, and exchange
shares are explained at
the end of this
prospectus and on the New
Account Form. Here are some procedures you should know
when investing in the fund.
How and when shares are priced
The share price (also called "net asset
value" or NAV per share) for the fund is
calculated at 4 p.m. ET each day the New
PAGE 89
York Stock Exchange is open for business.
To calculate the NAV, the fund's assets are
priced and totaled, liabilities are
subtracted, and the balance, called net
assets, is divided by the number of shares
outstanding.
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.
_________________________
When filling out the New
Account Form, you may
wish to give yourself the
widest range of options
for receiving proceeds
from a sale. How your purchase, sale, or exchange price
is determined
If we receive your request in correct form
before 4 p.m. ET, your transaction will be
priced at that day's NAV. If we receive it
after 4 p.m., it will be priced at the next
business day's NAV.
We cannot accept orders that request a
particular day or price for your
transaction or any other special
conditions.
Note: The time at which transactions are
priced and until which orders are accepted
may be changed in case of an emergency or
if the New York Stock Exchange closes at a
time other than 4 p.m. ET.
PAGE 90
How you can receive the proceeds from a
sale
_________________________
If for some reason we
cannot accept your
request to sell shares,
we will contact you. If your request is received by 4 p.m. ET
in correct form, proceeds are usually sent
on the next business day. Proceeds can be
sent to you by mail, or to your bank
account by ACH transfer or bank wire.
Proceeds sent by bank wire should be
credited to your account the next business
day, and proceeds sent by ACH transfer
should be credited the second day after the
sale. ACH (Automated Clearing House) is an
automated method of initiating payments
from and receiving payments in your
financial institution account. ACH is a
payment system supported by over $20,000
banks, savings and credit unions, which
electronically exchanges the transactions
primarily through the Federal Reserve
Banks.
Exception:
o Under certain circumstances and when
deemed to be in the fund's best interest,
your proceeds may not be sent for up to
five business days after receiving your
sale or exchange request. If you were
exchanging into a bond or money fund,
your new investment would not begin to
earn dividends until the sixth business
day.
Useful Information on Distributions and
Taxes
_________________________
The fund distributes all
net investment income and
realized capital gains to
shareholders. Dividends and other distributions
Dividend and capital gain distributions are
reinvested in additional fund shares in
PAGE 91
your account unless you select another
option on your New Account Form. The
advantage of reinvesting distributions
arises from compounding; that is, you
receive interest and capital gain
distributions on a rising number of shares.
Dividends not reinvested are paid by check
or transmitted to your bank account via
ACH. If the Post Office cannot deliver your
check, or if your check remains uncashed
for six months, a fund reserves the right
to reinvest your distribution check in your
account at the then current NAV and to
reinvest all subsequent distributions in
shares of the fund.
Income dividends
o The fund declares and pays dividends (if
any) annually.
o The dividends of the fund 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.
Capital gains
o A capital gain or loss is the difference
between the purchase and sale price of a
security.
o If the fund has net capital gains for
the year (after subtracting any capital
losses), they are usually declared and
paid in December to shareholders of
record on a specified date that month.
Tax information
_________________________
The fund sends timely
information for your tax
filing needs. You need to be aware of the possible tax
consequences when:
PAGE 92
o the fund makes a distribution to your
account, or
o you sell fund shares, including an
exchange from one fund to another.
Taxes on fund redemptions.
When you sell shares in any fund, you may
realize a gain or loss. An exchange from
one fund to another is still a sale for tax
purposes.
In January, the funds will send you Form
1099-B, indicating the date and amount of
each sale you made in the fund during the
prior year. This information will also be
reported to the IRS. We will also tell you
the average cost of the shares you sold
during the year. Average cost information
is not reported to the IRS, and you do not
have to use it. You may calculate the cost
basis using other methods acceptable to the
IRS, such as "specific identification."
To help you maintain accurate records,
we send you a confirmation immediately
following each transaction (except for
systematic purchases and redemptions) you
make and a year-end statement detailing all
your transactions in each fund account
during the year.
Taxes on fund distributions.
_________________________
Distributions are
taxable whether
reinvested in additional
shares or received
in cash. The following summary does not apply to
retirement accounts, such as IRAs which are
tax-deferred until you withdraw money from
them.
In January, the funds will send you Form
1099-DIV indicating the tax status of any
dividend and capital gain distribution made
to you. This information will also be
reported to the IRS. All distributions made
PAGE 93
by these funds are taxable to you for the
year in which they were paid. The only
exception is that distributions declared
during the last three months of the year
and paid in January are taxed as though
they were paid by December 31. Dividends
and distributions are taxable to you
regardless of whether they are taken in
cash or reinvested. The funds will send
you any additional information you need to
determine your taxes on fund distributions,
such as the portion of your dividend, if
any, that may be exempt from state income
taxes.
Short-term capital gains are taxable as
ordinary income and long-term gains are
taxable at the applicable long-term gain
rate. The gain is long or short term
depending on how long the fund held the
securities, not how long you held shares in
the fund.
Distributions resulting from the sale of
certain 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 you tax return for
your portion of foreign taxes paid by the
fund.
Tax effect of buying shares before a
capital gain distribution. If you buy
shares near or on the "record date" -- the
date that establishes you as the person to
receive the upcoming distribution -- you
will receive, in the form of a taxable
distribution, a portion of the money you
just invested. Therefore, you may wish to
find out the fund's record date(s) before
investing. Of course, the fund's share
PAGE 94
price may, at any time, reflect
undistributed capital gains or unrealized
appreciation. When these amounts are
eventually distributed, they are taxable.
(Note: For information on the tax
consequences of passive foreign investment
companies and hedging, please see
"Investment Policies and Practices.")
Transaction Procedures and Special
Requirements
_________________________ Purchase Conditions
Following these
procedures helps assure
timely and accurate
transactions. Nonpayment. If your payment is not received
or you pay with a check or ACH transfer
that does not clear, your purchase will be
cancelled. You will be responsible for any
losses or expenses incurred by the fund or
transfer agent, and the fund can redeem
shares you own in this or another
identically registered T. Rowe Price fund
as reimbursement. The fund and its agents
have the right to reject or cancel any
purchase, exchange, or redemption due to
nonpayment.
U.S. Dollars. All purchases must be paid
for in U.S. dollars; checks must be drawn
on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you
just purchased and paid for by check or ACH
transfer, the fund will redeem your shares
at the price on the day the request is
received, but will generally delay sending
you the proceeds for up to 10 calendar days
to allow the check or transfer to clear. If
you requested a redemption by mail or
mailgram, the proceeds will be mailed no
later than the seventh day following
receipt unless the check or ACH transfer
has not cleared. (The 10-day hold does not
apply to purchases paid for by: bank wire;
PAGE 95
cashier's, certified, or treasurer's
checks; or automatic purchases through your
paycheck.)
Telephone transactions. 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 a 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 promptly after the
telephone transaction.
Redemptions over $250,000. Large sales can
adversely affect a portfolio manager's
ability to implement a fund's investment
strategy by causing the premature sale of
securities that would otherwise be held. If
in any 90-day period, you redeem (sell)
more than $250,000, or your sale amounts to
more than 1% of the fund's net assets, the
fund has the right to delay sending your
proceeds for up to five business days after
receiving your request, or to pay the
difference between the redemption amount
and the lesser of the two previously
mentioned figures with securities from the
fund.
Excessive Trading
_________________________
T. Rowe Price may bar
excessive traders from
purchasing shares. Frequent trades involving either
substantial fund assets or a substantial
portion of your account or accounts
controlled by you, can disrupt management
of the fund and raise its expenses. We
define "excessive trading" as exceeding one
PAGE 96
purchase and sale involving the same fund
within any 120-day period.
For example, you are in fund A. You can
move substantial assets from fund A to fund
B, and, within the next 120 days, sell your
shares in fund B to return to fund A or
move to fund C.
If you exceed the number of trades
described above, you may be barred
indefinitely from further purchases of T.
Rowe Price funds.
Three types of transactions are exempt from
excessive trading guidelines: (1) trades
solely between money market funds, (2)
redemptions that are not part of exchanges,
and (3) systematic purchases or redemptions
(See "Shareholder Services").
Keeping Your Account Open
Due to the relatively high cost to the fund
of maintaining small accounts, we ask you
to maintain an account balance of at least
$1,000. If your balance is below $1,000 for
three months or longer, the fund has the
right to close your account after giving
you 60 days in which to increase your
balance.
Signature Guarantees
You may need to have your signature
guaranteed in certain situations, such as:
_________________________
A signature guarantee is
designed to protect you
and the fund from fraud
by verifying your
signature.
o Written requests 1) to redeem over
$50,000 or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any
person, address, or bank account not on
record.
PAGE 97
o Transferring redemption proceeds to a T.
Rowe Price fund account with a different
registration from yours.
o Establishing certain services after the
account is opened.
You can obtain a signature guarantee from
most banks, savings institutions,
broker/dealers and other guarantors
acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or
organizations that do not provide
reimbursement in the case of fraud.
3 More About the funds
The Fund's Organization and Management
_________________________
Shareholders benefit
from T. Rowe Price's 58
years of investment
management
experience. How is the fund organized?
T. Rowe Price International Funds, Inc.
currently consists of ten series, each
representing a separate class of shares and
having different objectives and investment
policies. The ten 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, Global
Government Bond Fund, 1990; Japan Fund,
1991; Short-Term Global Income Fund, 1992;
Latin America Fund, 1993; and Emerging
Markets Bond Fund, 1994. 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. Although the fund offers
only its own shares, the fund might become
liable for any misstatement in the
prospectus about another fund. The fund's
PAGE 98
Board has considered this factor in
approving the use of combined
prospectuses.
What is meant by "shares"?
As with all mutual funds, investors
purchase "shares" when they invest in a
fund. These shares are part of a fund's
authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles
the shareholder to:
o receive a proportional interest in a
fund's capital gain distributions;
o cast one vote per share on certain fund
matters, including the election of fund
directors, changes in fundamental
policies, or approval of changes in a
fund's management contract.
Does the fund have an annual shareholder
meeting?
The fund is not required to hold meetings
but will do so when certain matters, such
as a change in the fund's fundamental
policies, are to be decided. In addition,
shareholders representing at least 10% of
all eligible votes may call a special
meeting if they wish for the purpose of
voting on the removal of any fund director.
If a meeting is held and you cannot attend,
you can vote by proxy. Before the meeting,
the fund will send you proxy materials that
explain the issues to be decided and
include a voting card for you to mail
back.
_________________________
All decisions regarding
the purchase and sale of
fund investments are made
by Price-Fleming--
specifically by the
fund's portfolio manager. Who runs the fund?
General Oversight. The fund is governed by
a Board of Directors that meets regularly
to review the fund's investments,
PAGE 99
performance, expenses, and other business
affairs. The Board elects the fund's
officers. The policy of the fund is that a
majority of Board members will be
independent of Price-Fleming.
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, 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.
Portfolio Management. The fund has an
Investment Advisory Group that has day-to-
day responsibility for managing the
portfolio and developing and executing the
PAGE 100
fund's investment program. The members of
the advisory group are: Martin G. Wade,
Christopher D. Alderson, Peter B. Askew,
Richard J. Bruce, Mark J. T. Edwards, John
R. Ford, Robert C. Howe, James B. M.
Seddon, Benedict R. F. Thomas, and David J.
L. Warren.
Martin Wade joined Price-Fleming in 1979
and has 25 years of experience with the
Fleming Group in research, client service
and investment management. (Fleming Group
includes Robert Fleming and/or Jardine
Fleming.) Christopher Alderson joined
Price-Fleming in 1988, and has eight years
of experience with the Fleming Group in
research and portfolio management. Peter
Askew joined Price-Fleming in 1988 and has
19 years of experience managing multi-
currency fixed-income portfolios. Richard
Bruce joined Price-Fleming in 1991 and has
six years of experience in investment
management with the Fleming Group in Tokyo.
Mark Edwards joined Price-Fleming in 1986
and has 13 years of experience in financial
analysis. John Ford joined Price-Fleming
in 1982 and has 14 years of experience with
the Fleming Group in research and portfolio
management. Robert Howe joined Price-
Fleming in 1986 and has 13 years of
experience in economic research, company
research and portfolio management. James
Seddon joined Price-Fleming in 1987 and has
8 years of portfolio management experience.
Benedict Thomas joined Price-Fleming in
1988 and has five years of portfolio
management experience. David Warren joined
Price-Fleming in 1984 and has 14 years of
experience in equity research, fixed-income
research and portfolio management.
Portfolio Transactions. Decisions with
respect to the purchase and sale of the
fund's portfolio securities on behalf of
the fund are made by Price-Fleming. The
PAGE 101
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 a 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.
Marketing. T. Rowe Price Investment
Services, Inc., a wholly-owned subsidiary
of T. Rowe Price, distributes (sells)
shares of these and all other T. Rowe Price
funds.
Shareholder Services. T. Rowe Price
Services, Inc., another wholly-owned
subsidiary, acts as the funds' transfer and
dividend disbursing agent and provides
shareholder and administrative services.
Services for certain types of retirement
plans are provided by T. Rowe Price
Retirement Plan Services, Inc., also a
wholly-owned subsidiary. The address for
each is 100 East Pratt St., Baltimore, MD
21202.
How are fund expenses determined?
The management agreement spells out the
expenses to be paid by the fund. In
addition to the management fee, the fund
pays for the following: shareholder service
expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing
prospectuses and reports sent to
shareholders; registration fees and
expenses; proxy and annual meeting expenses
(if any); and director/trustee fees and
expenses.
The Management Fee. This fee has two
parts--an "individual fund fee" (discussed
on page __) which reflects the fund's
particular investment management costs, and
PAGE 102
a "group fee." The group fee, which
reflects the benefits each fund derives
from sharing the resources of the T. Rowe
Price investment management complex, is
calculated monthly based on the net
combined assets of all T. Rowe Price funds
(except Equity Index and both Spectrum
Funds and any institutional or private
label mutual funds). The group fee
schedule (shown below) is graduated,
declining as the asset total rises, so
shareholders benefit from the overall
growth in mutual fund assets.
0.480% First $1 billion
0.450% 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
The funds' portion of the group fee is
determined by the ratio of its daily net
assets to the daily net assets of all the
Price funds described above. Based on
combined Price funds' assets of
approximately $35.5 billion at December 31,
1994, the Group Fee was 0.34%.
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)
PAGE 103
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.
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.
Understanding Performance Information
This section should help you understand the
terms used to describe the fund's
performance. You will come across them in
shareholder reports you receive from us
four times a year, in our newsletters,
"Insights" reports, in T. Rowe Price
advertisements, and in the media.
Total Return
_________________________
Total return is the most
widely used performance
measure. Detailed
performance information
is included in the funds'
annual reports and
quarterly shareholder
reports. This tells you how much an investment in
a fund has changed in value over a given
time period. It reflects any net increase
or decrease in the share price and assumes
that all dividends and capital gains (if
any) paid during the period were reinvested
in additional shares. Including reinvested
distributions means that total return
numbers include the effect of compounding,
i.e., you receive income and capital gain
distributions on a rising number of
shares.
Advertisements for the fund may include
cumulative or compound average annual total
PAGE 104
return figures, which may be compared with
various indices, other performance
measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an
investment for a specified period. A
cumulative return does not indicate how
much the value of the investment may have
fluctuated between the beginning and the
end of the period specified.
Average Annual Total Return
This is always hypothetical. Working
backward from the actual cumulative return,
it tells you what constant year-by-year
return would have produced the actual,
cumulative return. By smoothing out all the
variations in annual performance, it gives
you an idea of the investment's annual
contribution to your portfolio provided you
held it for the entire period in question.
Investment Policies and Practices
This section takes a detailed look at some
of the types of securities the fund may
hold in its portfolio and the various kinds
of investment practices that may be used in
day-to-day portfolio management. The fund's
investment program is subject to further
restrictions and risks described in the
"Statement of Additional Information."
_________________________
Fund managers have
considerable leeway in
choosing investment
strategies and selecting
securities they believe
will help the fund
achieve its objectives. Shareholder approval is required to
substantively change the fund's objective
(stated on page __) and certain investment
restrictions noted in the following section
as "fundamental policies." The managers
also follow certain "operating policies"
which can be changed without shareholder
PAGE 105
approval. However, significant changes are
discussed with shareholders in fund
reports. The fund adheres to applicable
investment restrictions and policies at the
time it makes an investment. A later change
in circumstances will not require the sale
of an investment if it was proper at the
time it was made.
The fund's holdings of certain kinds of
investments cannot exceed maximum
percentages of total assets, which are set
forth herein. For instance, the fund is not
permitted to invest more than 10% of total
assets in hybrid instruments. While these
restrictions provide a useful level of
detail about the fund's investment program,
investors should not view them as an
accurate gauge of the potential risk of
such investments. For example, in a given
period, a 5% investment in hybrid
securities could have significantly more
than a 5% impact on the fund's share price.
The net effect of a particular investment
depends on its volatility and the size of
its overall return in relation to the
performance of all the fund's other
investments.
Changes in the fund's holdings, the fund's
performance, and the contribution of
various investments are discussed in the
shareholder reports we send each
quarter.
Types of Portfolio Securities
In seeking to meet its investment
objective, the funds may invest in any type
of security whose investment
characteristics are consistent with the
fund's investment program. These and some
of the other investment techniques the fund
may use are described in the following
pages.
PAGE 106
Fundamental Policy. The fund will not
purchase a security if, as a result, with
respect to 75% of its total assets, more
than 5% of its total assets would be
invested in securities of the issuer or
more than 10% of the outstanding voting
securities of the issuer would be held by
one fund.
Common and Preferred Stocks. Stocks
represent shares of ownership in a company.
Generally, preferred stock has a specified
dividend and ranks after bonds and before
common stocks in its claim on income for
dividend payments and on assets should the
company be liquidated. After other claims
are satisfied, common stockholders
participate in company profits on a pro
rata basis; profits may be paid out in
dividends or reinvested in the company to
help it grow. Increases and decreases in
earnings are usually reflected in a
company's stock price, so common stocks
generally have the greatest appreciation
and depreciation potential of all corporate
securities. While most preferred stocks
pay a dividend, the funds may purchase
preferred stock where the issuer has
omitted, or is in danger of omitting,
payment of its dividend. Such investments
would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The
fund may invest in debt or preferred equity
securities convertible into or exchangeable
for equity securities. Traditionally,
convertible securities have paid dividends
or interest at rates higher than common
stocks but lower than non-convertible
securities. They generally participate in
the appreciation or depreciation of the
underlying stock into which they are
convertible, but to a lesser degree. In
recent years, convertibles have been
developed which combine higher or lower
current income with options and other
PAGE 107
features. 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).
Fixed Income Securities. The fund may
invest in any type of investment-grade
security. Such securities would be
purchased in companies which meet the
investment criteria for the fund. The
price of a bond fluctuates with changes in
interest rates, rising when interest rates
fall and falling when interest rates rise.
Hybrid Instruments. These instruments (a
type of derivative) can combine the
characteristics of securities, futures and
options. For example, the principal
amount, redemption or conversion terms of a
security could be related to the market
price of some commodity, currency or
securities index. Such securities may bear
interest or pay dividends at below market
(or even relatively nominal) rates. Under
certain conditions, the redemption value of
such an investment could be zero. Hybrids
can have volatile prices and limited
liquidity and their use by a fund may not
be successful.
Operating Policy. The fund may invest up
to 10% of its total assets in hybrid
instruments.
Passive Foreign Investment Companies. The
fund may purchase the securities of certain
foreign investment funds or trusts called
passive foreign investment companies. Such
trusts have been the only or primary way to
invest in certain countries. In addition
to bearing their proportionate share of the
trust's expenses (management fees and
operating expenses) shareholders will also
indirectly bear similar expenses of such
trusts. Capital gains on the sale of such
holdings are considered ordinary income
PAGE 108
regardless of how long the fund held 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, each T.
Rowe Price fund intends to treat these
securities as sold on the last day of its
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.
Private Placements. These securities are
sold directly to a small number of
investors, usually institutions. Unlike
public offerings, such securities are not
registered with the SEC. Although certain
of these securities may be readily sold,
for example, under Rule 144A, the sale of
others may involve substantial delays and
additional costs.
Operating Policy. The fund will not invest
more than 15% of its net assets in illiquid
securities, and no more than 5% in certain
restricted securities.
Types of Management Practices
_________________________
Cash reserves provide
flexibility and serve as
a short-term defense
during periods of unusual
market volatility. Cash Position. The fund will hold a
certain portion of its assets in U.S. and
foreign dollar denominated money market
securities, including repurchase
agreements, in the two highest rating
categories, maturing in one year or less.
For temporary, defensive purposes, the fund
PAGE 109
may invest without limitation in such
securities. This reserve position provides
flexibility in meeting redemptions,
expenses, and the timing of new
investments, and serves as a short-term
defense during periods of unusual market
volatility.
Borrowing Money and Transferring Assets.
The fund can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the fund's
investment objective and program. Such
borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental Policy. Borrowings may not
exceed 33 1/3% of the fund's total fund
assets.
Operating Policies. The fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of the fund's total
assets. The fund may not purchase
additional securities when borrowings
exceed 5% of total assets.
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
PAGE 110
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.
There are certain markets where it is
not possible to engage in effective foreign
currency hedging. This may be true, for
example, for the currencies of various
Latin American countries and other emerging
markets where the foreign exchange markets
are not sufficiently developed to permit
hedging activity to take place.
_________________________
Futures are used to
manage risk; options give
the investor the option
to buy or sell an asset
at a predetermined price
in the future. Futures and Options. Futures (a type of
derivative) are often used to manage risk,
because they enable the investor to buy or
sell an asset in the future at an agreed
PAGE 111
upon price. Options (another type of
derivative) give the investor the right,
but not the obligation, to buy or sell an
asset at a predetermined price in the
future. The fund may buy and sell futures
contracts (and options on such contracts)
to manage its exposure to changes in
securities prices and foreign currencies
and as an efficient means of adjusting
overall exposure to certain markets. The
fund may purchase, sell, or write call and
put options on securities, financial
indices, and foreign currencies.
Futures Contracts and Options may not
always be successful hedges; their prices
can be highly volatile; using them could
lower the fund's total return; and the
potential loss from the use of futures can
exceed a fund's initial investment in such
contracts.
Operating Policies. Futures: Initial margin
deposits and premiums on options used for
non-hedging purposes will not equal more
than 5% of the fund's net asset value.
Options on securities: The total market
value of securities against which the fund
has written call or put options may not
exceed 25% of its total assets. The fund
will not commit more than 5% of its total
assets to premiums when purchasing call or
put options.
Tax Consequences of Hedging. Under
applicable tax law, the fund may be
required to limit their gains from hedging
in foreign currency forwards, futures and
options. Although the fund is expected to
comply with such limits, the extent to
which these limits apply is subject to tax
regulations as yet unissued. Hedging may
also result in the application of the mark-
to-market and straddle provisions of the
Internal Revenue Code. These provisions
could result in an increase (or decrease)
in the amount of taxable dividends paid by
PAGE 112
the funds and could affect whether
dividends paid by the fund are classified
as capital gains or ordinary income.
Lending of Portfolio Securities. Like other
mutual funds, the fund may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
insolvency of the broker-dealer or other
borrower. In this event, the fund could
experience delays in recovering securities
and possibly capital losses.
Fundamental Policy. The value of loaned
securities may not exceed 33 1/3% of the
fund's total assets.
Portfolio Transactions. Turnover is an
indication of frequency. The funds' 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 previous three years are 1992--
37.8%, 1993--29.8%, and 1994--22.9%.
4 Investing with T. Rowe Price
________________________
Always verify your
transactions by carefully
reviewing the
confirmation we send
you. Please report any
discrepancies to
Shareholder Services. 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 funds
to withhold a percentage (currently 31%) of
your dividends, capital gain distributions,
and redemptions, and may subject you to an
IRS fine. You will also be prohibited from
opening another account by exchange. If
PAGE 113
this information is not received within 60
days after your account is established,
your account may be redeemed, priced at the
NAV on the date of redemption.
Unless you request otherwise, one
shareholder report will be mailed to
multiple account owners with the same tax
identification number and same zip code and
to shareholders who have requested that
their account be combined with someone
else's for financial reporting.
Opening a New Account: $2,500 minimum
initial investment; $1,000 for retirement
or gifts or transfers to minors (UGMA/UTMA)
accounts
Account Registration
If you own other T. Rowe Price funds, be
sure to register any new account just like
your existing accounts so you can exchange
among them easily. (The name and account
type would have to be identical.)
________________________
Regular Mail
T. Rowe Price
Account Services
P.O. Box 17300
Baltimore, MD
21298-9353
Mailgram, Express,
Registered, or Certified
Mail
T. Rowe Price
Account Services
10090 Red Run Blvd.
Owings Mills, MD 21117 By Mail
Please make your check payable to T. Rowe
Price Funds otherwise it will be returned
(we do not accept third party checks to
open new accounts) and send it together
with the New Account Form to the address at
left.
PAGE 114
By Wire
o Call Investor Services for an account
number and give the following wire
address to your bank: Morgan Guaranty
Trust Co. of New York, ABA# 021000238,
T. Rowe Price [fund name], AC-00153938.
Provide fund name, account name(s), and
account number.
o Complete a New Account Form and mail it
to one of the appropriate addresses
listed at left.
Note: No services will be established and
IRS penalty withholding may occur until a
signed New Account Form is received.
Also, retirement plans cannot be opened
by wire.
By Exchange
Call Shareholder Services. The new account
will have the same registration as the
account from which you are exchanging.
Services for the new account may be carried
over by telephone request if preauthorized
on the existing account. (See explanation
of "Excessive Trading " under "Transaction
Procedures.")
In Person
Drop off your New Account Form at any of
the locations listed below and obtain a
receipt.
Drop-off locations:
101 East Lombard St. T. Rowe Price
Baltimore, MD Financial Center
10090 Red Run. Blvd.
Owings Mills, MD
Farragut Square ARCO Tower
900 17th St., N.W. 31st Floor
Washington, D.C. 515 South Flower St.
Los Angeles, CA
Note: The fund and its agents reserve the
right to waive or lower investment
PAGE 115
minimums; to accept initial purchases by
telephone or mailgram; cancel or rescind
any purchase or exchange upon notice to the
shareholder within five business days of
the trade or if the written confirmation
has not been received by the shareholder,
whichever is sooner (for example, if an
account has been restricted due to
excessive trading or fraud); to otherwise
modify the conditions of purchase or any
services at any time; or to act on
instructions believed to be genuine.
Purchasing Additional Shares: $100 minimum
purchase; $50 minimum for retirement plans
and Automatic Asset Builder; $5,000 minimum
for telephone purchases.
By ACH Transfer
Use Tele*Access(registered trademark),
PC*Access(registered trademark) or call
Investor Services if you have established
electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire
address in "Opening a New Account."
________________________
Regular Mail
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD
21289-1500 By Mail
o Provide your account number and the fund
name on your check.
o Mail the check to us at the address shown
at left either with a reinvestment slip
or a note indicating the fund and account
number in which you wish to purchase
shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder
section on the New Account or Shareholder
Services Form ($50 minimum).
PAGE 116
By Phone
Call Shareholder Services to lock in that
day's closing price; payment is due within
five days ($5,000 minimum). Note: The
current collected balance in your fund
account must equal at least 25% of your
telephone purchase for additional shares.
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our
phones busy during unusually volatile
markets, please consider placing your order
by Tele*Access, PC*Access or mailgram (if
you have previously authorized telephone
services), or by express mail. For exchange
policies, please see "Transaction
Procedures and Special Requirements -
Excessive Trading."
Redemption proceeds can be mailed to your
account address, sent by ACH transfer, or
wired to your bank. For charges, see
"Electronic Transfers - By Wire" on page
__.
___________________
Mailgram, Express,
Registered, or
Certified Mail
(See page __.) By Mail
Provide account name(s) and numbers, fund
name(s), and exchange or redemption amount.
For exchanges, mail to the appropriate
address below or at left, indicate the fund
you are exchanging from and the fund(s) you
are exchanging into. T. Rowe Price requires
the signatures of all owners exactly as
registered, and possibly a signature
guarantee (see "Transaction Procedures and
Special Requirements--Signature
Guarantees").
PAGE 117
Regular Mail
For non-retirement For employer-sponsored
and IRA accounts: retirement accounts:
T. Rowe Price T. Rowe Price Trust
Account Services Company
P.O. Box 89000 P.O. Box 89000
Baltimore, MD Baltimore, MD
21289-0220 21289-0300
___________________
T. Rowe Price Trust
Company
1-800-492-7670
1-410-625-6585 Note: Redemptions 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.
_______________________
Shareholder Services
1-800-225-5132
1-410-625-6500 Shareholder Services
Many services are available to you as a T.
Rowe Price shareholder; some you receive
automatically and others you must authorize
on the New Account Form. By signing up for
services on the New Account Form rather
than later, you avoid having to complete a
separate form and obtain a signature
guarantee. This section reviews some of the
principal services currently offered. Our
Services Guide contains detailed
descriptions of these and other services.
If you are a new T. Rowe Price investor,
you will receive a Services Guide with our
Welcome Kit. Note: Corporate and other
institutional accounts require an original
or certified resolution to establish
services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for
individuals and institutions, including
PAGE 118
large and small businesses: IRAs, SEP-IRAs,
Keoghs (profit sharing, money purchase
pension), 401(k), and 403(b)(7). For
information on IRAs, call Investor
Services. For information on all other
retirement plans, please call our Trust
Company at 1-800-492-7670.
__________________
Investor Services
1-800-638-5660
1-410-547-2308 Exchange Service
You can move money from one account to an
existing identically registered account, or
open a new identically registered account.
Remember, exchanges are purchases and sales
for tax purposes. (Exchanges into a state
tax-free fund are limited to investors
living in states where the funds are
registered.) Some of the T. Rowe Price
funds may impose a redemption fee of .50%
to 2%, payable to such funds, on shares
held for less than one year, or in some
funds, six months.
Note: Shares purchased by telephone may
not be exchanged to another fund until
payment for the original purchase has been
received.
Automated Services
Tele*Access. 24-hour service via toll-free
number provides information such as yields,
prices, dividends, account balances, and
your latest transaction as well as the
ability to request prospectuses and account
forms and initiate purchase, redemption and
exchange orders in your accounts (see
"Electronic Transfers" below).
PC*Access. 24-hour service via dial-up
modem provides the same information as
Tele*Access, but on a personal computer.
Please call Investor Services for an
information guide.
PAGE 119
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling
one of our service representatives or by
visiting one of our four investor center
locations. For Investor Center addresses,
see "Drop-off locations" on page __.
Electronic Transfers
By ACH. With no charges to pay, you can
initiate a purchase or redemption for as
little as $100 or as much as $100,000
between your bank account and fund account
using the ACH network. Enter instructions
via Tele*Access, PC*Access or call
Shareholder Services.
By Wire. Electronic transfers can also be
conducted via bank wire. There is currently
a $5 fee for wire redemptions under $5,000,
and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Automatic Investing ($50 minimum) You can
invest automatically in several different
ways, including:
o Automatic Asset Builder. You instruct us
to move $50 or more once a month or less
often from your bank account, or you can
instruct your employer to send all or a
portion of your paycheck to the fund or
funds you designate.
o Automatic Exchange. Enables you to set up
systematic investments from one fund
account into another, such as from a
money fund into a stock fund.
Discount Brokerage
You can trade stocks, bonds, options,
precious metals and other securities at a
substantial savings over regular commission
rates. Call Investor Services for
information.
Note: If you buy or sell T. Rowe Price
Funds through anyone other than T. Rowe
PAGE 120
Price, such as broker-dealers or banks, you
may be charged transaction or service fees
by those institutions. No such fees are
charged by T. Rowe Price Investment
Services or the fund for transactions
conducted directly with the fund.
PAGE 121
Prospectus
To Open an Account
Investor Services International
1-800-638-5660 Stock Fund
1-410-547-2308
For Existing Accounts To help you ______________
Shareholder Services achieve your A choice of
1-800-225-5132 financial goals, T. Rowe Price worldwide and
1-410-625-6500 T. Rowe Price International regional stock
offers a wide Funds, Inc. funds for
For Yields & Prices range of stock, March 1, investors
Tele*Access(registered bond, and money 1995 seeking to
trademark) market diversify
1-800-638-2587 investments, as beyond U.S.
1-410-625-7676 well as borders.
24 hours, 7 days convenient
services and
timely,
Investor Centers informative
reports.
101 East Lombard St.
Baltimore, MD
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD
Farragut Square
900 17th Street, N.W.
Washington, D.C.
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA T. Rowe Price
Invest With
Confidence
(registered
trademark)
PAGE 122
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price International Funds, Inc.
International Stock Fund
International Discovery Fund
European Stock Fund
Japan Fund
New Asia Fund
Latin America Fund
and
Institutional International Funds, Inc.
Foreign Equity Fund
(the "Funds")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the Funds'
prospectus dated March 1, 1995, 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
March 1, 1995.
PAGE 123
TABLE OF CONTENTS
Page Page
Call and Put Options . . . Investment Performance . .
Capital Stock . . . . . . . Investment Programs . . .
Code of Ethics . . . . . . Investment Restrictions .
Custodian . . . . . . . . . Legal Counsel . . . . . .
Dealer Options . . . . . . Lending of Portfolio
Distributor for Funds . . . Securities . . . . . . .
Dividends . . . . . . . . . Management of Funds . . .
Federal and State Net Asset Value Per
Registration of Shares . . Share . . . . . . . . . .
Foreign Currency Portfolio Management
Transactions . . . . . . . Practices . . . . . . . .
Foreign Futures and Portfolio Transactions . .
Options . . . . . . . . . Pricing of Securities . .
Futures Contracts . . . . . Principal Holders of
Hybrid Instruments . . . . Securities . . . . . . .
Illiquid or Restricted Repurchase Agreements . .
Securities . . . . . . . . Risk Factors of Foreign
Independent Accountants . . Investing . . . . . . . .
Investment Management Tax Status . . . . . . . .
Services . . . . . . . . . Taxation of Foreign
Investment Objectives and Shareholders . . . . . .
Policies . . . . . . . . . Warrants . . . . . . . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of
each Fund's investment objectives and policies discussed in the
prospectus. Unless otherwise specified, the investment program
and restrictions of each Fund are not fundamental policies. The
operating policies of each 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 each Fund may not
be changed without the approval of at least a majority of the
outstanding shares of each 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.
Throughout this Statement of Additional Information,
"the Fund" is intended to refer to each Fund listed on the cover
page, unless otherwise indicated.
PAGE 124
INVESTMENT PROGRAMS
All Funds
The Funds' 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 Funds.
Each 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
Funds 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 Funds are subject to risks unique to
international investing. See discussion under "Risk Factors of
Foreign Investing" beginning on page __. Further, there is no
assurance that the favorable trends discussed below will
continue, and the Funds cannot guarantee they will achieve their
objectives.
International Stock Fund
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), Europe
(for example, United Kingdom, Germany, Hungary, Poland,
Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, Latin America, 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
PAGE 125
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.
International Discovery Fund
It is the present intention of Price-Fleming to invest
primarily in smaller (i.e. small to medium size) companies based
in developed and selected emerging countries located in the
Pacific Basin, Western Europe, Latin America and such other areas
and countries as Price-Fleming may determine from time to time.
Price-Fleming believes that such smaller companies may have the
potential for greater, more dynamic growth than larger firms,
which may have reached a period of maturity and more gradual
growth. It is generally easier for a company to grow from a
smaller base. In addition, smaller companies are often more
flexible and responsive to customers, and to changes in
competitive conditions. Medium size companies also display such
characteristics to a certain extent. However, there are also
special risks associated with investing in smaller companies.
In selecting portfolio investments, Price-Fleming will
consider: a company's growth prospects, including the potential
for superior appreciation due to growth in earnings, relative
valuation of its securities, and any risk associated with
investment; the industry in which the company operates, with a
view to identification of global developments within industries,
PAGE 126
international investment trends, and social, economic or
political movements affecting a particular industry; the country
in which the company is based, as well as historical and
anticipated foreign currency exchange rate fluctuations; and the
feasibility of gaining access to the securities market in a
country and of implementing the necessary custodial arrangements.
The investment program of the Fund has been developed in the
belief that research-based investment in a diversified portfolio
of equity securities of companies in a number of foreign
countries will give shareholders a chance to participate on a
global basis in the opportunities available in the growing
foreign securities markets.
The countries in which the Fund will seek investments
include those listed below. The Fund may not invest in all the
countries listed, and it may invest in other countries as well,
when such investments are consistent with the Fund's investment
objective and policies. Countries designated with a number sign
(#) are emerging, or less developed, countries which for purposes
of this prospectus are defined as countries with a low or middle-
income economy as determined by the World Bank.
Pacific Basin Western Europe Other
Australia Austria Argentina#
Hong Kong Belgium Brazil#
South Korea Denmark Canada
Japan Finland Chile#+
Malaysia# France Hungary#
Philippines# Germany India#+
New Zealand Greece# Mexico#
Singapore# Ireland Turkey#
Taiwan#+ Italy Colombia#+
Thailand# Luxembourg Venezuela#
Indonesia# Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
_________________________________________________________________
+ Indicates countries in which the Fund effectively may
invest only or primarily through investment funds
subject to the provisions of the Investment Company Act
of 1940 relating to the purchase of securities of
PAGE 127
investment companies. See "Investment Restrictions
Operating Policy No. 3."
The Fund also will seek to invest in leading companies
in other emerging countries as their securities markets and
banking systems develop, including People's Republic of China,
the Czech Republic, Slovakia, Israel, Jordan, Morocco, Nigeria,
Pakistan, Poland, Peru and Vietnam, at such time as investment in
these countries becomes feasible. It may not be feasible for the
Fund currently to invest in all of these countries due to
restricted access to their securities markets or inability to
implement satisfactory custodial arrangements.
European Stock Fund
Market deregulation, privatization, and lowered barriers
to foreign investment have led to greater investment
opportunities in Western Europe and the potential for greater
investment in Eastern Europe. Economic and political reforms in
Eastern Europe may increase the investment and growth
possibilities for all of Europe. The Fund intends to invest in
companies based in any Western or Eastern European country, as
well as Russia and the countries of the former Soviet Union.
European markets for investment include:
Primary Secondary Developing
France Austria Czech Republic
Germany Belgium Greece
Holland Denmark Hungary
Italy Finland Poland
Spain Ireland Russia
Sweden Luxembourg Slovakia
Switzerland Norway Turkey
United Kingdom Portugal
_________________________________________________________________
Other Eastern European markets may become available at
any time.
In seeking its objectives, the Fund will invest
primarily in established European companies participating in
markets and sectors which have superior long-term growth
potential. Individual stocks will be evaluated on various
criteria, including earnings history and prospects, book value,
degree of price leverage, and price/earnings ratio. Both large
and small capitalization companies will be candidates for the
portfolio.
PAGE 128
Japan Fund
The Japan Fund invests primarily in common stocks of
Japanese companies participating in markets and sectors which are
believed to have attractive long-term growth potential. These
may include the export sector, where many Japanese companies are
world leaders in their industries. They may also include the
consumer sector--the fastest-growing segment of Japan's economy--
where companies are working to meet growing domestic demand for
consumer goods and services.
The Fund has the flexibility to invest in both large and
small companies, as deemed appropriate by Price-Fleming. This
allows the Fund to benefit from the proven growth potential of
established companies, as well as the enhanced growth potential
of smaller companies. In making specific stock selections,
Price-Fleming takes into account, among other factors, a
company's size, financial condition, marketing and technical
strengths, and competitive position within its industry. The
Fund's portfolio will normally be broadly diversified across
industries and companies. Such broad diversification should help
reduce volatility.
New Asia Fund
Price-Fleming believes the rapidly growing economies in
Asia and the Pacific Basin, including Australia and New Zealand,
offer attractive opportunities for investment.
In contrast to Japan's more developed economy, the newly
industrialized nations of this region are in an earlier, more
dynamic growth stage of their development. Price-Fleming
believes that the continued growth opportunities exist due to
structural changes taking place throughout the region.
o The relaxation of trade barriers and the freer
movement of capital are increasing the flow of
commerce within the region and fostering economic
independence. At the same time, growing trade with
Japan, the United States and Europe is fueling
rapid economic development.
o Rising labor costs in more developed countries are
making the large, lower-cost work force of Asia and
the Pacific Basin increasingly attractive,
PAGE 129
resulting in the dramatic growth of manufacturing
industries.
o As capital investment increases, many of the Asian
and Pacific Basin countries are developing more
efficient capital markets, for investment.
The Fund may invest in the countries listed below, as
well as other Asian and Pacific Basin countries and regions, such
as China, Sri Lanka, Pakistan and Indochina, as their markets
become more accessible.
Australia Philippines#
Hong Kong Singapore#
India+# South Korea
Indonesia# Taiwan+#
Malaysia# Thailand#
New Zealand
_________________________________________________________________
+ Indicates countries in which the Fund effectively may
invest only or primarily through investment funds
subject to the provisions of the Investment Company Act
of 1940 relating to the purchase of securities of
investment companies. See "Investment Restrictions
Operating Policy No. 3."
# Countries designated with a number sign (#) are emerging
or less developed countries.
Other Asian and Pacific Basin markets may become
available at any time.
Latin America Fund
Price-Fleming believes that the economic revitalization
of the Latin American region will provide attractive investment
opportunities.
After the "lost years" of the 1970's and early 80's when
economic stagnation and hyperinflation became commonplace, the
governments of the region have embarked on a process of
transformation:
o rolling back the dominance of the state in favor of
the private sector, encouraging privatizations of
state owned companies, removing price controls and
controlling public expenditure; and
PAGE 130
o lowering tariff barriers, promoting trade and
encouraging both free trade blocks and investment
by foreigners.
As economies have been stabilized, capital flows into
the country have picked up leading to increased investment and a
revival of growth. Although countries such as Chile, Mexico and
Argentina have made considerable progress, this economic catch-up
is still at an early stage, while in countries such as Brazil and
Peru the process is just beginning.
The Fund may invest in the countries listed below,
together with other countries in the region as their markets
become accessible. The Latin America region includes Mexico,
Central America, South America and the islands of the Caribbean.
Argentina# Mexico#
Brazil# Peru#
Chile+# Venezuela#
Colombia+#
_________________________________________________________________
+ Indicates countries in which the Fund effectively may
invest only or primarily through investment funds
subject to the provisions of the Investment Company Act
of 1940 relating to the purchase of securities of
investment companies. See "Investment Restrictions
Operating Policy No. 3."
# Countries designated with a number sign (#) are emerging
or less developed countries.
Foreign Equity Fund
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
PAGE 131
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.
Risk Factors of Foreign Investing
There are special risks in investing in the Funds.
Certain of these risks are inherent in any international mutual
fund while others relate more to the countries in which the Funds
will invest. Many of the risks are more pronounced for
investments in developing or emerging countries, such as many of
the countries of Southeast Asia, Latin America, Eastern Europe
and the Middle East. Although there is no universally accepted
definition, a developing country is generally considered to be a
country which is in the initial stages of its industrialization
cycle with a per capita gross national product of less than
$8,000.
General. Investors should understand that all
investments have a risk factor. There can be no guarantee
against loss resulting from an investment in the Funds, and there
can be no assurance that the Funds' investment policies will be
successful, or that its investment objectives will be attained.
The Funds are designed for individual and institutional investors
seeking to diversify beyond the United States in actively
researched and managed portfolios, and are 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
PAGE 132
position. The internal politics of certain foreign countries are
not as stable as in the United States. For example, in 1991, the
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached. In
addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim
sovereignty of one another and there is a demilitarized border
between North and South Korea.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.
Currency Fluctuations. The Funds will invest in
securities denominated in various currencies. Accordingly, a
change in the value of any such currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of
the Funds' assets denominated in that currency. Such changes
will also affect the Funds' income. Generally, when a given
currency appreciates against the dollar (the dollar weakens) the
value of the Fund's securities denominated in that currency will
rise. When a given currency depreciates against the dollar (the
dollar strengthens) the value of the Funds' securities
denominated in that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
PAGE 133
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. It is contemplated that most
foreign securities, other than Latin American securities, will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Currently, it is anticipated
that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets and the
Funds' portfolio securities may be less liquid and subject to
more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable United States
securities and such levels may not be sustainable. Fixed
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
differ from those in United States markets. Such differences may
include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.
Investment Funds. The Funds 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 Funds' investment in these funds is
subject to the provisions of the 1940 Act discussed on page __.
If the Funds invest in such investment funds, the Funds'
shareholders will bear not only their proportionate share of the
expenses of the Funds (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.
PAGE 134
Information and Supervision. There is generally less
publicly available information about foreign companies comparable
to reports and ratings that are published about companies in the
United States. Foreign companies are also generally not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those
applicable to United States companies. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of
the Funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' 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
Funds. (See "Tax Status," page __.)
Costs. Investors should understand that the expense
ratios of the Funds 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 Funds are higher.
Small Companies. Small companies may have less
experienced management and fewer management resources than larger
firms. A smaller company may have greater difficulty obtaining
access to capital markets, and may pay more for the capital it
obtains. In addition, smaller companies are more likely to be
involved in fewer market segments, making them more vulnerable to
any downturn in a given segment. Some of these factors may also
apply, to a lesser extent, to medium size companies. Some of the
smaller companies in which the Funds will invest may be in major
foreign markets; others may be leading companies in emerging
countries outside the major foreign markets. Securities analysts
generally do not follow such securities, which are seldom held
outside of their respective countries and which may have
prospects for long-term investment returns superior to the
securities of well-established and well-known companies. Direct
investment in such securities may be difficult for United States
investors because, among other things, information relating to
such securities is often not readily available. Of course, there
are also risks associated with such investments, and there is no
assurance that such prospects will be realized.
PAGE 135
Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the possibility
of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
International Stock, International Discovery, European Stock, and
Foreign Equity Funds
Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of a Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia
are considered illiquid, each Fund will be required to include
such securities within its 10% restriction on investing in
illiquid securities.
PAGE 136
Japan
The Japan Fund's concentration of its investments in
Japan means the Fund will be more dependent on the investment
considerations discussed above and may be more volatile than a
fund which is broadly diversified geographically. To the extent
any of the other funds also invests in Japan, such investments
will be subject to these same factors. Additional factors
relating to Japan include the following:
In the past, Japan has experienced earthquakes and tidal
waves of varying degrees of severity, and the risks of such
phenomena, and damage resulting therefrom, continue to exist.
Japan also has one of the world's highest population densities.
A significant percentage of the total population of Japan is
concentrated in the metropolitan areas of Tokyo, Osaka and
Nagoya.
Energy. Japan has historically depended on oil for most
of its energy requirements. Almost all of its oil is imported,
the majority from the Middle East. In the past, oil prices have
had a major impact on the domestic economy, but more recently
Japan has worked to reduce its dependence on oil by encouraging
energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic
industries to processing and assembly type industries, has
contributed to the reduction of oil consumption. However, there
is no guarantee this favorable trend will continue.
Foreign Trade. Overseas trade is important to Japan's
economy. Japan has few natural resources and must export to pay
for its imports of these basic requirements. Japan's principal
export markets are the U.S., Canada, the United Kingdom, the
Federal Republic of Germany, Australia, Korea, Taiwan, Hong Kong
and the People's Republic of China. The principal sources of its
imports are the U.S., South East Asia and the Middle East.
Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and
semiconductors and the large trade surpluses ensuing therefrom,
Japan has had difficult relations with its trading partners,
particularly the U.S., where the trade imbalance is the greatest.
It is possible trade sanctions or other protectionist measures
could impact Japan adversely in both the short- and long-term.
PAGE 137
Latin America
The Latin America Fund's concentration of its
investments in Latin America means the Fund will be more
dependent on the investment considerations described above and
can be expected to be more volatile than a fund which is more
broadly diversified geographically. To the extent any of the
other funds also invests in Latin America, such investments will
be subject to these same factors. Additional factors relating to
Latin America include the following:
Inflation. Most Latin American countries have
experienced, at one time or another, severe and persistent levels
of inflation, including, in some cases, hyperinflation. This
has, in turn, led to high interest rates, extreme measures by
governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in
many countries has lessened, there is no guarantee it will remain
at lower levels.
Political Instability. The political history of certain
Latin American countries has been characterized by political
uncertainty, intervention by the military in civilian and
economic spheres, and political corruption. Such developments,
if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade
barriers and result in significant disruption in securities
markets.
Foreign Currency. Certain Latin American countries may
have managed currencies which are maintained at artificial levels
to the U.S. dollar rather than at levels determined by the
market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive
and negative effect on foreign investors. For example, in late
1994 the value of the Mexican peso lost more than one-third of
its value relative to the dollar. Certain Latin American
countries also may restrict the free conversion of their currency
into foreign currencies, including the U.S. dollar. There is no
significant foreign exchange market for certain currencies and it
would, as a result, be difficult for the Fund to engage in
foreign currency transactions designed to protect the value of
the Fund's interests in securities denominated in such
currencies.
Sovereign Debt. A number of Latin American countries
are among the largest debtors of developing countries. There
PAGE 138
have been moratoria on, and reschedulings of, repayment with
respect to these debts. Such events can restrict the flexibility
of these debtor nations in the international markets and result
in the imposition of onerous conditions on their economies.
In addition to the investments described in the Fund's
prospectus, the Fund may invest in the following:
Types of Securities
Hybrid Instruments
Hybrid Instruments have recently been developed and
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, particular currency, or a
domestic or foreign debt or equity securities index. Hybrid
Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments
or redemption terms determined by reference to the value of a
currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference
to the value of a 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, options,
futures and currencies, including volatility and lack of
liquidity. Reference is made to the discussion of futures,
options, and forward contracts herein 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. Alternatively, Hybrid Instruments may bear interest at
above market rates but bear an increased risk of principal loss
(or gain). 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 Commodities Futures Trading Commission
("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and
PAGE 139
sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities
Act of 1933 (the "1933 Act"). Where registration is required,
the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to
sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair
value as determined in accordance with procedures prescribed by
the Fund's Board of Directors. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the
Fund should be in a position where more than 15% of the value of
its net assets 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 15% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, 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 purchases, (3) dealer undertakings to make a market,
and (4) the nature of the security and of marketplace trades
(e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity
of Rule 144A securities would be monitored, and if as a result of
changed conditions it is determined that a Rule 144A security is
no longer liquid, the Fund's holdings of illiquid securities
PAGE 140
would be reviewed to determine what, if any, steps are required
to assure that the Fund does not invest more than 15% of its net
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Warrants
The Fund may invest in warrants. Warrants are pure
speculation in that they have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but
only the right to buy them. Warrants differ from call options in
that warrants are issued by the issuer of the security which may
be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying
securities.
There are, of course, other types of securities that
are, or may become available, which are similar to the foregoing
and the Fund may invest in these securities.
Portfolio Management Practices
All Funds, except Foreign Equity Fund
Lending of Portfolio Securities
Securities loans are made to broker-dealers or
institutional investors or other persons, pursuant to agreements
requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent
marked to market on a daily basis. The collateral received will
consist of cash, U.S. government securities, letters of credit or
such other collateral as may be permitted under its investment
program. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. The
Fund has a 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
PAGE 141
and sales of such securities in such foreign markets. The Fund
will not have the right to vote securities while they are being
lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by 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 and certain state regulatory agencies, the Fund may
make loans to, or borrow funds from, other mutual funds sponsored
or advised by T. Rowe Price or Price-Fleming (collectively,
"Price Funds"). The Fund has no current intention of engaging in
these practices at this time.
Foreign Equity Fund
InterFund Borrowing
Subject to approval by the Securities and Exchange
Commission, the Fund may 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 this practice at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through
which an investor (such as the Fund) purchases a security (known
as the "underlying security") from a well-established securities
dealer or a bank that is a member of the Federal Reserve System.
Any such dealer or bank will be on T. Rowe Price's approved list
and have a credit rating with respect to its short-term debt of
at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe
Price. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus
specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. Repurchase
agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Fund will only enter
PAGE 142
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 security and losses,
including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of
enforcing its rights.
Options
Writing Covered Call Options
The Fund may write (sell) American or European style
"covered" call options and purchase options to close out options
previously written by a Fund. In writing covered call options,
the Fund expects to generate additional premium income which
should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved
in the option. Covered call options will generally be written on
securities or currencies which, in Price-Fleming's opinion, are
not expected to have any major price increases or moves in the
near future but which, over the long term, are deemed to be
attractive investments for the Fund.
A call option gives the holder (buyer) the "right to
purchase" a security or currency at a specified price (the
exercise price) at expiration of the option (European style) or
at any time until a certain date (the expiration date) (American
style). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to
deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the
case of a call option, a writer is required to deposit in escrow
PAGE 143
the underlying security or currency or other assets in accordance
with the rules of a clearing corporation.
The Fund will write only covered call options. This
means that the Fund will own the security or currency subject to
the option or an option to purchase the same underlying security
or currency, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to the
fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call options
may be written will be purchased solely on the basis of
investment considerations consistent with the Fund's investment
objective. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which
the Fund will not do), but capable of enhancing the Fund's total
return. When writing a covered call option, a Fund, in return
for the premium, gives up the opportunity for profit from a price
increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should
the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Fund
has no control over when it may be required to sell the
underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its
obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of
the premium; however, such gain may be offset by a decline in the
market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will
realize a gain or loss from the sale of the underlying security
or currency. The Fund does not consider a security or currency
covered by a call to be "pledged" as that term is used in the
Fund's policy which limits the pledging or mortgaging of its
assets.
The premium received is the market value of an option.
The premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option
PAGE 144
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
effect such closing transactions at favorable prices. If the
Fund cannot enter into such a transaction, it may be required to
hold a security or currency that it might otherwise have sold.
When the Fund writes a covered call option, it runs the risk of
not being able to participate in the appreciation of the
underlying securities or currencies above the exercise price, as
well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
PAGE 145
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.
In order to comply with the requirements of several
states, the Fund will not write a covered call option if, as a
result, the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market
value of the Fund's net assets. Should these state laws change
or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating
the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and
puts on identical securities or currencies with identical
maturity dates.
Writing Covered Put Options
The Fund may write American or European style covered
put options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at
the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered
basis, which means that the Fund would maintain in a segregated
account cash, U.S. government securities or other liquid high-
grade debt obligations in an amount not less than the exercise
PAGE 146
price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise
price equal to or greater than the exercise price of the
"covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment
of the exercise price.) The Fund would generally write covered
put options in circumstances where 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 could be substantial and
result in a significant loss to the Fund. In addition, the Fund,
because it does not own the specific securities or currencies
which it may be required to purchase in exercise of the put,
cannot benefit from appreciation, if any, with respect to such
specific securities or currencies. In order to comply with the
requirements of several states, the Fund will not write a covered
put option if, as a result, the aggregate market value of all
portfolio securities or currencies covering put or call options
exceeds 25% of the market value of the Fund's net assets. Should
these state laws change or should the Fund obtain a waiver of its
application, the Fund reserves the right to increase this
percentage. In calculating the 25% limit, the Fund will offset,
against the value of assets covering written puts and calls, the
value of purchased puts and calls on identical securities or
currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put
options. As the holder of a put option, the Fund has the right
to sell the underlying security or currency at the exercise price
at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter
into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase
put options for defensive purposes in order to protect against an
PAGE 147
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 put and call options. Should
these state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The premium paid
by the Fund when purchasing a put option will be recorded as an
asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale
price at the time at which the net asset value per share of the
Fund is computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset will be
PAGE 148
terminated upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery
of the underlying security or currency upon the exercise of the
option.
Purchasing Call Options
The Fund may purchase American or European style call
options. As the holder of a call option, the Fund has the right
to purchase the underlying security or currency at the exercise
price at any time during the option period (American style) or at
the expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may
purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its
current return. The Fund may also purchase call options in order
to acquire the underlying securities or currencies. Examples of
such uses of call options are provided below.
Call options may be purchased by the Fund for the
purpose of acquiring the underlying securities or currencies for
its portfolio. Utilized in this fashion, the purchase of call
options enables the Fund to acquire the securities or currencies
at the exercise price of the call option plus the premium paid.
At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to the
Fund in purchasing a large block of securities or currencies that
would be more difficult to acquire by direct market purchases.
So long as it holds such a call option rather than the underlying
security or currency itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying
security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the
premium paid for the option.
To the extent required by the laws of certain states,
the Fund may not be permitted to commit more than 5% of its
assets to premiums when purchasing call and put options. Should
these state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it
owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for
this purpose where tax considerations make it inadvisable to
PAGE 149
realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While
the Fund would look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer
option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by
the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous
liquid market while dealer options have none. Consequently, the
Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option
prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote
the option. While the Fund will seek to enter into dealer
options only with dealers who will agree to and which are
expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to
liquidate a dealer option at a favorable price at any time prior
to expiration. Until the Fund, as a covered dealer call option
writer, is able to effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) or
currencies used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the
Fund may be unable to liquidate a dealer option. With respect to
options written by the Fund, the inability to enter into a
closing transaction may result in material losses to the Fund.
For example, since the Fund must maintain a secured position with
respect to any call option on a security it writes, the Fund may
not sell the assets which it has segregated to secure the
position while it is obligated under the option. This
requirement may impair a Fund's ability to sell portfolio
securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that
purchased dealer options and the assets used to secure the
written dealer options are illiquid securities. The Fund may
PAGE 150
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 futures contracts, including
stock index, interest rate and currency futures ("futures or
futures contracts").
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. The Fund may, purchase
or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the
Fund must sell futures contacts with respect to indices or
subindices whose movements will have a significant correlation
with movements in the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used
as a hedge against changes in prevailing levels of interest rates
or currency exchange rates in order to establish more definitely
the effective return on securities or currencies held or intended
to be acquired by the Fund. In this regard, the Fund could sell
interest rate or currency futures as an offset against the effect
of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect
of expected declines in interest rates or currency exchange
rates.
The Fund will enter into futures contracts which are
traded on national or foreign futures exchanges, and are
standardized as to maturity date and underlying financial
instrument. Futures exchanges and trading in the United States
are regulated under the Commodity Exchange Act by the CFTC.
Futures are traded in London at the London International
PAGE 151
Financial Futures Exchange in Paris at the MATIF and in Tokyo at
the Tokyo Stock Exchange. Although techniques other than the
sale and purchase of futures contracts could be used for the
above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's
objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those portions would exceed 5% of the net asset value of the Fund
after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded
on a commodities exchange will be considered "related options".
This policy may be modified by the Board of Directors without a
shareholder vote and does not limit the percentage of the Fund's
assets at risk to 5%.
In accordance with the rules of the State of California,
the Fund will apply the above 5% test without excluding the value
of initial margin and premiums paid for bona fide hedging
positions.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover (such
as owning an offsetting position) the position, or alternative
cover will be employed. Assets used as cover or held in an
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
PAGE 152
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the Fund's ability to meet
redemption requests or over current obligations.
If the CFTC or other regulatory authorities adopt
different (including less stringent) or additional restrictions,
the Fund would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one
party and purchase by another party of a specified amount of a
specific financial instrument (e.g., units of a stock index) for
a specified price, date, time and place designated at the time
the contract is made. Brokerage fees are incurred when a futures
contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred
to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
Unlike when the Fund purchases or sells a security, no
price would be paid or received by the Fund upon the purchase or
sale of a futures contract. Upon entering into a futures
contract, and to maintain the Fund's open positions in futures
contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures
broker an amount of cash, U.S. government securities, suitable
money market instruments, or liquid, high-grade debt securities,
known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by
the exchange during the term of the contract. Futures contracts
are customarily purchased and sold on margins that may range
upward from less than 5% of the value of the contract being
traded.
If the price of an open futures contract changes (by
increase in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of
favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the broker will pay
the excess to the Fund.
PAGE 153
These subsequent payments, called "variation margin," to
and from the futures broker, are made on a daily basis as the
price of the underlying assets fluctuate making the long and
short positions in the futures contract more or less valuable, a
process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms,
require actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for
the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the futures
contract.
For example, 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 political and economic events.
PAGE 154
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures
trading involves an extremely high degree of leverage. As a
result, a relatively small price movement in a futures contract
may result in immediate and substantial loss, as well as gain, to
the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of
its futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
positions or short futures positions. The Fund may close its
positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
PAGE 155
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange
or board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts
only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible
to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.
Hedging Risk. A decision of whether, when, and how to
hedge involves skill and judgment, and even a well-conceived
hedge may 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
instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the
futures and also would experience a decline in value in its
PAGE 156
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 used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
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
The Fund may purchase and sell options on the same types
of futures in which it may invest.
PAGE 157
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. 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 Funds and the other T. Rowe Price
Funds in a fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions
on Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
PAGE 158
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging
in futures or options transactions other than those described
above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in
the futures and options described above.
Foreign Futures and Options
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, it may
not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations and the rules
of the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In
particular, funds received from the Fund for foreign futures or
foreign options transactions may not be provided the same
PAGE 159
protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time the Fund's order is
placed and the time it is liquidated, offset or exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the
interbank market conducted directly between currency traders
(usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions
are charged at any stage for trades.
The Fund may enter into forward contracts for a variety
of purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
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 one currency
may experience a substantial movement against another currency,
including the U.S. dollar, it may enter into a forward contract
to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Fund
may enter into a forward contract where the amount of the foreign
PAGE 160
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in the Fund.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered
into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly
uncertain. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the
longer term investment decisions made with regard to overall
diversification strategies. However, 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.
The Fund may enter into forward contacts for any other
purpose consistent with the Fund's investment objective and
program. However, the Fund will not enter into a forward
contract, or maintain exposure to any such contract(s), if the
amount of foreign currency required to be delivered thereunder
would exceed the Fund's holdings of liquid, high-grade debt
securities and currency available for cover of the forward
contract(s). In determining the amount to be delivered under a
contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell
the portfolio security and make delivery of the foreign currency,
or it may retain the security and either extend the maturity of
the forward contract (by "rolling" that contract forward) or may
initiate a new forward contract.
If the Fund retains the portfolio security and engages
in an offsetting transaction, the Fund will incur a gain or a
loss (as described below) to the extent that there has been
movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward
prices decline during the period between the Fund's entering into
a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of
the foreign currency, the Fund will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price
PAGE 161
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 may 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
PAGE 162
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.
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
PAGE 163
three months as of the end of the Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.
INVESTMENT RESTRICTIONS
Fundamental policies of each Fund other than Latin
America 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 Funds' 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 that the Fund may
(i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments or
engage in other transactions, which may involve a
borrowing, in a manner consistent with the Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets
(including the amount borrowed) less liabilities
(other than borrowings) or such other percentage
permitted by law. Any borrowings which come to
exceed this amount will be reduced in accordance
with applicable law. The Fund may borrow from
banks, other Price Funds or other persons to the
extent permitted by applicable law.
(2) Commodities. Purchase or sell physical
commodities; except that it may enter into futures
contracts and options thereon;
PAGE 164
(3) 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;
(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an
interfund lending program with other Price Funds
provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed 33
1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
publicly- distributed or privately-placed debt
securities and purchase debt;
Foreign Equity Fund
Loans. Make loans, although the Fund may (i)
participate in an interfund lending program with
other Price Funds provided that no such loan may be
made if, as a result, the aggregate of such loans
would exceed 33 1/3% of the value of the Fund's
total assets; (ii) purchase money market securities
and enter into repurchase agreements; and (iii)
acquire publicly- distributed or privately-placed
debt securities and purchase debt;
All Funds
(5) Real Estate. Purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prevent the
Fund from investing in securities or other
instruments backed by real estate or securities of
companies engaged in the real estate business);
(6) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940; or
(7) 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
PAGE 165
securities in the ordinary course of pursuing its
investment program.
For All Funds, Except Latin America Fund
(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 a 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); and
(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 a 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).
NOTES
The following notes should be read in connection
with the above-described fundamental policies. The
notes are not fundamental policies.
With respect to investment restrictions (1) and
(4), the Fund will not borrow from or lend to any
other T. Rowe Price Fund (defined as any other
mutual fund managed be for which T. Rowe Price acts
as adviser) unless each Fund applies for and
receives an exemptive order from the SEC or the SEC
issues rules permitting such transactions. The
Fund has no current intention of engaging in any
such activity and there is no assurance the SEC
would grant any order requested by the Fund or
promulgate any rules allowing the transactions.
With respect to investment restriction (2), the
Fund does not consider currency contracts or hybrid
investments to be commodities.
For purposes of investment restriction (3), U.S.,
state or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industries are determined by reference to the
PAGE 166
classifications of industries set forth in the
Fund's semi-annual and annual reports.
For purposes of investment restriction (4), the
Fund will consider the acquisition of a debt
security to include the execution of a note or
other evidence of an extension of credit with a
term of more than nine months.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional
securities when money borrowed exceeds 5% of its
total assets;
(2) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
(3) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not
represent bona fide hedging, the aggregate initial
margin and premiums on such positions would exceed
5% of the Fund's net asset value.
(4) Illiquid Securities. Purchase illiquid securities
and securities of unseasoned issuers if, as a
result, more than 15% of its net assets would be
invested in such securities, provided that the
Fund will not invest more than 5% of its total
assets in restricted securities and not more than
5% in securities of unseasoned issuers.
Securities eligible for resale under Rule 144A of
the Securities Act of 1933 are not included in the
5% limitation but are subject to the 15%
limitation;
(4) 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;
PAGE 167
(5) Margin. Purchase securities on margin, except (i)
for use of short-term credit necessary for
clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection
with futures contracts or other permissible
investments;
(6) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by the
Fund as security for indebtedness except as may be
necessary in connection with permissible
borrowings or investments and then such
mortgaging, pledging or hypothecating may not
exceed 33 1/3% of the Fund's total assets at the
time of borrowing or investment;
(7) Oil and Gas Programs. Purchase participations or
other direct interests or enter into leases with
respect to, oil, gas, or other mineral exploration
or development programs;
(8) Options, Etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement
of Additional Information;
(9) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of
any issuer if, those officers and directors of the
Fund, and of its investment manager, who each own
beneficially more than .5% of the outstanding
securities of such issuer, together own
beneficially more than 5% of such securities;
(10) Short Sales. Effect short sales of securities;
(11) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any state or local 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 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
PAGE 168
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or
(12) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net
assets of the Fund would be invested in warrants
which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of
the value of the net assets of the Fund would be
invested in warrants whether or not so listed.
For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or
market and warrants acquired by the Funds in units
or attached to securities may be deemed to be
without value.
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. Each Fund is subject to certain
percentage limitations 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
Each 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 each Fund. Total
return is calculated as the percentage change between the
beginning value of a static account in each 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 each Fund. Each average annual compound rate of
PAGE 169
return is derived from the cumulative performance of each Fund
over the time period specified. The annual compound rate of
return for each Fund over any other period of time will vary from
the average.
International Stock Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/94+ 12/31/94 12/31/94 12/31/94++
_________ ________ ____________________
International
Stock Fund -0.76% 41.69% 423.20% 672.93%
S&P 500 1.32 51.74 281.99 603.09+++
Dow Jones Industrial
Average 4.98 63.03 349.26 704.86+++
Lipper International
Funds Average -0.71 31.13 328.06 482.54
EAFE Index 8.06 9.42 418.72 648.22+++
CPI 2.95 19.03 42.55 81.50
Financial Times
Actuaries World
Index++++ 5.83 22.17 N/A N/A
PAGE 170
Average Annual Compound Rates of Return
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/94+ 12/31/94 12/31/94 12/31/94++
________ _______ __________ __________
International Stock
Fund -0.76% 7.22% 18.00% 14.98%
S&P 500 1.32 8.70 14.34 14.39+++
Dow Jones Industrial
Average 4.98 10.27 16.21 15.46+++
Lipper International
Funds Average -0.71 5.35 15.24 12.60+++
EAFE Index 8.06 1.82 17.89 14.88+++
CPI 2.95 3.55 3.61 4.20+++
Financial Times
Actuaries World
Index++++ 5.83 4.09 N/A N/A
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $992.40 ($1,000 x
0.9924).
++ 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 - 12/31/94
++++ The inception date of this index is 12/31/85.
PAGE 171
International Discovery Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years Inception
Ended Ended 12/30/88 to
12/31/94+ 12/31/94 12/31/94++
__________ __________ ____________
International Discovery Fund-7.63% 22.51% 73.65%
S&P 500 1.32 51.74 99.82+++
Dow Jones Industrial
Average 4.98 63.03 115.46+++
Lipper International Small
Co. Funds Average -4.09 N/A N/A
EAFE Index 8.06 9.42 21.23+++
CPI 2.95 19.03 24.56+++
Average Annual Compound Rates of Return
Since
1 Year 5 Years Inception
Ended Ended 12/30/88 to
12/31/94+ 12/31/94 12/31/94++
__________ __________ ____________
International Discovery Fund-7.63% 4.14% 9.63%
S&P 500 1.32 8.70 12.23+++
Dow Jones Industrial
Average 4.98 10.27 13.65+++
Lipper International Small
Co. Funds Average -4.09 N/A N/A
EAFE Index 8.06 1.82 3.26+++
CPI 2.95 3.55 3.73+++
Morgan Stanley Capital
International World Index 5.58 4.24 6.30+++
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $923.70 ($1,000 x
0.9237).
++ Assumes purchase of one share of International Discovery
Fund at the public offering price of $10.00 on December 30,
1988. Over this time, stock prices in general have risen.
+++ 12/31/88 - 12/31/94
PAGE 172
Small company stocks achieved higher total annualized
returns than large-cap stocks and long-term bonds for the 25 and
50-year periods ending December 31, 1993. The table below shows
recent trends during the past ten years.
SMALL COMPANIES VS. LARGE COMPANIES
AVERAGE ANNUAL RETURNS
1983 - 1993
Chart 1
Sources: Japan Large - Tokyo Stock Exchange Section; Japan Small
- Tokyo Stock Exchange Section 2; Datastream; United Kingdom
Large - MSCI U.K. Index; United Kingdom Small - Hoarve Govette
Small Cap. Index; Datastream; United States Large - S&P 500
Index; Standard & Poor's, United State Small - Wilshire Small
Growth Index, Wilshire Associates.
European Stock Fund
Cumulative Performance Percentage Change
Since
1 Year 3 Years Inception
Ended Ended 2/28/90+ to
12/31/94 12/31/94 12/31/94++
__________ _____________________
European Stock Fund 4.06% 25.05% 29.93%
S&P 500 1.32 20.03 60.59
Dow Jones Industrial
Average 4.98 31.87 69.73
Lipper European Region
Funds Average 1.22 18.77 20.59
EAFE Index 8.06 26.64 22.12
CPI 2.95 8.85 17.27
PAGE 173
Average Annual Compound Rates of Return
Since
1 Year 3 Years Inception
Ended Ended 2/28/90+ to
12/31/94 12/31/94 12/31/94++
__________ _____________________
European Stock Fund 4.06% 7.74% 5.56%
S&P 500 1.32 6.28 10.29
Dow Jones Industrial
Average 4.98 9.66 11.55
Lipper European Region
Funds Average 1.22 5.62 3.77
EAFE Index 8.06 8.19 4.22
CPI 2.95 2.87 3.35
Morgan Stanley Capital
International Europe
Index 2.66 8.46 7.80
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $1,040.60 ($1,000 x
1.0406).
++ Assumes purchase of one share of European Stock Fund at
the public offering price of $10.00 on February 28, 1990.
Over this time, stock prices in general have risen.
PAGE 174
Japan Fund
Cumulative Performance Percentage Change
Since
1 Year Inception
Ended 12/30/91+ to
12/31/94 12/31/94++
__________ ____________
Japan Fund 15.09% 20.22%
Morgan Stanley Pacific
Basin Index 13.03 25.72+++
Morgan Stanley Capital
International World
Index 5.58 23.94+++
EAFE Index 8.06 26.64+++
S&P 500 1.32 20.03+++
Topix Index 21.26 13.91+++
Nikkei Average 26.67 7.48+++
Morgan Stanley Japan
Index 21.62 20.32+++
Lipper Japanese Funds
Average 15.39 13.01+++
Average Annual Compound Rates of Return
Since
1 Year Inception
Ended 12/30/91+ to
12/31/94 12/31/94++
__________ ____________
Japan Fund 15.09% 6.31%
Morgan Stanley Pacific
Basin Index 13.03 7.93+++
Morgan Stanley Capital
International World
Index 5.58 7.42+++
EAFE Index 8.06 8.19+++
S&P 500 1.32 6.28+++
Topix Index 21.26 4.44+++
Nikkei Average 26.67 2.43+++
Morgan Stanley Japan
Index 21.62 6.35+++
Lipper Japanese Funds
Average 15.39 4.15+++
PAGE 175
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $1,150.90 ($1,000 x
1.1509).
++ Assumes purchase of one share of Japan Fund at the public
offering price of $10.00 on December 27, 1991. Over this
time, stock prices in general have risen.
+++ 12/31/91 - 12/31/94
One reason investors may find the Japanese market
attractive is the proven competitiveness of Japanese companies
within their industries. Due to a commitment to capital
investment, technological expertise, and a highly productive
workforce, Japanese companies dominate many of the world's key
industries. Shown below are the number of Japanese companies
within the top ten largest companies of the world+ for the
industries indicated:
--- 9 of the top 10 banks
--- 7 of the top 10 appliance/household durable
companies
--- 8 of the top 10 financial service companies
--- 7 of the top 10 steel companies
--- 4 of the top 10 automobile companies
+ Based on total market capitalization in U.S. dollars.
Source: Morgan Stanley Capital International
U.S. S&P 500 VS. JAPAN TOPIX
1981 -- 1993
Chart 2
Sources: Bloomberg
Returns are measured in U.S. currency. Topix Index reflects the
first section of the Tokyo Stock Exchange.
The chart is for illustrative purposes only and should not
be considered representative of an investment in the Fund or of
the Fund's performance. Returns are measured in U.S. currency.
Topix Index reflects the first section of the Tokyo Stock
Exchange.
PAGE 176
Sources: Nikkei Needs; Bridge Information Systems
Growth of Real GNP in the OECD area!
Annual Percentage Change
Average
1976-85 1986 1987 1988 1989 1990 1991 1992 1993
_______ ____ ____ ____ ____ ____ ____ ____ ____
United States 2.9 2.9 3.1 3.9 2.5 1.2 -0.6 2.3 3.1
Japan 4.2 2.6 4.1 6.2 4.7 4.8 4.3 1.1 0.1
Source: World Economic Outlook, IMF, October 1994
Latin America Fund
Cumulative Performance Percentage Change
Since
1 Year Inception
Ended 12/29/93+ to
12/31/94 12/31/94++
__________ ____________
Latin America Fund -15.92% -15.50%
S&P 500 1.32 1.32+++
Average Annual Compound Rates of Return
Since
1 Year Inception
Ended 12/29/93+ to
12/31/94 12/31/94++
__________ ____________
Latin America Fund -15.92% -15.42%
S&P 500 1.32 1.32+++
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $840.80 ($1,000 x
0.8408).
++ Assumes purchase of one share of Latin America Fund at the
public offering price of $10.00 on December 29, 1993. Over
this time, stock prices in general have risen.
+++ 12/29/93 - 12/31/94
PAGE 177
The following is a line graph depicting the following plot
points:
January 1989 - January 1993
Chart 3
IFCI Composite 100 in January, 1989 and climbs steadily to 200 in
June, 1990 then declines to 150 in January, 1991 then increases
to 250 by May, 1992, then drops to 220 in September, 1992, and
climbs steadily to 240 in January, 1993.
IFCI Latin America 100 drops to 98 in January, 1989 and climbs
steadily to 575 in June, 1992 then declines to 425 in November,
1992 then increases to 500 by March, 1993.
IFCI Asia 100 climbs to 170 in July, 1990 then declines to 130 in
September, 1991 then climbs steadily to 170 by March, 1993.
IFCI Europe/Mideast 100 steadily climbs to 330 in July, 1990 then
declines to 200 in December, 1990 then climbs to 240 in February,
1991 and slowly declines to 99 in October, 1992 and slowly climbs
to 130 in January, 1993 and then drops to 120 in March, 1993.
S&P 500 fluctuates between 130 to 150 up to December, 1992 then
steadily climbs to 190 in March, 1993.
EAFE 100 climbs to 110 in January, 1990, then drops to 90 in
March, 1990 and climbs to 100 in June, 1990 and then declines 80
to 90 through March, 1993.
*IFCI represents International Finance Corp. Index
The chart is intended to represent an investment of $100 in each
of the indices at the beginning on 1989 and the investments
ending value as of March, 1993.
PAGE 178
New Asia Fund
Cumulative Performance Percentage Change
Since
1 Year 3 Years Inception
Ended Ended 9/28/90+ to
12/31/94 12/31/94 12/31/94++
__________ ______________________
New Asia Fund -19.15% 60.76% 94.88%
S&P 500 1.32 20.03 70.64+++
Dow Jones Industrial
Average 4.99 31.87 77.78+++
Lipper Pacific Region
Funds Average -12.45 47.46 77.00+++
EAFE Index 8.06 26.64 57.61+++
CPI 2.95 8.85 13.11+++
Average Annual Compound Rates of Return
Since
1 Year 3 Years Inception
Ended Ended 9/28/90+ to
12/31/94 12/31/94 12/31/94++
__________ ______________________
New Asia Fund -19.15% 17.15% 16.97%
S&P 500 1.32 6.28 13.39+++
Dow Jones Industrial
Average 4.98 9.66 14.49+++
Lipper Pacific Region
Funds Average -12.45 13.42 14.12+++
EAFE Index 8.06 8.19 11.29+++
CPI 2.95 2.87 2.94+++
Financial Times
Actuaries Pacific
Excluding Japan -14.67 20.37 21.66+++
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $ 808.50 ($1,000 x
0.8085).
++ Assumes purchase of one share of New Asia Fund at the
public offering price of $5.00 on September 28, 1990. Over
this time, stock prices in general have risen.
+++ 09/30/90 - 12/31/94
PAGE 179
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
________________
Average
1976-85 1986 1987 1988 1989 1990 1991 1992 1993
_______ ____ ____ ____ ____ ____ ____ ____ ____
World 3.4 3.6 4.0 4.7 3.4 2.2 0.9 1.7 2.3
Industrialized 2.8 2.9 3.2 4.4 3.3 2.4 0.8 1.5 1.3
Developing (Asia)6.4 6.7 8.0 9.2 5.7 5.8 6.2 8.2 8.5
Source: World Economic Outlook, IMF, October 1994
Foreign Equity Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years Inception
Ended Ended 9/7/89 to
12/31/94+ 12/31/94 12/31/94++
_________ _______ __________
Foreign Equity Fund -0.88% 42.30% 51.71%
S&P 500 1.32 51.74 54.24+++
Dow Jones Industrial Average 4.98 63.03 66.07+++
Lipper International Funds
Average -0.71 31.13 42.60+++
EAFE Index 8.06 9.42 19.68+++
CPI 2.95 19.03 20.47+++
Financial Times Actuaries
Euro-Pacific Index 9.29 7.44 18.27+++
PAGE 180
Average Annual Compound Rates of Return
Since
1 Year 5 Years Inception
Ended Ended 9/7/89 to
12/31/94+ 12/31/94 12/31/94++
_________ _______ __________
Foreign Equity Fund -0.88% 7.31% 8.16%
S&P 500 1.32 8.70 8.46+++
Dow Jones Industrial
Average 4.98 10.27 9.98+++
Lipper International Funds
Average -0.71 5.35 6.64+++
EAFE Index 8.06 1.82 3.44+++
CPI 2.95 3.55 3.55+++
Financial Times Actuaries
Euro-Pacific Index 9.29 1.45 3.20+++
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $991.20 ($1,000 x
0.9912).
++ Assumes purchase of one share of Foreign Equity Fund at the
public offering price of $10.00 on September 7, 1989. Over
this time, stock prices in general have risen.
+++ 8/31/89 - 12/31/94
The EAFE Index (Capital International Europe, Australia,
Far East Index) is a generally accepted benchmark for performance
of major overseas markets.
From time to time, in reports and promotional
literature: (1) each 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
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, Inc., a widely used
independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets which includes the
Lipper Pacific Region Average which tracks the average
performance of funds which concentrate investments in equity
securities whose primary trading markets or operations are in the
Western Pacific basin region, or a single country within this
region; (B) Morningstar, Inc., another widely used independent
PAGE 181
research firm which rates 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, Japan
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) the Nikkei Average, a
generally accepted benchmark for performance of the Japanese
stock market; (viii) indices of stocks comparable to those in
which each Fund invests including the Topix Index, which reflects
the performance of the First Section of the Tokyo Stock Exchange;
and (ix) 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 each 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 each 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 each 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 each Fund invests may be compared to relevant
indices or surveys (e.g. S&P Industry Surveys) in order to
evaluate each Fund's historical performance or current or
potential value with respect to the particular industry or
PAGE 182
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 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
Each 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
PAGE 183
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 12/31/94
50 years 20 years 10 years 5 years
Small-Company Stocks 14.4% 20.3% 11.1% 11.8%
Large-Company Stocks 11.9 14.6 14.4 8.7
Foreign Stocks N/A 16.3 17.9 1.8
Long-Term Corporate Bonds 5.3 10.0 11.6 8.4
Intermediate-Term U.S.
Gov't. Bonds 5.6 9.3 9.4 7.5
Treasury Bills 4.7 7.3 5.8 4.7
U.S. Inflation 4.5 5.5 3.6 3.5
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
PAGE 184
combinations over a specified time period in terms of return. An
example of this is shown on the next page.
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/94 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real Best Worst
Portfolio GrowthIncomeSafety ReturnReturn**Year Year
I. Low
Risk 40% 40% 20% 12.4% 6.9% 24.9% 0.1% $ 92,515
II. Moderate
Risk 60% 30% 10% 13.5% 8.1% 29.1% -1.8% $118,217
III. High
Risk 80% 20% 0% 14.5% 9.1% 33.4% -5.2% $149,200
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-94 and Lehman Brothers Government/Corporate Bond
Index from 1975), and 30-day Treasury bills from January 1975
through December 1994. Past performance does not guarantee
future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is
maintained each year. This exhibit is for illustrative
purposes only and is not representative of the performance of
any T. Rowe Price fund.
** Based on inflation rate of 5.5% for the 20-year period ended
12/31/94.
Insights
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
PAGE 185
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
Redemptions in Kind
In the unlikely event a shareholder in any of the
International Funds were to receive an in kind redemption of
portfolio securities of a 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 a Fund's 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 objectives 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.
MANAGEMENT OF FUNDS
The officers and directors of the Funds 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 Funds' directors who are considered
PAGE 186
"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 asterisk (*). These directors are referred to as
inside directors by virtue of their officership, directorship,
and/or employment with T. Rowe Price.
LEO C. BAILEY, Director--Retired; Address: 3396 South Placita
Fabula, Green Valley, Arizona 85614
ANTHONY W. DEERING, Director--Director, President and Chief
Executive 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--Principal, Overseas Partners,
Inc., a financial investment firm; formerly (6/65-3/89) Director
and Vice President-Consumer Products Division, McCormick &
Company, Inc., international food processors; Director, Waverly,
Inc., Baltimore, Maryland; Address: 111 Pavonia Avenue, Suite
334, Jersey City, New Jersey 07310
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
*M. DAVID TESTA, Chairman of the Board--Chairman of the Board,
Price-Fleming; Managing Director, T. Rowe Price; Vice President
and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst; Chartered Investment Counselor
*MARTIN G. WADE, President and Director--President, Price-
Fleming; Director, Robert Fleming Holdings Limited; Address: 25
Copthall Avenue, London, EC2R 7DR, England
CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-
Fleming
aPETER B. ASKEW, Executive Vice President--Executive Vice
President, Price-Fleming
aRICHARD J. BRUCE, Vice President--Vice President of Price-
Fleming; formerly (1985-1990) Investment Manager, Jardine Fleming
Investment Advisers, Tokyo
aROBERT 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
aMARK J. T. EDWARDS, Vice President--Vice President, Price-
Fleming
JOHN R. FORD, Vice President--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
PAGE 187
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
aSTEPHEN ILOTT, Vice President--Vice President, 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.
aCHRISTOPHER ROTHERY, Vice President--Employee, Price-Fleming;
formerly (1987-1989) employee of Robert Fleming Holdings Limited,
London
bR. TODD RUPPERT, Vice President--Vice President, T. Rowe Price,
T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
aCHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Rowe Price-Fleming International, Inc.
aBENEDICT R. F. THOMAS, Vice President--Vice President, Price-
Fleming
aPETER VAN DYKE, Vice President--Managing Director, T. Rowe
Price; Vice President, Rowe Price-Fleming International, Inc.
DAVID J. L. WARREN, Vice President--Vice President, Price-Fleming
WILLIAM F. WENDLER, II, Vice President--Vice President, Price-
Fleming, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
abEDWARD 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
PATRICIA S. BUTCHER, Assistant Secretary--Assistant 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
aANN B. CRANMER, Assistant Vice President--Assistant Vice
President, Price-Fleming
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
aLEAH P. HOLMES, Assistant Vice President--Vice President, Price-
PAGE 188
Fleming and Assistant Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T.
Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
a Mr. Askew is a Executive Vice President of the
International Funds only. Messrs. Bruce, Campbell,
Edwards, Ilott, Rothery, Smith, Thomas, VanDyke, and Wiese
are Vice Presidents of the International Funds only.
Mmes. Cranmer and Holmes are Assistant Vice Presidents of
the International Funds only.
b Mr. Wiese is a Executive Vice President, and Mr. Ruppert
is a Vice President of the Foreign Equity Fund.
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Complex
Person, from Fund Accrued as Paid to
Position Expensesa Part of Fundb Directorsc
_________________________________________________________________
International Stock
Leo C. Bailey, $11,299 N/A $64,583
Director
Anthony W. Deering, 11,299 N/A 66,333
Director
Donald W. Dick, 11,299 N/A 64,833
Director
Addison Lanier, 11,299 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
Martin G. Wade, 0 N/A 0
Directord
PAGE 189
International Discovery
Leo C. Bailey, $3,475 N/A $64,583
Director
Anthony W. Deering, 3,475 N/A 66,333
Director
Donald W. Dick, 3,475 N/A 64,833
Director
Addison Lanier, 3,475 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
Martin G. Wade, 0 N/A 0
Directord
European Stock
Leo C. Bailey, $2,689 N/A $64,583
Director
Anthony W. Deering, 2,689 N/A 66,333
Director
Donald W. Dick, 2,689 N/A 64,833
Director
Addison Lanier, 2,689 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
Martin G. Wade, 0 N/A 0
Directord
PAGE 190
Japan
Leo C. Bailey, $1,994 N/A $64,583
Director
Anthony W. Deering, 1,994 N/A 66,333
Director
Donald W. Dick, 1,994 N/A 64,833
Director
Addison Lanier, 1,994 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
Martin G. Wade, 0 N/A 0
Directord
New Asia
Leo C. Bailey, $10,075 N/A $64,583
Director
Anthony W. Deering, 10,075 N/A 66,333
Director
Donald W. Dick, 10,075 N/A 64,833
Director
Addison Lanier, 10,075 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
Martin G. Wade, 0 N/A 0
Directord
PAGE 191
Latin America
Leo C. Bailey, $1,725 N/A $64,583
Director
Anthony W. Deering, 1,725 N/A 66,333
Director
Donald W. Dick, 1,725 N/A 64,833
Director
Addison Lanier, 1,725 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
Martin G. Wade, 0 N/A 0
Directord
Foreign Equity
Leo C. Bailey, $4,533 N/A $64,583
Director
Anthony W. Deering, 4,533 N/A 66,333
Director
Donald W. Dick, 4,533 N/A 64,833
Director
Addison Lanier, 4,533 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
Martin G. Wade, 0 N/A 0
Directord
a Amounts in this Column are for the period June 1, 1993
through May 31, 1994.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994.
PAGE 192
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no renumeration from the
Fund.
The Funds' Executive Committee, comprised of Messrs. Testa and
Wade, have been authorized by the Board of Directors to exercise
all of the powers of the Board to manage the Funds 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 Funds, as a group, owned less than 1% of the
outstanding shares of each Fund.
As of January 31, 1994, the following shareholder
beneficially owned more than 5% of the outstanding shares of the
International Stock, New Asia, Japan and European Stock Funds,
respectively: Charles Schwab & Co. Inc., Reinvestment Account,
Attn.: Mutual Fund Dept., 101 West Montgomery Street, San
Francisco, California 94104-4122. Each of the following
shareholders beneficially owned more than 5% of the outstanding
shares of the Foreign Equity Fund: Continental Bank N.A., c/o
Robert Kramer, 231 S. Lasalle Street, Chicago, Illinois 60604-
1407.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, Price-Fleming provides
each Fund with discretionary investment services. Specifically,
Price-Fleming is responsible for supervising and directing the
investments of each 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 each Fund, including the negotiation of
commissions and the allocation of principal business and
portfolio brokerage. In addition to these services, Price-
Fleming provides the Funds with certain corporate administrative
services, including: maintaining the Funds' corporate existence,
corporate records, and registering and qualifying Fund shares
under federal and state laws; monitoring the financial,
PAGE 193
accounting, and administrative functions of each Fund;
maintaining liaison with the agents employed by each Fund such as
the Fund's custodian and transfer agent; assisting each Fund in
the coordination of such agents' activities; and permitting
Price-Fleming's employees to serve as officers, directors, and
committee members of each Fund without cost to the Fund.
The Management Agreement also provides that Price-
Fleming, its directors, officers, employees, and certain other
persons performing specific functions for each 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 Funds 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 Funds.
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") and
Jardine Fleming Investment Holdings Limited ("JFIH"), wherein FIM
and JFIH have agreed to render investment research and
administrative support to Price-Fleming. FIM is a wholly-owned
subsidiary 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 of .075% of the market
value of all assets in equity accounts under Price-Fleming's
PAGE 194
management. 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.
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.
All Funds, except Foreign Equity Fund
Management Fee
Each 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 each Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:
PAGE 195
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 Funds' 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% for
the International Stock Fund, 0.50% each for the European Stock,
Japan and New Asia Funds, 0.75% each for the International
Discovery and Latin America Funds, and multiplying this product
by the net assets of the Fund for that day, as determined in
accordance with the Funds' prospectus as of the close of business
on the previous business day on which the Fund was open for
business.
The following chart sets forth the total management fees
if any, paid to Price-Fleming by the Funds, during the last three
years:
PAGE 196
International Stock International DiscoveryJapan
1994 $35,176,000 1994 $5,142,000 1994 $1,289,000
1993 $14,955,000 1993 $1,983,000 1993 $ 458,000
1992 $12,522,000 1992 $1,798,000 1992 $ 19,000
European Stock New Asia Latin America
1994 $2,710,000 1994 $17,319,694 1994 $1,195,000
1993 $1,422,000 1993 $ 4,937,000 1993 *
1992 $1,198,000 1992 $ 1,954,000 1992 *
*Prior to commencement of Fund operations.
Limitation on Fund Expenses
The Management Agreement between each Fund and Price-
Fleming provides that each 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 each 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 a Fund is entitled to reimbursement, the expenses of each
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.
International Discovery Fund
Effective January 1, 1993 Price-Fleming agreed to extend
the 1.50% expense limitation through December 31, 1993. Expenses
paid or assumed by Price-Fleming under the agreement, are subject
to reimbursement to Price-Fleming by the Fund whenever the Fund's
expense ratio is below 1.50%; however, no reimbursement will be
made after December 31, 1994 (for the initial agreement),
December 31, 1995 (for the second agreement), or if it would
result in the expense ratio exceeding 1.50%. The Management
Agreement also provides that one or more additional expense
limitation periods may be implemented in the future, and that
with respect to any additional limitation period, the Fund may
reimburse Price-Fleming, provided the reimbursement does not
PAGE 197
result in the Fund's aggregate expenses exceeding the additional
expense limitation or any applicable state expense limitation.
Pursuant to the Fund's past expense limitations, $159,00
if unaccrued 1991-1992 management fees were repaid during the
year ended October 31, 1994, and $386,000 remains subject to
reimbursement through December 31, 1994. Additionally, $85,000
of unaccrued management fees for the ten months ended October 31,
1993 are subject to reimbursement through December 31, 1995.
Japan Fund
In the interest of limiting the expenses of the Fund
during its initial period of operations, Price-Fleming agreed to
bear any expenses through December 31, 1993, which would cause
the Fund's ratio of expenses to average net assets to exceed
1.50%. Effective January 1, 1994 Price-Fleming agreed to extend
the 1.50% expense limitation through October 31, 1995. Expenses
paid or assumed by Price-Fleming under each agreement are subject
to reimbursement to Price-Fleming by the Fund whenever the Fund's
expense ratio is below 1.50%; however, no reimbursement will be
made after December 31, 1995 (for the initial agreement), October
31, 1997 (for the second agreement), or if it would result in the
expense ratio exceeding 1.50%. The Management Agreement also
provides that one or more additional expense limitation periods
(of the same or different time periods) may be implemented after
the expiration of the one on December 31, 1993, and that with
respect to any such additional limitation period, the Fund may
reimburse Price-Fleming, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional
expense limitation.
Pursuant to the Fund's past expense limitation,
management fees aggregating $100,000 and $211,000 were not
accrued for the ten-month fiscal period ended October 31, 1993
and the fiscal period ended December 31, 1992, respectively.
These unaccrued fees are subject to reimbursement through
December 31, 1995.
Latin America Fund
In the interest of limiting the expenses of the Fund
during its initial period of operations, Price-Fleming agreed to
bear any expenses through October 31, 1995, which would cause the
Fund's ratio of expenses to average net assets to exceed 2.00%.
Expenses paid or assumed under this agreement are subject to
reimbursement to Price-Fleming by the Fund whenever the Fund's
PAGE 198
expense ratio is below 2.00%; however, no reimbursement will be
made after October 31, 1997, or if it would result in the expense
ratio exceeding 2.00%. The Management Agreement also provides
that one or more additional expense limitation periods (of the
same or different time periods) may be implemented after the
expiration of the current one on October 31, 1995, and that with
respect to any such additional limitation period, the Fund's may
reimburse Price-Fleming, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional
expense limitation or any applicable state expense limitation.
T. Rowe Price Spectrum Fund, Inc. (International Stock Fund)
The Fund is a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc.
("Spectrum Fund"), T. Rowe Price, T. Rowe Price Services, Inc.
and various other T. Rowe Price funds which, along with the Fund,
are funds in which Spectrum Fund invests (collectively all such
funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors
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.
Foreign Equity Fund
Limitation on Fund Expenses
The Management Agreement provides that one or more
expense limitation periods may be implemented after the
expiration of the one on February 29, 1992, and that with respect
to any additional limitation period, the Fund may reimburse
Price-Fleming for a period of up to two years, provided the
PAGE 199
reimbursement does not result in the Fund's aggregate expenses
exceeding the additional expense limitation (or any
applicable state expense limitation). Although Price-Fleming may
at any time voluntarily extend an expense limitation without
shareholder approval, this provision permits Price-Fleming to
adopt an expense limitation from time to time and be reimbursed
for any amount it assumed or waived under such an expense
limitation.
For its services to the Fund under the Management
Agreement, Price-Fleming is paid an annual fee, in monthly
installments, based on the Fund's average daily net assets at the
rate of .70%. For the years 1994, 1993, and 1992, Price-Fleming
received from the Fund management fees totaling $5,137,006,
$2,064,000, and $1,437,000, respectively.
DISTRIBUTOR FOR FUNDS
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 Funds'
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 each Fund's shares is continuous.
Investment Services is located at the same address as
the Funds and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to the Funds
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that each 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
PAGE 200
those fees and expenses specifically assumed by each Fund.
Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of each 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 Funds.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the
custodian for the Funds' U.S. securities and cash, but it does
not participate in the Funds' 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 Funds have entered into a Custodian Agreement
with The Chase Manhattan Bank, N.A., London, pursuant to which
portfolio securities which are purchased outside the United
States are maintained in the custody of various foreign branches
of The Chase Manhattan Bank and such other custodians, including
foreign banks and foreign securities depositories 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.
CODE OF ETHICS
The Funds' investment adviser (Price-Fleming) has a
written Code of Ethics which requires all employees to obtain
prior clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; the security is subject to internal
trading restrictions. In addition, employees are prohibited from
engaging in short-term trading (e.g., purchases and sales
involving the same security within 60 days. Any material
PAGE 201
violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of
Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of
portfolio securities on behalf of the Funds are 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 each 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, a Fund may pay higher
brokerage commissions in return for brokerage and research
services. In selecting broker-dealers to execute a 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 Funds. 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.
PAGE 202
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, the 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
Funds with a broker or dealer who furnishes brokerage and/or
research services, designate any such broker or dealer to receive
selling concessions, discounts or other allowances or otherwise
deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. The prices the Fund
pays to underwriters of newly-issued securities usually include a
concession paid by the issuer to the underwriter. Price-Fleming
may receive research services in connection with brokerage
transactions, including designations in fixed price offerings.
Price-Fleming may cause a 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.
PAGE 203
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 a 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 a particular Fund will not necessarily be used
PAGE 204
by Price-Fleming exclusively in connection with the management of
that Fund.
Some of Price-Fleming's other clients have investment
objectives and programs similar to those of the Funds. Price-
Fleming may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Funds. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is 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.
None of the Funds allocates 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 each 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 a 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
PAGE 205
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"), and Robert Fleming
& Co. Limited ("RF&Co."). FIM 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 a 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 Funds 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
Funds' 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 Funds. The directors have reviewed and from
time to time may continue to review whether other recapture
opportunities are legally permissible and available and, if they
appear to be, determine whether it would be advisable for a Fund
to seek to take advantage of them.
During the year 1994, the International Stock,
International Discovery, New Asia, Japan, Latin America, and
Foreign Equity Funds paid $1,608,031, $365,658, $3,067,341,
$462,690, $1,254, and $289,368, respectively, in total brokerage
commissions in connection with their portfolio transactions. The
PAGE 206
brokerage commissions paid to JFS represented 9%, 15%, 20%, 36%,
0.28%, and 8%, respectively, of the Funds' aggregate brokerage
commissions paid during 1994. The aggregate dollar amount of
transactions effected through JFS, involving the payment of
commissions represented 18%, 15%, 21%, 33%, 0.12%, and 5%,
respectively, of the aggregate dollar amount of all transactions
involving the payment of commissions during 1994. International
Stock, European Stock, International Discovery, and Foreign
Equity Funds paid to RF&Co., $145,770, $1,000, $5,160, $7,109,
and $57,122, respectively, in total brokerage commissions in
connection with their portfolio transactions. The brokerage
commissions paid to RF&Co. represented 2%, 2%, 0.35%, and 3%,
respectively, of the Funds' aggregate brokerage commissions paid
during 1994. The aggregate dollar amount of transactions
effected through RF&Co., involving the payment of commissions
represented 1%, 2%, 0.50%, and 4%, respectively, of the aggregate
dollar amount of all transactions involving the payment of
commissions during 1994. International Stock, International
Discovery, New Asia, and Foreign Equity Funds paid to Ord
Minnett, $552,490, $54,618, $450,748, and $84,723, respectively,
in total brokerage commissions in connection with their portfolio
transactions. The brokerage commissions paid to Ord Minnett,
represented 6%, 3%, 3%, and 4%, respectively, of the Funds'
aggregate brokerage commissions paid during 1994. The aggregate
dollar amount of transactions effected through Ord Minnett,
involving the payment of commissions represented 3%, 3%, 4%, and
3%, respectively, of the aggregate dollar amount of all
transactions involving the payment of commissions during 1994.
In accordance with the written procedures adopted pursuant to
Rule 17e-1, the independent directors of each Fund reviewed the
1994 transactions with affiliated brokers and determined that
such transactions resulted in an economic advantage to the Funds
either in the form of lower execution costs or otherwise.
Other
For the years 1994, 1993, and 1992, the total brokerage
commissions paid by International Stock Fund, including the
discounts received by securities dealers in connection with
underwritings, were $9,684,485, $5,419,000, and $4,052,000,
respectively. Of these commissions, approximately 83%, 76%, and
85%, 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.
PAGE 207
The portfolio turnover rate of the International Stock
Fund for each of the last three years has been as follows: 1994--
22.9%, 1993--29.8%, and 1992--37.8%.
For the years 1994, 1993, and 1992, the total brokerage
commissions paid by the International Discovery Fund, including
the discounts received by securities dealers in connection with
underwritings, were $2,042,917, $1,277,000, and $458,000,
respectively. Of these commissions, approximately 82%, 81%, and
81%, 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 International
Discovery Fund for each of the last three years has been as
follows: 1994--57.4%, 1993--71.8%, and 1992--38.0%.
For the years 1994, 1993, and 1992, the total brokerage
commissions paid by the European Stock Fund, including the
discounts received by securities dealers in connection with
underwritings, were $219,614, $182,000, and $328,000,
respectively. Of these commissions, approximately 98% was paid
for 1994 and 99% was paid for 1993 and 1992, all commissions 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 European Stock Fund
for each of the last three years has been as follows: 1994--
24.5%, 1993--21.3%, and 1992--52.0%.
For the years 1994, 1993, and 1992, the total brokerage
commissions paid by the Japan Fund, including the discounts
received by securities dealers in connection with underwritings,
were $1,284,041, $412,000, and $277,000, respectively. Of these
commissions, approximately 64%, 73%, and 91% 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 Japan Fund for each
of the last three years has been as follows: 1994--61.5%, 1993--
61.4%, and 1992--41.6%.
For the years 1994, 1993, and 1992, the total brokerage
commissions paid by the New Asia Fund, including the discounts
received by securities dealers in connection with underwritings,
PAGE 208
were $13,086,017, $6,642,000, and $1,757,000, respectively. Of
these commissions, approximately 77%, 72%, and 64%, 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 New Asia Fund for
each of the last three years has been as follows: 1994--63.2%,
1993-40.4%, and 1992--36.3%.
For the years 1994, 1993, and 1992, the total brokerage
commissions paid by the Foreign Equity Fund, including the
discounts received by securities dealers in connection with
underwritings, were $1,913,957, $853,000, and $563,000,
respectively. Of these commissions, approximately 85%, 79%, 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 Foreign Equity Fund
for each of the last three years has been as follows: 1994--
22.0%, 1993--27.4%, and 1992--35.1%.
For the year 1994 the total brokerage commissions paid
by the Latin America Fund, including the discounts received by
securities dealers in connection with underwritings, were
$447,402. Of these commissions, approximately 99% 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 Latin America Fund
for the year 1994 was 12.2%
PRICING OF SECURITIES
Equity securities listed or regularly traded on a
securities exchange (including NASDAQ) are valued at the last
quoted sales price at the time 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.
PAGE 209
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 each 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 Funds, as authorized
by the Board of Directors.
Trading in the portfolio securities of each Fund may
take place in various foreign markets on certain days (such as
Saturday) when the Funds are not open for business and do not
calculate their net asset values. In addition, trading in a
Fund's portfolio securities may not occur on days when the Fund
is open. The calculation of each 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 each 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 each Fund's shares
is equal to that Fund's net asset value per share or share price.
Each 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 each Fund, other than the Japan Fund, is calculated as
PAGE 210
of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The net asset value per
share of the Japan Fund is calculated as of the close of trading
on the NYSE each day the NYSE and the Tokyo Stock Exchange
("TSE") are both open. 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.
The TSE is scheduled to be closed on the following week days in
1995: January 2, 3, 16; March 21; May 3, 4, 5; September 15;
October 10; and November 3, 23, as well as the following weeks
days in 1996: January 1, 2, 3, 15; February 12; March 20; April
29; May 3, 6; September 16, 23; October 10; November 4; and
December 23, 31. If the TSE closes on any additional or
different dates, the Japan Fund will be closed on such dates.
Determination of net asset value (and the offering,
sale, redemption and repurchase of shares) for a Fund may be
suspended at times (a) during which the NYSE is closed, other
than customary weekend and holiday closings, or in the case of
the Japan Fund, either the NYSE or TSE is closed, (b) during
which trading on any of such Exchanges is restricted (c) during
which an emergency exists as a result of which disposal by a 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
Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
PAGE 211
Dividends and distributions paid by the Funds 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 these Funds 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. Each Fund must declare dividends by
December 31 of each year equal to at least 98% of ordinary income
(as of December 31) and capital gains (as of October 31) in order
to avoid a federal excise tax and distribute within 12 months
100% of ordinary income and capital gains as of December 31 to
avoid federal income tax.
Foreign currency gains and losses, including the portion
of gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations are taxable as ordinary
income. If the net effect of these transactions is a gain, the
ordinary income dividend paid by the fund will be increased; if
the result is a loss, a portion of its ordinary income dividend
may be classified as a return of capital. Adjustments, to
reflect these gains and losses will be made at the end of each
Fund's taxable year.
At the time of your purchase, each Fund's net asset
value may reflect undistributed income, capital gains or net
unrealized appreciation or depreciation of securities held by
each 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, each 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 October 31, 1994, the books of each Fund indicated that each
Fund's aggregate net assets included undistributed net income,
net realized capital gains or losses, and unrealized appreciation
or depreciation which are listed below.
PAGE 212
Net Realized
Undistributed Capital Unrealized
Fund Net Income Gains (Losses) Appreciation
International Stock $54,550,000 $302,445,000 $806,617,000
International Discovery1,537,000 33,944,000 45,862,000
European Stock 3,579,000 13,484,000 42,827,000
Japan 0 13,693,000 8,491,000
New Asia 4,570,000 170,946,000 10,351,000
Net Realized
Undistributed Capital Unrealized
Fund Net Income Gains (Losses) Depreciation
Latin America $ 0 $ 2,398,000 $ 76,000
Foreign Equity 3,718,000 13,846,000 2,683,000
Income received by each Fund from sources within various
foreign countries may be subject to foreign income taxes withheld
at the source. Under the Code, if more than 50% of the value of
a Fund's total assets at the close of its taxable year comprise
securities issued by foreign corporations or governments, 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.
Each 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 a Fund will be able to do so.
Each shareholder will be notified within 60 days after the close
of each taxable year of a Fund, if that 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.
PAGE 213
If, in any taxable year, a 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 the Funds 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 each Fund - see discussion of
"pass through" of the foreign tax credit 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 each 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
"International Corporation") was 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
Institutional International Funds, Inc. (the "Institutional
Corporation") was organized in 1989, as a Maryland corporation.
PAGE 214
Each 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 International Corporation consists of ten
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, Short-Term Global Income, Latin America,
and Emerging Markets Bond Funds were added as separate series of
the Corporation in 1991, 1992, 1993, and 1994, respectively. The
Short-Term Global Income, Global Government Bond, International
Bond, and Emerging Markets Bond Funds are described in a separate
Statement of Additional Information. Currently, the
Institutional Corporation consists of one series, which was added
in 1990 to the Corporation. Each Charter also provides that the
Board of Directors may issue additional series of shares.
Each Funds' 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 each Fund has authorized to
issue without shareholder approval.
PAGE 215
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 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
PAGE 216
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
Each Fund's shares are registered for sale under the
Securities Act of 1933, and the Funds or their 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, L.L.P., whose
address is 919 Third Avenue, New York, New York 10022, is legal
counsel to the Funds.
INDEPENDENT ACCOUNTANTS
International Stock, International Discovery, European Stock,
Japan and Latin America Funds
Price Waterhouse, LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to each
Fund. The financial statements of the International Stock,
International Discovery, European Stock, Japan, and Latin America
Funds for the year ended October 31, 1994, and the report of
independent accountants are included in each Fund's Annual Report
for the year ended October 31, 1994, on pages 8-19, 7-23, 6-17,
5-12, and 6-14, respectively. A copy of each Annual Report
accompanies this Statement of Additional Information. The
following financial statements and the report of independent
accountants appearing in each Annual Report for the year ended
October 31, 1994, are incorporated into this Statement of
Additional Information by reference:
PAGE 217
International
Stock Fund
Annual Report
Page
______________
Report of Independent Accountants 19
Statement of Net Assets, October 31, 1994 8-14
Statement of Operations, year ended
October 31, 1994 14
Statement of Changes in Net Assets, year ended
October 31, 1994, ten months ended October 31,
1993, and year ended December 31, 1992 15
Notes to Financial Statements
October 31, 1994 16-18
Financial Highlights 18
International
Discovery Fund
Annual Report
Page
_________________
Report of Independent Accountants 23
Portfolio of Investments, October 31, 1994 7-16
Statement of Assets and Liabilities,
October 31, 1994 17
Statement of Operations, year ended
October 31, 1994 18
Statement of Changes in Net Assets, year ended
October 31, 1994, ten months ended October 31,
1993, and year ended December 31, 1992 19
Notes to Financial Statements
October 31, 1994 20-21
Financial Highlights 22
PAGE 218
European
Stock Fund
Annual
Report Page
_____________
Report of Independent Accountants 17
Statement of Net Assets, October 31, 1994 6-11
Statement of Operations, year ended
October 31, 1994 12
Statement of Changes in Net Assets, year ended
October 31, 1994, ten months ended October 31, 1993,
and year ended December 31, 1992 13
Notes to Financial Statements, October 31, 1994 14-15
Financial Highlights 16
Japan Fund
Annual
Report Page
_____________
Report of Independent Accountants 12
Statement of Net Assets, October 31, 1994 5-6
Statement of Operations, year ended October 31, 1994 7
Statement of Changes in Net Assets, year ended
October 31, 1994, ten months ended October 31, 1993
and December 30, 1991 (Commencement of Operations)
to December 31, 1992 8
Notes to Financial Statements, October 31, 1994 9-10
Financial Highlights 11
PAGE 219
Latin America
Fund Annual
Report Page
_______________
Report of Independent Accountants 14
Statement of Net Assets, October 31, 1994 6-8
Statement of Operations, December 29, 1993
(Commencement of Operations) to October 31, 1994 9
Statement of Changes in Net Assets, December 29, 1993
(Commencement of Operations) to October 31, 1994 10
Notes to Financial Statements, October 31, 1994 11-12
Financial Highlights 13
New Asia and Foreign Equity Funds
Coopers & Lybrand, L.L.P., 217 East Redwood Street,
Baltimore, Maryland 21202, are independent accountants to each
Fund. The financial statements of the New Asia and Foreign
Equity Funds for the year ended October 31, 1994, and the report
of independent accountants are included in each Fund's Annual
Report for the year ended October 31, 1994, on pages 6-15 and 8-
23, respectively. A copy of each Annual Report accompanies this
Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in
each Annual Report for the year ended October 31, 1994, are
incorporated into this Statement of Additional Information by
reference:
New Asia
Fund Annual
Report Page
___________
Report of Independent Accountants 15
Portfolio of Investments 6-9
Statement of Assets and Liabilities,
October 31, 1993 9
Statement of Operations, year ended
October 31, 1994 10
Statement of Changes in Net Assets, year
ended October 31, 1994, ten months ended
October 31, 1993 and year ended
December 31, 1992 11
Notes to Financial Statements,
October 31, 1994 12-13
Financial Highlights 14
PAGE 220
Foreign Equity
Fund Annual
Report Page
_______________
Report of Independent Accountants 23
Statement of Net Assets, October 31, 1994 8-17
Statement of Operations, year ended
October 31, 1994 18
Statement of Changes in Net Assets, year
ended October 31, 1994, ten months ended
October 31, 1993 and year ended
December 31, 1992 19
Notes to Financial Statements,
October 31, 1994 20-21
Financial Highlights 22
PAGE 221
APPENDIX A
Chart 1
Bar graph appears here comparing small companies of the U.S.,
Japan, U.K., and the U.S. to large companies in the same
countries for the years 12/31/83 to 12/31/93.
9.71 15.11 18.06 18.56 10.78 14.92
Japan-SmallJapan-Large U.K.-SmallU.K.-Large U.S.-SmallU.S.-Large
Chart 2
A line graph with the vertical axis representing percent
return+ ranging from - 0 to 3,000 for the Japan Topix and 0 to
200 for U.S. S&P 500 and the horizontal axis indicating periods
ended December 31 from 1981 to 1993. The Topix Index hovers
around 600 from 12/81 to 12/82, followed by increases to
approximately 2,800 during 1989, and then declines to 1,600
during 1993. The S&P 500 hovers around 30 from 12/81 thru 12/82
then steadily increases to 2,500 as of 12/93. The chart is for
illustrative purposes only and should not be considered
representative of an investment in the Fund or of the Fund's
performance.
Chart 3
The following is a line graph depicting the following plot
points:
IFCI Composite 100 in January, 1989 and climbs steadily to 200 in
June, 1990 then declines to 150 in January, 1991 then increases
to 250 by May, 1992, then drops to 220 in September, 1992, and
climbs steadily to 240 in January, 1993.
IFCI Latin America 100 drops to 98 in January, 1989 and climbs
steadily to 575 in June, 1992 then declines to 425 in November,
1992 then increases to 500 by March, 1993.
IFCI Asia 100 climbs to 170 in July, 1990 then declines to 130 in
September, 1991 then climbs steadily to 170 by March, 1993.
IFCI Europe/Mideast 100 steadily climbs to 330 in July, 1990 then
declines to 200 in December, 1990 then climbs to 240 in February,
1991 and slowly declines to 99 in October, 1992 and slowly climbs
to 130 in January, 1993 and then drops to 120 in March, 1993.
PAGE 222
S&P 500 fluctuates between 130 to 150 up to December, 1992 then
steadily climbs to 190 in March, 1993.
EAFE 100 climbs to 110 in January, 1990, then drops to 90 in
March, 1990 and climbs to 100 in June, 1990 and then declines 80
to 90 through March, 1993.
*IFCI represents International Finance Corp. Index
The chart is intended to represent an investment of $100 in each
of the indices at the beginning on 1989 and the investments
ending value as of March, 1993.
PAGE 223
T. ROWE PRICE
Facts at a Glance
Investment Goals
Each of the four funds seeks the
highest total return over time
consistent with its particular
investment strategy and level of
potential risk. There is no
assurance the funds will achieve
their objectives.
Strategies and Risk/Reward
Prime Reserve Fund. A money market
fund seeking preservation of
capital, liquidity, and, consistent
with these goals, the highest
possible income through investments
in high-quality money market
securities. Risk/Reward: Lowest
potential risk and reward. YOUR
INVESTMENT IN THE FUND IS NEITHER
INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE IS NO
ASSURANCE THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
Short-Term Bond Fund. A
conservative bond fund seeking a
high level of income consistent with
minimum fluctuation in principal
value and liquidity primarily
through investments in short- and
intermediate-term debt securities.
Risk/Reward: Higher than a money
market fund but lower potential
reward and risk than a longer-term
bond fund.
Equity Income Fund. A conservative
stock fund seeking substantial
dividend income and also capital
appreciation by investing primarily
in dividend-paying common stocks of
PAGE 224
established companies. Risk/Reward:
Higher potential risk and reward
than a money market or bond fund,
but less than more aggressive stock
funds.
International Stock FundR. A
moderately aggressive stock fund
seeking long-term growth of capital
through investments primarily in
common stocks of established, non-
U.S. companies. Risk/Reward: High
potential risk and reward. In
addition to the usual risks of stock
market investing, the fund's share
price may be affected by foreign
currency exchange conditions.
Investor Profile
Investors should select funds that
closely match their goals (e.g.,
preservation of principal or capital
appreciation) and investment time
horizons (e.g., short or long term).
The funds are appropriate for both
regular and tax-deferred accounts,
such as IRAs.
Fees and Charges
100% no load. No sales charges; no
12b-1 marketing fees; free telephone
exchange.
Investment Manager
The Prime Reserve, Short-Term Bond,
and Equity Income Funds are managed
by T. Rowe Price Associates, Inc.,
which was founded in 1937 and
currently manages over $54 billion.
The International Stock Fund is
managed by Rowe Price-Fleming
International, Inc., a joint venture
established in 1979 between T. Rowe
Price Associates and Robert Fleming
Holdings, Ltd. which currently
manages over $18 billion.
PAGE 225
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. T. Rowe Price
Prime Reserve Fund, Inc.
Short-Term Bond Fund, Inc.
Equity Income Fund
International Funds, Inc.
March 1, 1995
Prospectus
Contents
_______________________________
1 About the Funds
_______________________________
Transaction and Fund Expenses
_______________________________
Financial Highlights
_______________________________
Fund, Market, and Risk Characteristics
_______________________________
2 About Your Account
_______________________________
Pricing Shares; Receiving Sale
Proceeds
_______________________________
Distributions and Taxes
_______________________________
Transaction Procedures and Special
Requirements
_______________________________
3 More About the Funds
_______________________________
Organization and Management
_______________________________
PAGE 226
Understanding Fund Performance
_______________________________
Investment Policies and Practices
_______________________________
4 Investing With T. Rowe Price
_______________________________
Meeting Requirements for New Accounts
_______________________________
Opening a New Account
_______________________________
Purchasing Additional Shares
_______________________________
Exchanging and Redeeming
_______________________________
Shareholder Services
_______________________________
This prospectus contains information
you should know before investing. Please
keep it for future reference. A Statement
of Additional Information about the
funds, dated March 1, 1995, has been
filed with the Securities and Exchange
Commission and is incorporated by
reference in this prospectus. To obtain a
free copy, call 1-800-638-5660.
PAGE 227
1 About the Funds
Transaction and fund Expenses
These tables should help you understand the
kinds of expenses you will bear directly or
indirectly as a fund shareholder.
The first part of the table, "Shareholder
Transaction Expenses," shows that you pay
no sales charges. All the money you invest
in a fund goes to work for you, subject to
the fees explained below.
___________________________________________
Shareholder Transaction Expenses
Short- Inter-
Prime Term Equity national
Reserve Bond Income Stock
___________________________________________
Sales load
"charge" on
purchases None None None None
___________________________________________
Sales load
"charge" on
reinvested
dividends None None None None
___________________________________________
Redemption
fees None None None None
___________________________________________
Exchange
fees None None None None
___________________________________________
Annual Fund Expenses Percentage of
Fiscal Year
Average Net
Assetsa
Short- Inter-
Prime Term Equity national
Reserve Bond Income Stock
___________________________________________
Manage-
ment fee 0.39% 0.44% 0.60% 0.69%
PAGE 228
___________________________________________
Marketing
fees
(12b-1) None None None None
___________________________________________
Total other
(Share-
holder
servicing,
custodial,
auditing,
etc.) 0.34% 0.35% 0.31% 0.27%
___________________________________________
Total
fund
expenses 0.73% 0.79% 0.91% 0.96%
___________________________________________
a Expenses are expressed as a percent of
fiscal year 1994 (Prime Reserve, Short-
Term Bond, and International Stock
Funds) and fiscal year 1993 (Equity
Income Fund) average fund net assets.
Note: Each fund charges a $5 fee for
wire redemptions under $5,000, subject
to change without notice.
___________________________________________
Table 1
The second half of Table 1, "Annual Fund
Expenses," provides an estimate of how much
it will cost to operate each fund for a
year, based on fiscal year expenses. These
are costs you pay indirectly, because they
are deducted from the fund's total assets
before the daily share price is calculated
and before dividends and other
distributions are made. In other words,
you will not see these expenses on your
account statement.
The main types of expenses, which all
mutual funds may charge against fund
assets, are:
o A management fee: the percent of fund
assets paid to the fund's investment
PAGE 229
manager. Each fund's fee comprises both
a group fee, discussed later, and an
individual fund fee, as follows: .05%
for the Prime Reserve Fund, .10% for the
Short-Term Bond Fund, .25% for the Equity
Income Fund and .35% for the
International Stock Fund.
o "Other" administrative expenses:
primarily the servicing of shareholder
accounts, such as providing statements,
reports, disbursing dividends, as well as
custodial services. For the years ended
February 28, 1994 (Prime Reserve and
Short-Term Bond Funds), December 31, 1993
(Equity Income Fund) and October 31, 1994
(International Stock Fund), the funds
paid the fees shown in Table 3 to T. Rowe
Price Services, Inc. for transfer and
dividend disbursing functions and
shareholders services; T. Rowe Price
Retirement Plan Services, Inc. for
recordkeeping services for certain
retirement plans; and T. Rowe Price for
fund accounting services. Fees paid by
the Prime Reserve and Short-Term Bond
Funds for the three-months ended May 31,
1994 are also shown.
o Marketing or distribution fees: an
annual charge ("12b-1") to existing
shareholders to defray the cost of
selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses,
please see "The Funds' Organization and
Management."
o Hypothetical example: Assume you invest
at least $1,000, the fund returns 5%
annually, expense ratios remain as
previously listed, and you close your
account at the end of the time periods
shown. Your expenses would be:
_________________________
PAGE 230
The table at right is
just an example; actual
expenses can be higher or
lower than those shown. ___________________________________________
Fund 1 year 3 years 5 years 10 years
___________________________________________
Prime Reserve$ 7 $2 $41 $ 91
Short-Term
Bond $ 8 $25 $44 $ 98
Equity Income$ 9 $29 $50 $112
International
Stock $10 $32 $56 $124
___________________________________________
Table 2
___________________________________________
Service Fees Paid
Transfer Subaccounting Accounting
Agent Services
___________________________________________
Prime
Reserve $2,540,000 $4,408,000 $ 85,000
___________________________________________
Short-Term
Bond $ 882,000 $ 324,000 $108,000
___________________________________________
Equity
Income $2,714,000 $3,259,000 $ 85,000
___________________________________________
International
Stock $2,515,000 $4,002,000 $125,000
___________________________________________
Table 3
Financial Highlights
The following tables provide information
about each fund's financial history. It is
based on a single share outstanding
throughout each fiscal year. The
respective table is part of each fund's
financial statements which are included in
each fund's annual report and are
incorporated by reference into the
Statement of Additional Information. This
document is available to shareholders upon
request. The financial statements in the
PAGE 231
annual report have been audited by the
funds' independent accountants whose
respective unqualified reports cover the
periods shown.
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest- Real- Total
ning of ment Invest- Activi- ment lized Distri-
Year Ended Period Income ments ties Income Gain butions
_________________________________________________________________
Prime Reserve
1985 $1.000 $.099 -- $.099 $(.099) -- $(.099)
1986 1.000 .075 -- .075 (.075) -- (.075)
1987 1.000 .059 -- .059 (.059) -- (.059)
1988a 1.000 .063 -- .063 (.063) -- (.063)
1989 1.000 .072 -- .072 (.072) -- (.072)
1990 1.000 .085 -- .085 (.085) -- (.085)
1991 1.000 .073 -- .073 (.073) -- (.073)
1992a 1.000 .051 -- .051 (.051) -- (.051)
1993 1.000 .030 -- .030 (.030) -- (.030)
1994 1.000 .026 -- .026 (.026) -- (.026)
1994b 1.000 .008 -- .008 (.008) -- (.008)
_________________________________________________________________
PAGE 232
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment
Asset Return to Income
Value, (Includes Net Average to Aver-
End of Reinvested Assets ($ Net age Net
Year Ended Year Dividends) Thousands) Assets Assets
_________________________________________________________________
Prime Reserve
1985 $1.000 10.3% $3,183,523 0.61% 9.90%
1986 1.000 7.9% 2,812,921 0.65% 7.61%
1987 1.000 6.0% 2,633,001 0.76% 5.89%
1988a 1.000 6.5% 3,424,753 0.79% 6.37%
1989 1.000 7.5% 4,063,417 0.79% 7.29%
1990 1.000 8.8% 4,841,954 0.75% 8.45%
1991 1.000 7.6% 4,753,267 0.75% 7.33%
1992a 1.000 5.3% 4,115,224 0.78% 5.14%
1993 1.000 3.1% 3,596,590 0.75% 3.04%
1994 1.000 2.6% 3,378,976 0.74% 2.56%
1994b 1.000 0.8% 3,627,255 0.73%b 3.02%b
_________________________________________________________________
a Year ended February 29.
b For the three months ended May 31, 1994. Fiscal year-end
changed from February 28 to May 31. All ratios are
annualized.
_________________________________________________________________
PAGE 233
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net Tax
Begin- Invest- on ment Invest- Real- Return
Year ning of ment Invest- Activi- ment lized of
Ended Period Income ments ties Income Gain Capital
_________________________________________________________________
Short-Term Bond
1985b $5.00 $.53 $(.03) $.50 $(.53) -- --
1986 4.97 .47 .20 .67 (.47) -- --
1987 5.17 .40 .04 .44 (.40) -- --
1988d 5.21 .39 (.13) .26 (.39) -- --
1989 5.08 .41 (.20) .21 (.41) -- --
1990 4.88 .42 .03 .45 (.42) -- --
1991 4.91 .39 .06 .45 (.39) $(.03) --
1992d 4.94 .35 .11 .46 (.35) -- --
1993 5.05 .33 .04 .37 (.33) -- --
1994 5.09 .31 (.09) .22 (.28) -- $(.03)
1994e 5.00 .07 (.15) (.08) (.07) -- --
_________________________________________________________________
PAGE 234
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Total Value, (Includes Net Averageto Aver- Turn-
Year Distri- End of Reinvested Assets ($ Net age Net over
Ended butions Period Dividends) thousands)Assets Assets Ratea
_________________________________________________________________
Short-Term Bond
1985b $(.53) $4.97 10.6% $ 41,978 0.90%c 10.73% 73.3%
1986 (.47) 5.17 14.0% 96,152 1.31% 9.12% 20.6%
1987 (.40) 5.21 8.8% 218,006 0.94% 7.58% 6.8%
1988d (.39) 5.08 5.4% 284,237 0.91% 7.85% 203.0%
1989 (.41) 4.88 4.3% 231,573 0.94% 8.27% 309.1%
1990 (.42) 4.91 9.4% 209,711 0.95% 8.43% 161.1%
1991 (.42) 4.94 9.6% 218,634 0.93% 7.90% 980.4%
1992d (.35) 5.05 9.7% 396,980 0.88% 7.07% 380.7%
1993 (.33) 5.09 7.6% 556,330 0.76% 6.59% 68.4%
1994 (.31) 5.00 4.4% 668,066 0.74% 6.00% 90.8%
1994e (.07) 4.85 (1.7)% 601,924 0.79%e 5.56%e 222.8%e
_________________________________________________________________
a Portfolio turnover rate prior to February 28, 1986 excludes
long-term U.S. government securities.
b For the period March 2, 1984 (commencement of operations) to
February 28, 1985.
c Excludes investment management fees in excess of the 0.90%
voluntary expense limitation in effect through February 28,
1985.
d Year ended February 29.
e For the three months ended May 31, 1994. Fiscal year-end
changed from February 28 to May 31. All ratios are
annualized.
_________________________________________________________________
PAGE 235
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Year Ended, ning of ment Invest- Activi- ment lized Distri-
December 31 Period Income ments ties Income Gain butions
_________________________________________________________________
Equity Income
1985a $10.00 $.14 $ .86 $1.00 -- -- --
1986 11.00 .66 2.21 2.87 $(.65) $(.26) $(.91)
1987 12.96 .64 (.14) .50 (.82) (1.35) (2.17)
1988 11.29 .63 2.46 3.09 (.62) (.38) (1.00)
1989 13.38 .77 1.06 1.83 (.76) (.39) (1.15)
1990 14.06 .67 (1.62) (.95) (.65) (.19) (.84)
1991 12.27 .62 2.44 3.06 (.61) (.10) (.71)
1992 14.62 .62 1.41 2.03 (.63) (.39) (1.02)
1993 15.63 .54 1.74 2.28 (.54) (.72) (1.26)
_________________________________________________________________
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Year Ended, End of Reinvested Assets ($ Net age Net over
December 31 Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
Equity Income
1985a $11.00 10.0% $ 16,623 1.00%b 7.62% 36.6%
1986 12.96 26.8% 93,991 1.00%b 5.16% 72.5%
1987 11.29 3.5% 185,096 1.10%c 4.58% 79.8%
1988 13.38 27.6% 500,922 1.30% 4.83% 36.4%
1989 14.06 13.7% 968,441 1.11% 5.31% 34.4%
1990 12.27 (6.8)% 862,059 1.13% 5.09% 24.4%
1991 14.62 25.3% 1,335,400 1.05% 4.44% 33.5%
1992 15.63 14.1% 2,091,535 0.97% 3.95% 30.0%
1993 16.65 14.8% 2,851,347 0.91% 3.23% 31.2%
_________________________________________________________________
PAGE 236
a For the period October 31, 1985 (commencement of operations)
to December 31, 1985.
b Excludes expenses in excess of a 1.00% voluntary expense
limitation in effect through December 31, 1986.
c Excludes expenses in excess of a state expense limitation.
_________________________________________________________________
Investment Activities Distributions
Net Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest-Real- Total
Period ning of ment Invest- Activi- ment lized Distri-
Ended Period Income ments ties Income Gain butions
_________________________________________________________________
International Stocka
1985 $ 6.59 $.11 $2.71 $2.82 $(.15) $ (.22)$ (.37)
1986 9.04 .11 5.23 5.34 (.11) (1.38) (1.49)
1987 12.89 .12 .74 .86 (.23) (4.98) (5.21)
1988 8.54 .16 1.36 1.52 (.16) (.93) (1.09)
1989 8.97 .16 1.94 2.10 (.16) (.67) (.83)
1990 10.24 .22 (1.13) (.91) (.16) (.36) (.52)
1991 8.81 .15 1.22 1.37 (.15) (.49) (.64)
1992 9.54 .14 (.47) (.33) (.16) (.16) (.32)
1993c 8.89 .10 2.75 2.85 -- -- --
1994 11.74 .09 1.30 1.39 (.09) (.20) (.29)
_________________________________________________________________
PAGE 237
End of Period
Ratio
of
Ratio Net
of Invest-
Net Total Expenses ment Port-
Asset Return to Income folio
Value, (Includes Net Average to Aver- Turn-
Period End of Reinvested Assets ($ Net age Net over
Ended Period Dividends) Thousands) Assets Assets Rate
_________________________________________________________________
International Stocka
1985 $ 9.04 45.3% $ 376,843 1.11% 1.54% 61.9%
1986 12.89 61.3% 790,020 1.10% 0.89% 56.4%
1987 8.54 8.0% 642,463 1.14% 0.93% 76.5%
1988 8.97 17.9% 630,114 1.16% 1.78% 42.4%
1989 10.24 23.7% 970,214 1.10% 1.63% 47.8%
1990 8.81 (8.9%) 1,030,848 1.09% 2.16% 47.1%
1991 9.54 15.9% 1,476,309 1.10% 1.51% 45.0%
1992 8.89 (3.5%) 1,949,631 1.05% 1.49% 37.8%
1993c 11.74 32.1% 2,746,055 1.01%b 1.52%b 29.8%b
1994 12.84 12.0% 6,205,713 0.96% 1.11% 22.9%
_________________________________________________________________
a All share and per-share figures reflect the 2-for-1 stock
split effective August 31, 1987.
b Annualized.
c For the ten months ended October 31, 1993. Fiscal year-end
changed from December 31 to October 31.
_________________________________________________________________
Table 4
Fund, Market, and Risk Characteristics: What to Expect
Prime Reserve Fund
To help you decide if the fund is
appropriate for you, this section takes a
closer look at the short-term, fixed-income
markets in which it invests and its
investment program.
_________________________
There is no assurance the
fund will be able to
maintain a stable net
asset value of $1.00 per
share. What is a money market fund?
PAGE 238
A money market fund is a pool of assets
invested in U.S. dollar-denominated,
short-term debt obligations with fixed or
floating rates of interest and maturities
generally less than 13 months. Issuers can
include the U.S. Government and its
agencies, domestic and foreign banks and
other corporations, and municipalities.
Money funds can be taxable or tax-exempt,
depending on their investment program.
Because of the high degree of safety they
provide, money market funds typically offer
the lowest return potential of any type of
mutual fund.
What are the fund's investment objectives?
The fund's objectives are preservation of
capital, liquidity, and, consistent with
these, the highest possible current income
through investments primarily in
high-quality, money market securities.
_______________________
For further details of
the fund's investment
program and risks, please
see the section entitled
"Investment Policies and
Practices." What are the main characteristics of the
fund?
The fund invests at least 95% of its total
assets in prime money market instruments
that is, securities receiving the highest
credit rating assigned by at least two
established rating agencies, by one rating
agency if the security is rated by only
one, or, if unrated, the equivalent rating
as established by T. Rowe Price . The
fund's dollar-weighted average maturity
will not exceed 90 days. It will generally
purchase securities with maturities of 13
months or less, although U.S. Government
securities with maturities up to 25 months
may also be purchased. Its yield will
fluctuate in response to changes in
interest rates, but the share price has
managed to remain stable at $1.00. Unlike
most bank accounts or certificates of
PAGE 239
deposit, the fund is not insured or
guaranteed by the U.S. Government.
What are the main types of money market
securities the fund can invest in?
o Commercial paper--unsecured promissory
notes that corporations typically issue
to finance current operations and other
expenditures.
o Treasury bills--debt obligations sold at
a discount and repaid at face value by
the U.S. Treasury. Bills mature in one
year or less and are backed by the full
faith and credit of the U.S. Government.
o Certificates of deposit--receipts for
funds deposited at large banks that
guarantee a fixed interest rate over a
specified time period.
o Repurchase agreements--contracts, usually
involving U.S. Government securities,
that require one party to repurchase
securities at a fixed price on a
designated date.
o Banker's acceptances--bank-issued
commitment to pay for merchandise sold in
the import/export market.
o Agency notes--debt obligations of
agencies sponsored by the U.S. Government
that are not backed by the full faith and
credit of the United States.
o Medium-term notes--unsecured corporate
debt obligations that are continuously
offered in a broad range of maturities
and structures.
o Bank notes--unsecured obligations of a
bank that rank on an equal basis with
other kinds of deposits but do not carry
FDIC insurance.
________________________
Some fundamentals of
money market securities. Is the fund's yield fixed or will it vary?
It will vary. Yield is calculated every day
by dividing the fund's net income per
share, expressed at annual rates, by the
share price. Since income in the fund will
fluctuate as the short-term securities in
PAGE 240
its portfolio mature and the proceeds are
reinvested, its yield will vary.
Is the fund's yield the same thing as its
total return?
Yes. Your total return is the result of
reinvested income and the change in share
price for a given time period. Since money
funds are managed to maintain a stable
share price, their yield and total return
should be the same. Of course, there is no
guarantee a money fund will maintain a
$1.00 share price.
What is credit quality and how does it
affect a money market fund's yield?
Credit quality refers to a borrower's
expected ability to make all required
interest and principal payments in a timely
manner. Because highly-rated issuers
represent less risk, they can borrow at
lower interest rates than less creditworthy
issuers. Securities backed by the full
faith and credit of the U.S. Government are
regarded as free of credit risk. Among
money market securities, Treasury bills
generally carry lower yields than other
instruments of comparable maturity.
What is meant by a fund's maturity?
Every money market instrument has a stated
maturity date when the issuer must repay
the entire principal to the investor. The
fund has no maturity in the strict sense of
the word, but does have a dollar-weighted
average maturity, expressed in days. This
number is an average of the maturities of
the underlying instruments, with each
maturity "weighted" by the percentage of
fund assets it represents.
Do money market securities react to changes
in interest rates?
Yes. As interest rates change, the prices
of money market securities fluctuate, but
changes are usually small because of their
very short maturities. Investments are
PAGE 241
typically held until maturity in a money
fund to help it maintain a $1.00 share
price.
What are the main risks of investing in
money market funds?
Since they are managed to maintain a $1.00
share price, money market funds should have
little risk of principal loss. However, the
potential for realizing a loss of principal
could derive from:
o Credit risk--the chance that any of the
fund's holdings will have its credit
rating downgraded or will default (fail
to make scheduled interest and principal
payments), potentially reducing the
fund's income level and share price.
Regulations require that 95% of the
holdings in money market funds be rated
in the highest credit category, and that
the remaining 5% be rated no lower than
the second highest credit category.
o Interest rate or market risk--the decline
in the prices of fixed-income securities
and funds that may accompany a rise in
the overall level of interest rates. A
sharp and unexpected rise in interest
rates could cause a money fund's price to
drop below a dollar. However, the
extremely short-term securities held in
money market portfolios--a means of
achieving an overall fund objective of
principal safety--reduces much of their
potential for price fluctuation.
How do T. Rowe Price investment managers
try to reduce risk?
Consistent with the fund's objectives, the
portfolio manager actively manages the fund
in an effort to manage risk and increase
yield. Risk management tools include:
o Diversification of assets to reduce the
impact of a single holding on the fund's
net asset value;
PAGE 242
o Thorough credit research by our own
analysts; and
o Maturity adjustments to reflect the fund
manager's interest rate outlook.
_________________________
An investment in the fund
should help you meet your
individual investment
goals for principal
stability, liquidity and
income, but should not
represent your complete
investment program. What should I consider when selecting a
fund?
Review your own financial objectives, time
horizon, and risk tolerance. For example, a
money fund is designed to provide principal
stability, which makes it a good choice for
money you may need for occasional or
unexpected expenses and for money awaiting
investment in longer-term bond or stock
funds.
Is there other information I need to review
before making a decision?
Be sure to read "Investment Policies and
Practices" in Section 3, which reviews the
following topics: Types of Portfolio
Securities (money market securities, asset-
backed securities, foreign securities and
private placements); Types of Fund
Management Practices (borrowing money and
transferring assets and lending of
portfolio securities).
Short-Term Bond Fund
To help you decide if the fund is
appropriate for you, this section takes a
closer look at the fixed-income markets in
which it invests as well as its investment
program.
_________________________
The fund should not
represent your complete
investment program or be
PAGE 243
used for short-term
trading. What is the fund's objective?
The fund's objective is a high level of
income consistent with minimum fluctuation
in principal value and liquidity.
What types of securities will the fund
purchase?
The fund will invest in a diversified
portfolio of short- and intermediate-term
corporate, government, and mortgage
securities. The fund may also invest in
other types of securities such as bank
obligations, collateralized mortgage
obligations (CMOs), foreign securities,
hybrids, and futures and options. Under
normal circumstances, at least 65% of total
assets will be invested in short-term
bonds. The fund's dollar-weighted average
effective maturity will not exceed three
years, and the fund will not purchase any
security whose effective maturity, average
life or tender date measured from the date
of settlement, exceeds seven years.
_________________________
For further details on
the fund's investment
program and risks, please
see the section entitled
"Investment Policies and
Practices." What is the credit quality of the fund's
investments?
Securities purchased by the fund will be
rated within the four highest credit
categories by at least one established
public rating agency (or, if unrated, a T.
Rowe Price equivalent). An investment-grade
security can range from the highest rated
(AAA) to medium quality (BBB). Securities
in the BBB category may be more susceptible
to adverse economic conditions or changing
circumstances and the securities at the
lower end of the BBB category have certain
speculative characteristics. The fund may
retain a security that is downgraded to a
non-investment grade level after purchase.
PAGE 244
What are the major differences between the
Short-Term Bond Fund, money market funds,
and long-term bond funds?
o Price--Like all bond funds, the fund has
a fluctuating share price. Money market
funds are managed to maintain a stable
share price.
o Maturity--Short-term bond funds have
longer average maturities (from one to 3
years) than money market funds (90 days
or less). Long-term bond funds have the
longest average maturities (10 years or
more).
o Income--Short-term bond funds typically
offer more income than money market funds
and less income than longer-term bond
funds.
What are derivatives and can the fund
invest in them?
In the broadest sense, a derivative is any
security whose value is derived from
underlying securities or a market
benchmark. The amount of risk represented
by derivatives varies widely from one to
another, and may not be accurately depicted
by the instrument's credit quality rating.
The quality rating assesses the issuer's
ability to make all required interest and
principal payments. However, the particular
structure of the derivative may determine
whether or not the investor (such as the
fund) actually receives the interest and/or
principal payments. The fund can invest in
derivatives to hedge against risks as well
as to enhance returns. Some of the
potentially more volatile derivatives the
fund may purchase include futures and
stripped securities. (For additional
information on derivatives and their
potential use by the fund, please see the
section beginning on page __).
_________________________
For a better
understanding of the
fund, you may find it
PAGE 245
helpful to review these
fundamentals of fixed-
income investing. Is the fund's yield fixed or will it vary?
It will vary. The yield is calculated every
day by dividing the fund's net income per
share, expressed at annual rates, by the
share price. Since both income and share
price will fluctuate, the fund's yield will
also vary.
Is a bond fund's "yield" the same thing as
"total return"?
No. Your total return is the result of
reinvested income and the change in share
price for a given time period. Income is
always a positive contributor to total
return and can enhance a rise in share
price or serve as an offset to a drop in
share price.
What is "credit quality" and how does it
affect the fund's yield?
Credit quality refers to a bond issuer's
expected ability to make all required
interest and principal payments in a timely
manner. Because highly rated bond issuers
represent less risk, they can borrow at
lower interest rates than less creditworthy
issuers. Therefore, a fund investing in
high-quality securities should have a lower
yield than an otherwise comparable fund
investing in lower credit-quality
securities.
What is meant by a bond's or bond fund's
maturity?
Every bond has a stated maturity date when
the issuer must repay the bond's entire
principal value to the investor. Some types
of bonds, including the mortgage-backed
securities in this fund may also have an
"effective maturity" that is shorter than
the stated date. The effective maturity of
mortgage-backed bonds is determined by the
rate at which homeowners pay down the
principal on the underlying mortgages. Many
corporate and municipal bonds are
PAGE 246
"callable," meaning their principal can be
repaid before their stated maturity dates
(or after) specified call dates. Bonds are
most likely to be called when interest
rates are falling, because the issuer wants
to refinance at a lower rate. In such an
environment, a bond's "effective maturity"
is usually its nearest call date.
A bond mutual fund has no maturity in the
strict sense of the word, but does have a
dollar-weighted average maturity or average
effective maturity. This number is an
average of the stated or effective
maturities of the underlying bonds, with
each maturity "weighted" by the percentage
of fund assets it represents. Funds that
target effective maturities would use the
effective (rather than stated) maturities
of the underlying bonds when computing the
average. Targeting effective maturity
provides additional flexibility in
portfolio management but, all else being
equal, could result in higher volatility
than a fund targeting a stated maturity or
maturity range.
What is a bond's or bond fund's "duration"?
Duration is a better measure than maturity
of a bond price sensitivity to interest
rate changes because it takes into account
the time value of cash flows generated over
the bond's life. Future interest and
principal payments are discounted to
reflect their present value and then are
multiplied by the number of years they will
be received to produce a value that is
expressed in years, i.e., the duration. A
more refined measure than average maturity,
effective duration takes into account call
features and sinking fund payments which
may shorten a bond's life.
Since duration can also be computed for
bond funds, you can estimate the effect of
interest rates on a bond fund's share
price. Simply multiply the fund's duration
PAGE 247
(available for T. Rowe Price bond funds in
our quarterly shareholder reports) by an
expected change in interest rates. For
example, the price of a bond fund with a
duration of five years would be expected to
fall approximately 5% if rates rose by one
percentage point.
Why should an investor in this fund expect
less share price fluctuation than in a
longer-term fund?
When interest rates rise, a bond's price
usually falls, and vice versa.
________________________
In general, the longer a
bond's maturity, the
greater the price
increase or decrease in
response to a given
change in interest rates,
as shown in the table at
right. ___________________________________________
How Interest Rates Affect Bond Prices
Change in $1,000
Bond Principal Value if
Maturity Coupon Interest Rates:
Increase Decrease
_________ _________
1% 2% 1% 2%
___________________________________________
1 year 5.08% $990 $981 $1,010 $1,020
___________________________________________
5 years 6.80 959 920 1,043 1,088
___________________________________________
10 years 7.19 933 871 1,074 1,155
___________________________________________
20 years 7.46 892 802 1,132 1,294
___________________________________________
Table 5 Coupons reflect yields on Treasury
securities as of May 31, 1994.
This is an illustration and does
not represent expected yields or
share-price changes of any T. Rowe
Price fund.
PAGE 248
Since the average effective maturity of
bonds held by the fund is expected to be
approximately three years, the fund's share
price, like the value of the underlying
bonds in its portfolio, should fluctuate
less than a fund which holds bonds with
longer average effective maturities.
_________________________
Prices of the fund's
shares will fluctuate.
When you sell your
shares, their prices may
be higher or lower than
when you purchased them. What are the main risks of investing in
this fund?
o Interest rate or market risk--the decline
in bond and bond fund prices that
accompanies a rise in the overall level
of interest rates. Because short-term
bond funds are less sensitive to interest
rates increases or decreases than
longer-term bond funds, they are expected
to limit, but not eliminate, interest
rate or market risk.
o Credit risk--the chance that any of the
fund's holdings will have its credit
rating downgraded or will default (fail
to make scheduled interest and principal
payments) potentially reducing the fund's
share price and income level.
How do T. Rowe Price investment managers
try to reduce risk?
Consistent with the fund's objective, the
portfolio manager actively manages the fund
in an effort to manage risk and increase
total return. Risk management tools
include:
o Diversification of assets to reduce the
impact of a single holding on the fund's
net asset value;
o Thorough credit research by our own
analysts; and
o Adjustments in the fund's duration to try
to reduce the negative impact of rising
PAGE 249
interest rates or take advantage of the
favorable effects of falling rates.
Depending on market outlook, the investment
manager may shorten or lengthen the fund's
average effective maturity within the
ranges and guidelines established in this
prospectus.
How can I decide if the fund is appropriate
for me?
Review your own financial objectives, time
horizon, and risk tolerance to choose a
fund (or funds) suitable for your
particular needs. For example, the fund is
expected to be a good choice for investors
seeking more income than provided by very
short-term investments, such as money
market funds and CDs, with less principal
risk than longer-term investments.
Keep in mind that the share price of any
bond fund will fluctuate. The price you
receive when you sell your shares may be
higher or lower than the price you paid
originally. If you are investing for
principal safety and liquidity, you should
consider a money market fund.
Is there other information I need to review
before making a decision?
Be sure to review "Investment Policies and
Practices" in Section 3, which reviews the
following topics: Types of Portfolio
Securities (bonds, foreign securities,
asset-backed securities, mortgage-backed
securities, hybrid instruments, private
placements, banking industry and utility
industry concentration); Types of Fund
Management Practices (cash position,
borrowing money and transferring assets,
futures and options, managing foreign
exchange risk, lending of portfolio
securities, when-issued securities and
forward commitment contracts and portfolio
transactions).
_________________________
PAGE 250
You should review the
Fund's investment
objective and program. Equity Income Fund
The fund's investment objective is to seek
to provide substantial dividend income and
also capital appreciation by investing
primarily in dividend-paying common stocks
of established companies. In pursuing its
objective, the fund emphasizes companies
with favorable prospects for increasing
dividend income, and secondarily, capital
appreciation. Over time, the income
component (dividends and interest earned)
of the fund's investments is expected to be
a significant contributor to the fund's
total return. The fund's income yield is
expected to be significantly above that of
the Standard & Poor's 500 Stock Index.
Total return will consist primarily of
dividend income and secondarily of capital
appreciation (or depreciation).
The fund's share price will fluctuate with
changing market 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 market. The fund
cannot guarantee it will achieve its
investment objective.
_________________________
Over time, dividend
income can account for a
significant component of
the total return from
equity investments. The investment program of the fund is based
on several premises. First, T. Rowe Price
believes that, over time, dividend income
can account for a significant component of
the total return from equity investments.
Second, dividends are normally a more
stable and predictable source of return
than capital appreciation. While the price
of a company's stock generally increases or
decreases in response to short-term
PAGE 251
earnings and market fluctuations, its
dividends are generally less volatile.
Finally, T. Rowe Price believes that stocks
which distribute a high level of current
income tend to have less price volatility
than those which pay below average
dividends.
To achieve its objective, the fund, under
normal circumstances, will invest at least
65% of its assets in income-producing
common stocks, whose prospects for dividend
growth and capital appreciation are
considered favorable by T. Rowe Price. To
enhance capital appreciation potential, the
fund also uses a value-oriented approach,
which means it invests in stocks it
believes are currently undervalued in the
market place. The fund's investments will
generally be made in companies which share
some of the following characteristics:
o established operating histories;
o above-average current dividend yields
relative to the S&P 500;
o low price/earnings ratios relative to the
S&P 500;
o sound balance sheets and other financial
characteristics; and
o low stock price relative to company's
underlying value as measured by assets,
earnings, cash flow or business
franchises.
The fund may also invest its assets in
fixed income securities (corporate,
government, and municipal bonds of various
maturities). The fund would invest in
municipal bonds when the expected total
return from such bonds appears to exceed
the total returns obtainable from corporate
or government bonds of similar credit
quality. Interest earned on municipal bonds
purchased by the fund will be taxable
income to fund shareholders. Although the
fund will invest primarily in U.S. common
stocks, it may also purchase other types of
PAGE 252
securities, for example, foreign
securities, convertible securities and
warrants, when considered consistent with
the fund's investment objective and
program. The fund may also engage in a
variety of investment management practices,
such as buying and selling futures and
options. Please see Investment Policies for
a more complete description of these and
other permissible fund investments.
_________________________
Common stocks offer a way
to invest for long-term
growth of capital. As the U.S. economy has expanded, corporate
profits have grown, and share values have
risen.
Economic growth has been punctuated by
periodic declines. Share prices of even the
best managed, most profitable corporations
are subject to market risk, which means
their stock prices can decline. In
addition, swings in investor psychology
and/or significant trading by large
institutional investors can result in price
fluctuations. For this reason, equity
investors should have a long-term
investment horizon and be willing to wait
out bear markets.
International Stock Fund
To help you decide whether the fund is
appropriate for you, this section takes a
closer look at the fund's investment
programs and the markets in which it
invests.
Why invest internationally?
There are three main reasons:
o Expanded investment opportunities. More
than half of the world's total stock
market capitalization and two-thirds of
global GNP consists of non-U.S. stocks
and companies.
PAGE 253
o The potential for higher returns.
Foreign stocks represented by the Morgan
Stanley EAFE Index (Europe, Australia,
Far East) outperformed U.S. stocks
measured by the S&P 500 Stock Index in
every rolling 10-year period from 1981
through 1994.
o Lower overall volatility in your
investment portfolio through increased
diversification. Since foreign stock
markets tend to move independently of the
U.S. market and each other, spreading
investments across a number of markets
can help smooth out fluctuations in the
returns of your total equity holdings.
What are some of the opportunities
represented by major overseas markets?
o Europe: Market deregulation,
privatization, and lower trade barriers
have expanded the range of investment
opportunities. The emergence of
capitalist economies in Eastern Europe
could, over the long term, open
previously inaccessible markets and also
provide a lower-cost, skilled labor pool,
which may further stimulate European
economies.
o Asia: No longer solely dependent on the
Japanese "engine" for growth, the newly
industrialized countries of the Pacific
Rim are powered by worldwide exports and,
increasingly, by strong inter-regional
demand. In addition, China's move toward
a more capitalistic economy has positive
implications for the entire region's
future.
o Japan: Although its growth rate has
slowed, the longer-term outlook for
Japan's economy is positive. In addition
to its productive labor force,
technological expertise, and commitment
to capital investment, Japan's shift to a
PAGE 254
more domestic-oriented economy should
promote future growth and create new
investment opportunities.
o Latin America: After years of stagnation,
some countries here are experiencing
rising growth rates that reflect lower
trade barriers, privatization of
industry, progress on reducing inflation
and restructuring of national debt
burdens.
o Emerging markets: A number of
countries in Latin America, the Far
East, Europe, and Africa are
emerging from economic periods of
stagnation and offer the potential
for growth exceeding that of the
United States and other developed
countries. The emerging market
countries initiating market-based
economic reforms are expected to
benefit from significant amounts of
capital in-flows.
_________________________
The fund's share price
will fluctuate, when you
sell your shares, you may
lose money. What can I expect in terms of price
volatility?
Like U.S. stock investments, common stocks
of foreign companies offer investors a way
to build capital over time. Nevertheless,
the long-term rise of foreign stock prices
as a group has been punctuated by periodic
declines. As in the U.S., share prices of
even the best managed, most profitable
corporations are subject to market risk,
which means they can fluctuate widely.
In less liquid and well developed stock
markets, such as those in some Asian and
Latin American countries, volatility may be
heightened by actions of a few major
investors. For example, substantial
increases or decreases in cash flows of
mutual funds investing in these markets
PAGE 255
could significantly affect stock prices
and, therefore, share prices.
Risk Factors
What are the major risks associated with
international investing and this fund?
Foreign stock prices are subject to many of
the same influences as U.S. stocks, such as
general economic conditions, company and
industry earnings prospects, and investor
psychology. International investing also
involves additional risks which can
increase the potential for the losses in
the fund. These risks can be significantly
magnified for investments in emerging
markets.
_________________________
Exchange rate movements
can be large and can last
for extended periods. o Currency fluctuations. Transactions in
foreign securities are conducted in local
currencies, so dollars must be exchanged
for another currency each time a stock is
bought or sold or a dividend is paid.
Likewise, share-price quotations and
total return information reflect
conversion into dollars. Fluctuations in
foreign exchange rates can significantly
increase or decrease the dollar value of
a foreign investment, boosting or
offsetting its local market return. For
example, if a French stock rose 10% in
price during a year, but the U.S. dollar
gained 5% against the French franc during
that time, the U.S. investor's return
would be reduced to 5%. This is because
the franc would "buy" fewer dollars at
the end of the year than at the
beginning, or, conversely, a dollar would
buy more francs.
o Costs. It is more expensive for U.S.
investors to trade in foreign markets
than in the U.S. Mutual funds offer a
very efficient way for individuals to
invest abroad, but the overall expense
PAGE 256
ratios of international funds are usually
somewhat higher than those of typical
domestic stock funds.
_________________________
While certain
countries have made
progress in economic
growth, liberalization,
fiscal discipline, and
political and social
stability, there is no
assurance these trends
will continue. o Political and economic factors. The
economies, markets, and political
structures of a number of the countries
in which each fund can invest do not
compare favorably with the United States
and other mature economies in terms of
wealth and stability. Therefore,
investments in these countries will be
riskier and more subject to erratic and
abrupt price movements.
Some economies are less well developed
and less diverse (for example, Latin
America, Eastern Europe, African and
certain Asian countries), and more
vulnerable to the ebb and flow of
international trade, trade barriers, and
other protectionist or retaliatory
measures (for example, Japan, Southeast
Asia, Latin America and Africa). Some
countries, particularly in Latin America
and Africa, are grappling with severe
inflation and high levels of national
debt. Investments in countries that have
recently begun moving away from central
planning and state-owned industries
toward free markets, such as the Eastern
European, Chinese and African economies,
should be regarded as speculative.
_________________________
For more details on
potential risks of
foreign investments, see
"Investment Policies and
Practices."
PAGE 257
Certain countries have histories of
instability and upheaval (Latin America
and Africa) and internal politics that
could cause their governments to act in a
detrimental or hostile manner toward
private enterprise or foreign investment.
Such actions, for example, nationalizing
a company or industry, could have a
severe effect on security prices and
impair the fund's ability to repatriate
capital or income.
o Legal, regulatory, and operational.
Portfolio countries lack uniform
accounting, auditing, and financial
reporting standards, have less
governmental supervision of financial
markets than in the U.S., do not honor
legal rights enjoyed in the U.S., and
have settlement practices, such as
delays, which could subject the fund to
risks of loss not customary in the U.S.
o Pricing. Portfolio securities may be
listed on foreign exchanges that are open
on days (such as Saturdays) when the
funds do not compute their prices. As a
result, a fund's net asset value may be
significantly affected by trading on days
when shareholders cannot make
transactions.
How do fund managers try to reduce risk?
The principal tools are intensive research
and diversification; currency hedging
techniques are used from time to time.
o In addition to conducting on-site
research in portfolio countries and
companies, Rowe Price-Fleming has close
ties with investment analysts based
throughout the world.
o Diversification significantly reduces but
does not eliminate risk. The impact on a
fund's share price from a drop in the
price of a particular stock is reduced
PAGE 258
substantially by investing in a portfolio
with dozens of different companies.
Likewise, the impact of unfavorable
developments in a particular country is
reduced in the multi-country funds
because investments are spread among many
countries.
Portfolio managers keep close watch on
individual investments as well as on
political and economic trends in each
country and region. Holdings are adjusted
according to the manager's analysis and
outlook.
o While currency translation does affect
the short-run returns provided by foreign
stocks, its influence on long-term
results has been far outweighed by price
trends on local stock exchanges. However,
when foreign exchange rates are expected
to be unfavorable for U.S. investors,
fund managers can hedge the risk through
use of currency forwards and options. In
a general sense, these tools allow a
manager to exchange currencies in the
future at a rate specified in the
present. (For more details, please see
"Foreign Currency Transactions" under
"Investment Policies and Practices.") If
the manager's forecast is wrong, the
hedge may cause a loss. Also, it may be
difficult or not practical to hedge
currency risk in many emerging
countries.
_________________________
The fund should not be
relied upon as a complete
investment program, nor
be used for short-term
trading purposes. How can I decide if the fund may be
appropriate for me?
First, be sure that your investment
objective is the same as the fund's:
capital appreciation over time. If you
will need the money you plan to invest in
the near future, the fund is not suitable.
PAGE 259
Second, your decision should take into
account whether you have any other foreign
stock investments.
Third, consider your risk tolerance and the
risk profile of the fund.
Is there additional information about the
fund to help me make a decision?
Yes. You should review the following
details about the fund discussed in this
prospectus and other materials you receive
about the fund.
The fund expects to invest substantially
all of its assets outside the U.S. and to
diversify broadly among countries
throughout the world, both developed, newly
industrialized, and emerging.
The fund expects to invest substantially
all of its assets in common stocks.
However, it may also invest in a variety of
other equity- related securities, such as
preferred stocks, warrants and convertible
securities, as well as corporate and
governmental debt securities, when
considered consistent with the fund's
investment objectives and program. The
fund may also engage in a variety of
investment management practices, such as
buying and selling futures and options.
Under normal market conditions, the fund's
investments in securities other than common
stocks is limited to no more than 35% of
total assets. However, for temporary
defensive purposes, the fund may invest all
or a significant portion of its assets in
U.S. Government and corporate debt
obligations. The fund will not purchase
any debt security which at the time of
purchase is rated below investment grade.
This would not prevent the fund from
retaining a security downgraded to below
investment grade after purchase.
PAGE 260
Where can I find more details about the
fund's policies and practices?
Be sure to review "Investment Policies
and Practices" in Section 3, which
discusses the following: Types of Portfolio
Securities (common and preferred stocks;
convertible securities and warrants; fixed-
income securities; hybrid instruments;
passive foreign investment companies;
private placements); and Types of Fund
Management Practices (cash position;
borrowing money and transferring assets;
foreign currency transactions; futures and
options; lending of portfolio securities;
and portfolio turnover).
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
_________________________
The various ways you can
buy, sell, and exchange
shares are explained at
the end of this
prospectus and on the New
Account Form. Here are some procedures you should know
when investing in a fund.
How and when shares are priced
The share price (also called "net asset
value" or NAV per share) for each fund is
calculated at 4 p.m. ET each day the New
York Stock Exchange is open for business.
To calculate the NAV, a fund's assets are
priced and totaled, liabilities are
subtracted, and the balance, called net
assets, is divided by the number of shares
outstanding.
The Prime Reserve fund's NAVs, which are
managed to remain at $1.00, are calculated
at noon ET each day as well as 4 p.m.
Amortized cost or amortized market value is
used to value money fund securities that
mature in 60 days or less.
PAGE 261
How your purchase, sale, or exchange price
is determined
If we receive your request in correct form
before 4 p.m. ET, your transaction will be
priced at that day's NAV. If we receive it
after 4 p.m., it will be priced at the next
business day's NAV.
We cannot accept orders that request a
particular day or price for your
transaction or any other special
conditions.
Note: The time at which transactions are
priced and until which orders are accepted
may be changed in case of an emergency or
if the New York Stock Exchange closes at a
time other than 4 p.m. ET.
________________________
When filling out the New
Account Form, you may
wish to give yourself the
widest range of options
for receiving proceeds
from a sale. How you can receive the proceeds from a
sale
If your request is received by 4 p.m. ET in
correct form, proceeds are usually sent the
next business day. Proceeds can be sent to
you by mail, or to your bank account by ACH
transfer or bank wire. Proceeds sent by
bank wire should be credited to your
account the next business day, and proceeds
sent by ACH transfer should be credited the
second day after the sale. ACH (Automated
Clearing House) is an automated method of
initiating payments from and receiving
payments in your financial institution
account. ACH is a payment system supported
by over 20,000 banks, credit unions and
savings banks which electronically
exchanges the transactions through the
Federal Reserve Banks.
_________________________
If for some reason we
cannot accept your
PAGE 262
request to sell shares,
we will contact you. Exception:
o Under certain circumstances and when
deemed to be in the fund's best
interests, your proceeds may not be sent
for up to five business days after
receiving your sale or exchange request.
If you were exchanging into another bond
or money fund, your new investment would
not begin to earn dividends until the
sixth business day.
Useful Information on Distributions and Taxes
________________________
The funds distribute all
net investment income and
realized capital gains to
shareholders. Dividends and other distributions
Dividend and capital gain distributions are
reinvested in additional fund shares in
your account unless you select another
option on your New Account Form. The
advantage of reinvesting distributions
arises from compounding; that is, you
receive interest and capital gain
distributions on a rising number of shares.
Dividends not reinvested are paid by check
or transmitted to your bank account via
ACH. If the Post Office cannot deliver
your check, or if your check remains
uncashed for six months, the fund reserves
the right to reinvest your distribution
check in your account at the then current
NAV and to reinvest all subsequent
distributions in shares of the fund.
Income dividends
o The Short-Term Bond Fund declares income
dividends daily at 4 p.m. ET to
shareholders of record and for whom
payment has been received on the previous
business day.
PAGE 263
o The Prime Reserve Fund declares income
dividends daily at noon ET to
shareholders of record and for whom
payment has been received at that time.
o Bond and money funds pay dividends on the
last business day of each month.
o Bond and money fund shares will earn
dividends through the date of redemption;
also, shares redeemed on a Friday or
prior to a holiday will continue to earn
dividends until the next business day.
Generally, if you redeem all of your
shares at any time during the month, you
will also receive all dividends earned
through the date of redemption in the
same check. When you redeem only a
portion of your shares, all dividends
accrued on those shares will be
reinvested, or paid in cash, on the next
dividend payment date.
o The Equity Income Fund declares and pays
a dividend quarterly. All or part of the
fund's dividends will be eligible for the
70% deduction for dividends received by
corporations.
o The International Stock Fund declares and
pays dividends (if any) annually. The
dividends of the fund will not be
eligible for the 70% deduction for
dividends received by corporations, if,
as expected, none of the funds' income
consists of dividends paid by U.S.
corporations.
_________________________
Since money funds are
managed to maintain a
constant share price, the
Prime Reserve Fund is not
expected to make capital
gain distributions. Capital gains
o A capital gain or loss is the difference
between the purchase and sale price of a
PAGE 264
security.
o If a fund has net capital gains for the
year (after subtracting any capital
losses), they are usually declared and
paid in December to shareholders of
record on a specified date that month. If
a second distribution is necessary, it is
usually declared and paid during the
first quarter of the following year.
Tax information
You need to be aware of the possible tax
consequences when
o you sell fund shares, including an
exchange from one fund to another, or
o the fund makes a distribution to your
account.
Taxes on fund redemptions (excluding Prime
Reserve Fund). When you sell shares in any
fund, you may realize a gain or loss. An
exchange from one fund to another is still
a sale for tax purposes.
In January, the fund will send you Form
1099-B, indicating the date and amount of
each sale you made in the fund during the
prior year. This information will also be
reported to the IRS. We will also tell you
the average cost of the shares you sold
during the year. Average cost information
is not reported to the IRS, and you do not
have to use it. You may calculate the cost
basis using other methods acceptable to the
IRS, such as "specific identification."
_________________________
The funds send timely
information for your tax
filing needs. To help you maintain accurate records, we
send you a confirmation immediately
following each transaction (except for
systematic purchases and redemptions) you
make and a year-end statement detailing all
PAGE 265
your transactions in each fund account
during the year.
Taxes on fund distributions. The following
summary does not apply to retirement
accounts, such as IRAs, which are
tax-deferred until you withdraw money from
them.
In January, the funds will send you Form
1099-DIV indicating the tax status of any
dividend and capital gain distribution made
to you. This information will also be
reported to the IRS. All distributions made
by the funds are taxable to you for the
year in which they were paid. The only
exception is that distributions declared
during the last three months of the year
and paid in January are taxed as though
they were paid by December 31. The funds
will send you any additional information
you need to determine your taxes on fund
distributions, such as the portion of your
dividend, if any, that may be exempt from
state income taxes.
_________________________
Distributions are taxable
whether reinvested in
additional shares or
received in cash. Short-term capital gains are taxable as
ordinary income and long-term gains are
taxable at the applicable long-term gain
rate. The gain is long or short term
depending on how long the fund held the
securities, not how long you held shares in
the fund. If you realize a loss on the
sale or exchange of fund shares held six
months or less, your short-term loss
recognized is reclassified to long-term to
the extent of any capital gain distribution
received.
Distributions resulting from the sale of
certain foreign currencies and debt
securities, to the extent of foreign
exchange gains, are taxed as ordinary
income or loss. If these transactions
PAGE 266
result in reducing the short-term bond
fund's net income, a portion of the
dividends may be classified as a return of
capital (which lowers your tax base.) If
any of the funds pay nonrefundable taxes to
foreign governments during the year, the
taxes will reduce the fund's dividends, and
with respect to the International Stock
Fund, will also be included in your taxable
income. However, you may be able to claim
an offsetting credit or deduction on you
tax return for your portion of foreign
taxes paid by the International Stock Fund.
Tax effect of buying shares before a
capital gain distribution (excluding Prime
Reserve Fund.) If you buy shares near or on
the "record date"--the date that
establishes you as the person to receive
the upcoming distribution--you will
receive, in the form of a taxable
distribution, a portion of the money you
just invested. Therefore, you may wish to
find out a fund's record date(s) before
investing. Of course, a fund's share price
may reflect undistributed capital gains or
unrealized appreciation.
(Note: For information on the tax
consequences of passive foreign investment
companies and hedging, please see
"Investment Policies and Practices.")
Transaction Procedures and Special
Requirements
_________________________
Following these
procedures helps assure
timely and accurate
transactions. Purchase Conditions
Nonpayment. If your payment is not received
or you pay with a check or ACH transfer
that does not clear, your purchase will be
cancelled. You will be responsible for any
losses or expenses incurred by the fund or
transfer agent, and the fund can redeem
shares you own in this or another
identically registered T. Rowe Price fund
PAGE 267
as reimbursement. The funds and their
agents have the right to reject or cancel
any purchase, exchange, or redemption due
to nonpayment.
U.S. dollars. All purchases must be paid
for in U.S. dollars; checks must be drawn
on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you
just purchased and paid for by check or ACH
transfer, the funds will redeem your shares
at the price on the day the request is
received, but will generally delay sending
you the proceeds for up to 10 calendar days
to allow the check or transfer to clear. If
you requested a redemption by mail or
mailgram, the proceeds will be mailed no
later than the seventh day following
receipt unless the check or ACH transfer
has not cleared. (The 10-day hold does not
apply to purchases paid for by: bank wire;
cashier's, certified, or treasurer's
checks; or automatic purchases through your
paycheck.)
Telephone transactions. 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
funds use 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 a 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 promptly after the
telephone transaction.
Redemptions over $250,000. Large sales can
adversely affect a portfolio manager's
ability to implement a fund's investment
PAGE 268
strategy by causing the premature sale of
securities that would otherwise be held. If
in any 90-day period, you redeem (sell)
more than $250,000, or your sale amounts to
more than 1% of the fund's net assets, the
fund has the right to delay sending your
proceeds for up to five business days after
receiving your request, or to pay the
difference between the redemption amount
and the lesser of the two previously
mentioned figures with securities from the
fund.
_________________________
T. Rowe Price may bar
excessive traders from
purchasing shares. Excessive Trading
Frequent trades involving either
substantial fund assets or a substantial
portion of your account or accounts
controlled by you, can disrupt management
of the fund and raise its expenses. We
define "excessive trading" as exceeding one
purchase and sale involving the same fund
within any 120-day period.
For example, you are in fund A. You can
move substantial assets from fund A to fund
B, and, within the next 120 days, sell your
shares in fund B to return to fund A or
move to fund C.
If you exceed the number of trades
described above, you may be barred
indefinitely from further purchases of T.
Rowe Price funds.
Three types of transactions are exempt from
excessive trading guidelines: 1) trades
solely between money market funds; 2)
redemptions that are not part of exchanges;
and 3) systematic purchases or redemptions
(see "Shareholder Services").
_________________________
A signature guarantee is
designed to protect you
and the fund from fraud
PAGE 269
by verifying your
signature. Keeping Your Account Open
Due to the relatively high cost to each
fund of maintaining small accounts, we ask
you to maintain an account balance of at
least $1,000. If your balance is below
$1,000 for three months or longer, the fund
has the right to close your account after
giving you 60 days in which to increase
your balance.
Signature Guarantees
You may need to have your signature
guaranteed in certain situations, such as:
o Written requests to 1) redeem over
$50,000, or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any
person, address, or bank account not on
record.
o Transferring redemption proceeds to a T.
Rowe Price fund account with a different
registration from yours.
o Establishing certain services after the
account is opened.
You can obtain a signature guarantee from
most banks, savings institutions,
broker/dealers and other guarantors
acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or
organizations that do not provide
reimbursement in the case of fraud.
3 More About the Funds
The Funds' Organization and Management
How are the funds organized?
The Prime Reserve and Short-Term Bonds are
Maryland corporations organized in 1975 and
1983, respectively, and the Equity Income
PAGE 270
Fund, for tax and business reasons, was
organized as a Massachusetts business trust
in 1985. The International Stock Fund is a
series of the T. Rowe Price International
Funds, Inc. (the Corporation) which 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 Prime Reserve,
Short-Term Bond, and Equity Income Funds
and the Corporation are registered with the
Securities and Exchange Commission under
the Investment Company Act of 1940 as
diversified, open-end investment companies,
commonly known as "mutual funds." Although
each fund offers only its own shares, a
fund might become liable for any
misstatement in the prospectus about
another fund. The funds' Boards of
Directors have considered this factor in
approving the use of combined prospectuses.
What is meant by "shares"?
As with all mutual funds, investors
purchase "shares" when they invest in a
fund. These shares are part of a fund's
authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles
the shareholder to:
o receive a proportional interest in a
fund's capital gain distributions;
o cast one vote per share on certain fund
matters, including the election of fund
directors, changes in fundamental
policies, or approval of changes in a
fund's management contract.
Does each fund have an annual shareholder
meeting?
The funds are not required to hold meetings
and do not intend to do so except when
PAGE 271
certain matters, such as a change in a
fund's fundamental policies, are to be
decided. In addition, shareholders
representing at least 10% of all eligible
votes may call a special meeting if they
wish for the purpose of voting on the
removal of any fund director(s)/trustee(s).
If a meeting is held and you cannot attend,
you can vote by proxy. Well before the
meeting, the fund will send you proxy
materials that explain the issues to be
decided and include a voting card for you
to mail back.
Who runs the funds?
General Oversight. The funds are governed
by a Board of Directors or Trustees that
meets regularly to review the fund's
investments, performance, expenses, and
other business affairs. The Board elects
the funds' officers. The policy of each
fund is that a majority of Board members
will be independent of T. Rowe Price and
Price-Fleming.
Investment Manager. For the Prime Reserve,
Short-Term Bond and Equity Income Funds,
all decisions regarding the purchase and
sale of fund investments are made by T.
Rowe Price--specifically by the funds'
portfolio managers. T. Rowe Price's office
is located at 100 East Pratt Street,
Baltimore, Maryland 21202. For the
International Stock Fund, Price-Fleming is
responsible for selection and management of
portfolio investments. Price-Fleming's
U.S. office is located at 100 East Pratt
Street, Baltimore, Maryland 21202. Price-
Fleming also has offices in 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).
_________________________
PAGE 272
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, 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.
Portfolio Management. The Prime Reserve
Fund has an Investment Advisory Committee
composed of the following members: Edward
A. Wiese, Chairman, Patrice L.
Berchtenbreiter, Paul W. Boltz, Brian E.
Burns, Robert P. Campbell, Michael J.
Conelius, Donna M. Davis-Ennis, Laura L.
McAree, James M. McDonald, Joan R. Potee,
Robert M. Rubino, and Gwendolyn G. Wagner.
The Committee Chairman has day-to-day
responsibility for managing the fund and
works with the Committee in developing and
executing the fund's investment program.
Mr. Wiese has been Chairman of the fund's
Committee since 1990. He joined T. Rowe
Price in 1984 and has been managing
investments since 1985.
The Short-Term Bond Fund has an
Investment Advisory Committee composed of
the following members: Edward A. Wiese,
Chairman, Robert P. Campbell, Christy M.
DiPietro, and Thomas E. Tewksbury. The
PAGE 273
Committee Chairman has day-to-day
responsibility for managing the fund and
works with the Committee in developing and
executing the fund's investment program.
Mr. Wiese has been Chairman of the
Committee since 1995. He joined T. Rowe
Price in 1984 and has been managing
investments since 1995.
The Equity Income Fund has an Investment
Advisory Committee composed of the
following members: Brian C. Rogers,
Chairman, Thomas H. Broadus, Jr., Richard
P. Howard, and William J. Stromberg. The
Committee Chairman has day-to-day
responsibility for managing the fund and
works with the Committee in developing and
executing the fund's investment program.
Mr. Rogers has been Chairman of the
Committee since 1993. He joined T. Rowe
Price in 1982 and has been managing
investments since 1983.
The International Stock Fund has an
investment advisory group that has day-to-
day responsibility for managing the
portfolio and developing and executing the
fund's investment program. The fund's
advisory group is composed of the following
members: Martin G. Wade, Christopher D.
Alderson, Peter B. Askew, Richard J. Bruce,
Mark J. T. Edwards, John R. Ford, Robert C.
Howe, James B. M. Seddon, Benedict R. F.
Thomas, and David J. L. Warren.
Martin Wade joined Price-Fleming in 1979
and has 25 years of experience with the
Fleming Group in research, client service
and investment management. (Fleming Group
includes Robert Fleming and/or Jardine
Fleming.) Christopher Alderson joined
Price-Fleming in 1988, and has eight years
of experience with the Fleming Group in
research and portfolio management. Peter
Askew joined Price-Fleming in 1988 and has
19 years of experience managing multi-
currency fixed-income portfolios. Richard
PAGE 274
Bruce joined Price-Fleming in 1991 and has
six years of experience in investment
management with the Fleming Group in Tokyo.
Mark Edwards joined Price-Fleming in 1986
and has 13 years of experience in financial
analysis. John Ford joined Price-Fleming
in 1982 and has 14 years of experience with
the Fleming Group in research and portfolio
management. Robert Howe joined Price-
Fleming in 1986 and has 13 years of
experience in economic research, company
research and portfolio management.
Benedict Thomas joined Price-Fleming in
1988 and has five years of portfolio
management experience. David Warren joined
Price-Fleming in 1984 and has 14 years of
experience in equity research, fixed-income
research and portfolio management.
Portfolio Transactions. The International
Stock 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 a 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.
Marketing. T. Rowe Price Investment
Services, Inc., a wholly-owned subsidiary
of T. Rowe Price, distributes (sells)
shares of these and all other T. Rowe Price
funds.
Shareholder Services. T. Rowe Price
Services, Inc., another wholly-owned
subsidiary, acts as the funds' transfer and
dividend disbursing agent and provides
shareholder and administrative services.
Services for certain types of retirement
plans are provided by T. Rowe Price
Retirement Plan Services, Inc., also a
wholly-owned subsidiary. The address for
PAGE 275
each is 100 East Pratt St., Baltimore, MD
21202.
How are fund expenses determined?
The management agreement spells out the
expenses to be paid by each fund. In
addition to the management fee, each fund
pays for the following: shareholder service
expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing
prospectuses and reports sent to
shareholders; registration fees and
expenses; proxy and annual meeting expenses
(if any); and director/trustee fees and
expenses.
The Management Fee. This fee has two
parts--an "individual fund fee" (discussed
on page __) which reflects the fund's
particular investment management costs, and
a "group fee." The group fee, which
reflects the benefits each fund derives
from sharing the resources of the T. Rowe
Price investment management complex, is
calculated monthly based on the net
combined assets of all T. Rowe Price funds
(except Equity Index, both Spectrum funds
and any institutional or private label
mutual funds). The group fee schedule
(shown below) is graduated, declining as
the asset total rises, so shareholders
benefit from the overall growth in mutual
fund assets.
0.480% First $1 billion
0.450% 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
PAGE 276
Each fund's portion of the group fee is
determined by the ratio of its daily net
assets to the daily net assets of all the
Price Funds as described above. Based on
combined Price funds' assets of
approximately $35.5 billion at December 31,
1994, the Group Fee was 0.34%.
_________________________
International Stock Fund 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 equal accounts under
Price-Fleming's management. FIM and JFIH
are wholly-owned subsidiaries of Flemings
and Jardine Fleming, respectively. 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.
Understanding Performance Information
This section should help you understand the
terms used to describe the funds'
performance. You will come across them in
shareholder reports you receive from us
four times a year, in our newsletters,
"Insights" reports, in T. Rowe Price
advertisements, and in the media.
________________________
Total return is the most
widely used performance
measure. Detailed
PAGE 277
performance information
is included in each
fund's annual report and
quarterly shareholder
reports. Total Return
This tells you how much an investment in a
fund has changed in value over a given time
period. It reflects any net increase or
decrease in the share price and assumes
that all dividends and capital gains (if
any) paid during the period were reinvested
in additional shares. Including reinvested
distributions means that total return
numbers include the effect of compounding,
i.e., you receive income and capital gain
distributions on a rising number of shares.
Advertisements for a fund may include
cumulative or compound average annual total
return figures, which may be compared with
various indices, other performance
measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an
investment for a specified period. A
cumulative return does not indicate how
much the value of the investment may have
fluctuated between the beginning and the
end of the period specified.
Average Annual Total Return
This is always hypothetical. Working
backward from the actual cumulative return,
it tells you what constant year-by-year
return would have produced the actual,
cumulative return. By smoothing out all the
variations in annual performance, it gives
you an idea of the investment's annual
contribution to your portfolio provided you
held it for the entire period
in question.
________________________
You will see frequent
references to the yield
of the Prime Reserve and
Short-Term Bond Funds in
PAGE 278
our reports,
advertisements, in media
stories, and so on. Yield
The current or "dividend yield" on the fund
or any investment tells you the
relationship between the investment's
current level of annual income and its
price on a particular day. The dividend
yield reflects the actual income paid to
shareholders for a given period,
annualized, and divided by the average
price during the given period. For example,
a fund providing $5 of annual income per
share and a price of $50 has a current
yield of 10%. Yields can be calculated for
any time period.
The fund may advertise a "current" yield,
reflecting the latest 7-day income
annualized, or an "effective" yield, which
assumes the income has been reinvested in
the fund.
The advertised or "SEC yield" is found by
determining the net income per share (as
defined by the SEC) earned by the fund
during a 30-day base period and dividing
this amount by the per-share price on the
last day of the base period. The "SEC
yield" may differ from the dividend yield.
Investment Policies and Practices
________________________
Fund managers have
considerable leeway in
choosing investment
strategies and selecting
investments they believe
will help the fund
achieve its objectives. This section takes a detailed look at some
of the types of securities the funds may
hold in their portfolios and the various
kinds of investment practices that may be
used in day-to-day portfolio management.
The funds' investment programs are subject
to further restrictions and risks described
in the "Statement of Additional
PAGE 279
Information." The funds adhere to
applicable investment restrictions and
policies at the time they make an
investment. Except as may be required for
the Prime Reserve Fund by Rule 2a-7 under
the Investment Company Act of 1940, a later
change in circumstances will not require
the sale of an investment if it was proper
at the time it was made.
Shareholder approval is required to
substantively change a fund's objectives
and certain investment restrictions noted
in the following section as "fundamental
policies." The managers also follow
certain "operating policies" which can be
changed without shareholder approval.
However, significant changes are discussed
with shareholders in fund reports.
Changes in a fund's holdings, a fund's
performance and the contribution of various
investments are discussed in the
shareholder reports we send each quarter.
Prime Reserve Fund
Types of Portfolio Securities
In seeking to meet its investment
objectives, the fund may invest in any type
of short-term security whose yield, credit
quality and maturity characteristics are
consistent with the fund's investment
program. These and some of the other
investment techniques the fund may use are
described in the following pages.
Money Market Securities. Money market
securities are an IOUs issued by companies
or governmental units. Money market
securities may be interest-bearing or
discounted to reflect the rate of interest
paid. In the case of interest-bearing
securities, the issuer has a contractual
obligation to pay coupon interest at a
stated rate on specific dates and to repay
PAGE 280
the face value on a specified date. In the
case of a discount security, no coupon
interest is paid, but the security's price
is discounted such that the interest is
realized when the security matures at face
value. In either case, an issuer may have
the right to redeem or "call" the security
before maturity, and the investor may have
to reinvest the proceeds at lower market
rates.
Except for adjustable rate instruments, the
money market security's interest rate, as
reflected in the coupon rate or discount,
is usually fixed for the life of the
security. Its current yield (coupon or
discount as a percent of current price)
will fluctuate to reflect changes in
interest rate levels. A money market
security's price usually rises when
interest rates fall, and vice versa.
Money market securities may be unsecured
(backed by the issuer's general
creditworthiness only) or secured (also
backed by specified collateral).
Certain money market securities have
interest rates that are adjusted
periodically which tend to minimize
fluctuations in their principal value. The
maturity of those securities may be
shortened under certain specified
conditions.
Operating policy. The fund will not
purchase any security (other than a U.S.
government security) if it would cause the
fund to have more than: (1) 5% of its
total assets in securities of that issuer,
where the securities are prime securities
(other than for certain temporary, limited
purposes); or (2) where the securities are
not prime securities, 5% of its total
assets in such securities and 1% of its
total assets in the securities of that
issuer.
PAGE 281
Asset-backed Securities. An underlying pool
of assets, such as credit card or
automobile trade receivables or corporate
loans or bonds, backs these bonds and
provides the interest and principal
payments to investors. Credit quality
depends primarily on the quality of the
underlying assets and the level of credit
support, if any, provided by the issuer.
The underlying assets (i.e., loans) are
subject to prepayments which can shorten
the securities' weighted average life and
may lower their return. The value of these
securities also may change because of
actual or perceived changes in the
creditworthiness of the originator,
servicing agent, or of the financial
institution providing the credit support.
There is no limit on the funds' investment
in these securities.
_________________________
Foreign securities
increase the fund's
diversification and may
enhance return, but
involve some special
risks. Foreign Securities. The fund may invest in
foreign securities--dollar-denominated
money market securities of foreign issuers,
foreign branches of U.S. banks and U.S.
branches of foreign banks. Such
investments increase a portfolio's
diversification and may enhance return, but
they also involve some special risks such
as exposure to potentially adverse local
political and economic developments;
nationalization and exchange controls;
potentially lower liquidity and higher
volatility; possible problems arising from
accounting, disclosure, settlement, and
regulatory practices that differ from U.S.
standards.
Operating policy: The fund may invest
without limit in U.S. dollar-denominated
foreign securities.
PAGE 282
Private Placements (Restricted Securities).
These securities are sold directly to a
small number of investors, usually
institutions. Unlike public offerings, such
securities are not registered with the SEC.
Although certain of these securities may be
readily sold, for example under Rule 144A,
others may be illiquid and their sale may
involve substantial delays and additional
costs.
Operating policy: The fund will not invest
more than 10% of its net assets in illiquid
securities.
Types of Fund Management Practices
Borrowing Money and Transferring Assets.
The fund can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the fund's
investment objectives and program. Such
borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental policy: Borrowings may not
exceed 33 1/3% of total fund assets.
Operating policies: The fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of the fund's total
assets. The fund may not purchase
additional securities when borrowings
exceed 5% of total assets.
Lending of Portfolio Securities. Like other
mutual funds, the fund may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
insolvency of the broker-dealer or other
borrower. In this event, the fund could
PAGE 283
experience delays in recovering its
securities and possibly capital losses.
Fundamental policy: The value of loaned
securities may not exceed 33 1/3% of the
fund's total assets.
Short-Term Bond Fund
Types of Portfolio Securities
In seeking to meet its investment
objective, the fund may invest in any type
of security or instrument (including
certain potentially high risk derivatives)
whose yield, credit quality and maturity
characteristics are consistent with the
fund's investment program. These and some
of the other investment techniques the fund
may use are described in the following
pages.
The fund's holdings of certain kinds of
investments cannot exceed maximum
percentages of total assets, which are set
forth in the prospectus. For instance,
this fund is not permitted to invest more
than 10% of total assets in hybrid
instruments. While these restrictions
provide a useful level of detail about the
fund's investment program, investors should
not view them as an accurate gauge of the
potential risk of such investments. For
example, in a given period, a 5% investment
in hybrid securities could have
significantly more than a 5% impact on the
fund's share price. The net effect of a
particular investment depends on its
volatility and the size of its overall
return in relation to the performance of
all the fund's other investments.
Fundamental policy: The fund will not
purchase a security if, as a result, with
respect to 75% of its total assets, more
than 5% of its total assets would be
invested in securities of the issuer or
PAGE 284
more than 10% of the outstanding voting
securities of the issuer would be held by
the fund, provided that these limitations
do not apply to the fund's purchases of
securities issued or guaranteed by the U.S.
Government, it agencies or
instrumentalities.
Bonds. A bond is an interest-bearing
security--an IOU--issued by companies or
governmental units. The issuer has a
contractual obligation to pay interest at a
stated rate on specific dates and to repay
principal (the bond's face value) on a
specified date. An issuer may have the
right to redeem or "call" a bond before
maturity, and the investor may have to
reinvest the proceeds at lower market
rates.
A bond's annual interest income, set by its
coupon rate, is usually fixed for the life
of the bond. Its yield (income as a percent
of current price) will fluctuate to reflect
changes in interest rate levels. A bond's
price usually rises when interest rates
fall, and vice versa, so its yield stays
current. High-yield bond prices are less
directly responsive to interest rate
changes than investment-grade issues and
may not always follow this pattern.
Bonds may be unsecured (backed by the
issuer's general creditworthiness only) or
secured (also backed by specified
collateral).
Certain bonds have interest rates that are
adjusted periodically which tend to
minimize fluctuations in their principal
value. In calculating the fund's weighted
average maturity, the maturity of these
securities may be shortened under certain
specified conditions.
Bonds may be senior or subordinated
obligations. Senior obligations generally
PAGE 285
have the first claim on a corporation's
earnings and assets and, in the event of
liquidation, are paid before subordinated
debt.
Foreign Securities. The fund may invest in
foreign securities, including nondollar-
denominated securities traded outside of
the U.S. and dollar-denominated securities
of foreign issuers. Such investments
increase a portfolio's diversification and
may enhance return, but they also involve
some special risks such as exposure to
potentially adverse local political and
economic developments; nationalization and
exchange controls; potentially lower
liquidity and higher volatility; possible
problems arising from accounting,
disclosure, settlement, and regulatory
practices that differ from U.S. standards;
and the chance that fluctuations in foreign
exchange rates will decrease the
investment's value (favorable changes can
increase its value).
Operating policy: The fund may invest
without limitation, in U.S.
dollar-denominated debt securities issued
by foreign issuers, foreign branches of
U.S. banks, and U.S. branches of foreign
banks. The fund may also invest up to 10%
of its total assets in non-U.S. dollar-
denominated fixed income securities
principally traded in financial markets
outside the United States.
Asset-backed Securities. An underlying pool
of assets, such as credit card or
automobile trade receivables or corporate
loans or bonds, backs these bonds and
provides the interest and principal
payments to investors. Credit quality
depends primarily on the quality of the
underlying assets and the level of credit
support, if any, provided by the issuer.
The underlying assets (i.e., loans) are
subject to prepayments which can shorten
PAGE 286
the securities' weighted average life and
may lower their return. The value of these
securities also may change because of
actual or perceived changes in the
creditworthiness of the originator,
servicing agent, or of the financial
institution providing the credit support.
There is no limit on the fund's investment
in these securities.
Mortgage-backed Securities. The fund may
invest in a variety of mortgage-backed
securities. Mortgage lenders pool
individual home mortgages with similar
characteristics to back a certificate or
bond, which is sold to investors such as
the fund. Interest and principal payments
generated by the underlying mortgages are
passed through to the investors. The "big
three" issuers are Government National
Mortgage Association (GNMA), the Federal
National Mortgage Association (Fannie Mae),
and the Federal Home Loan Mortgage
Corporation (Freddie Mac). GNMA
certificates are backed by the full faith
and credit of the U.S. Government, while
others, such as Fannie Mae and Freddie Mac
certificates, are only supported by the
ability to borrow from the U.S. Treasury or
supported only by the credit of the agency.
Private mortgage bankers and other
institutions also issue mortgage-backed
securities.
Mortgage securities are subject to
scheduled and unscheduled principal
payments as homeowners pay down or prepay
their mortgages. As these payments are
received, they must be reinvested when
interest rates may be higher or lower than
on the original mortgage security.
Therefore, mortgage securities are not an
effective means of locking in long-term
interest rates. In addition, when interest
rates fall, the pace of mortgage
prepayments picks up. These refinanced
mortgages are paid off at face value (par),
PAGE 287
causing a loss for any investor who may
have purchased the security at a price
above par. In such an environment, this
risk limits the potential price
appreciation of these securities and can
negatively affect the fund's net asset
value. When rates rise, however,
mortgage-backed securities have
historically experienced smaller price
declines than comparable quality bonds.
There is no limit on the fund's investment
in these securities.
Additional mortgage-backed securities in
which the fund may invest include:
o Collateralized Mortgage Obligations
CMOs). CMOs are debt securities that
are fully collateralized by a
portfolio of mortgages or
mortgage-backed securities. All
interest and principal payments from
the underlying mortgages are passed
through to the CMOs in such a way as
to create, in most cases, more
definite maturities than is the case
with the underlying mortgages. CMOs
may pay fixed or variable rates of
interest, and certain CMOs have
priority over others with respect to
the receipt of prepayments.
o Stripped Mortgage Securities. Stripped
mortgage securities (a potentially
high risk type of derivative) are
created by separating the interest and
principal payments generated by a pool
of mortgage-backed securities or a CMO
to create additional classes of
securities. Generally, one class
receives only interest payments (IOs)
and one principal payments (POs).
Unlike other mortgage-backed
securities and POs, the value of IOs
tends to move in the same direction as
interest rates. The fund could use
IOs as a hedge against falling
PAGE 288
prepaying rates (interest rates are
rising) and/or a bear market
environment. POs can be used as a
hedge against rising prepayment rates
(interest rates are falling) and/or a
bull market environment. IOs and POs
are acutely sensitive to interest rate
changes and to the rate of principal
prepayments. A rapid or unexpected
increase in prepayments can severely
depress the price of IOs, while a
rapid or unexpected decrease in
prepayments could have the same effect
on POs. These securities are very
volatile in price and may have lower
liquidity than most other
mortgage-backed securities. Certain
non-stripped CMOs may also exhibit
these qualities, especially those
which pay variable rates of interest
which adjust inversely with and more
rapidly than short-term interest
rates. There is no guarantee the
fund's investment in CMOs, IOs or POs
will be successful, and the fund's
total return could be adversely
affected as a result.
Operating policy: The fund may invest up
to 10% of its total assets in stripped
mortgage securities.
Hybrid Instruments. These instruments (a
type of derivative) can combine the
characteristics of securities, futures and
options. For example, the principal amount
or interest rate of a hybrid could be tied
(positively or negatively) to the price of
some commodity, currency or securities
index or another interest rate (each a
"benchmark"). Hybrids can be used as an
efficient means of pursuing a variety of
investment goals, including currency
hedging, duration management, and increased
total return. Hybrids may not bear
interest or pay dividends. The value of a
hybrid or its interest rate may be a
PAGE 289
multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more
steeply and rapidly than the benchmark.
These benchmarks may be sensitive to
economic and political events, such as
commodity shortages and currency
devaluations, which cannot be readily
foreseen by the purchaser of a hybrid.
Under certain conditions, the redemption
value of a hybrid could be zero. Hybrids
can have volatile prices and limited
liquidity. Thus, an investment in a hybrid
may entail significant market risks that
are not associated with a similar
investment in a traditional, U.S. dollar-
denominated bond that has a fixed principal
amount and pays a fixed rate or floating
rate of interest. The purchase of hybrids
also exposes the fund to the credit risk of
the issuer of the hybrid. These risks may
cause significant fluctuations in the net
asset value of the fund. There is no
assurance that the fund's investment in
hybrids will be successful.
Operating policy: The fund may invest up
to 10% of its total assets in hybrid
instruments.
Private Placements (Restricted Securities).
These securities are sold directly to a
small number of investors, usually
institutions. Unlike public offerings, such
securities are not registered with the SEC.
Although certain of these securities may be
readily sold, for example under Rule 144A,
others may be illiquid and their sale may
involve substantial delays and additional
costs.
Operating policy: The fund will not invest
more than 15% of its net assets in illiquid
securities.
Banking Industry. The fund will, as a
matter of fundamental policy, normally
concentrate 25% or more of its assets in
PAGE 290
the securities of the banking industry when
the fund's position in issues maturing in
one year or less equals 35% or more of the
fund's total assets. Investments in the
banking industry may be affected by general
economic conditions as well as exposure to
credit losses arising from possible
financial difficulties of borrowers. In
addition, the profitability of the banking
industry is largely dependent upon the
availability and cost of funds for the
purpose of financing lending operations
under prevailing money market conditions.
T. Rowe Price believes that any risk to the
fund which might result from concentrating
in the banking industry will be minimized
by diversification of the fund's
investments and T. Rowe Price's credit
research.
Utility Industry Concentration. As a
matter of fundamental policy, the fund
will, under certain conditions, invest up
to 50% of its assets in any one of the
following industries: gas utility, gas
transmission utility, electric utility,
telephone utility, and petroleum.
Investments in any of these industries may
be affected by environmental conditions,
energy conservation programs, fuel
shortages, availability of capital to
finance operations and construction
programs, and federal and state legislative
and regulatory actions. T. Rowe Price
believes that any risk to the fund which
might result from concentrating in any such
industry will be minimized by
diversification of the fund's investments.
Types of Fund Management Practices
_________________________
Cash reserves provide
flexibility and serve as
a short-term defense
during periods of unusual
market volatility. Cash Position. The fund will hold a certain
portion of its assets in U.S. and foreign
PAGE 291
dollar-denominated money market securities,
including repurchase agreements, in the two
highest rating categories, maturing in one
year or less. For temporary, defensive
purposes, the fund may invest without
limitation in such securities. This reserve
position provides flexibility in meeting
redemptions, expenses, and the timing of
new investments, and serves as a short-term
defense during periods of unusual market
volatility.
Borrowing Money and Transferring Assets.
The fund can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the fund's
investment objectives and program. Such
borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental policy: Borrowings may not
exceed 33 1/3% of total fund assets.
Operating policies: The fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of the fund's total
assets. The fund may not purchase
additional securities when borrowings
exceed 5% of total assets.
_________________________
Futures are used to
manage risk; options give
the investor the option
to buy or sell an asset
at a predetermined price
in the future. Futures and Options. Futures (a type of
derivative) are often used to manage or
hedge risk because they enable the investor
to buy or sell an asset in the future at an
agreed upon price. Options (another type
of derivative) give the investor the right,
but not the obligation, to buy or sell an
asset at a predetermined price in the
PAGE 292
future. The fund may buy and sell futures
contracts (and options on such contracts)
for a number of reasons including: to
manage its exposure to changes in interest
rates, bond prices, and foreign currencies;
as an efficient means of adjusting its
overall exposure to certain markets; to
protect portfolio value; and to adjust the
portfolio's duration. The fund may
purchase, sell, or write call and put
options on securities, financial indices,
and foreign currencies.
Futures contracts and options may not
always be successful hedges; their prices
can be highly volatile; using them could
lower the fund's total return and the
potential loss from the use of futures can
exceed the fund's initial investment in
such contracts.
Operating policies: Futures: Initial
margin deposits and premiums on options
used for non-hedging purposes will not
equal more than 5% of the fund's net asset
value. Options on securities: The total
market value of securities against which
the fund has written call or put options
may not exceed 25% of its total assets.
The fund will not commit more than 5% of
its total assets to premiums when
purchasing call or put options.
Managing Foreign Exchange Risk. Investors
in foreign securities may "hedge" their
exposure to potentially unfavorable
currency changes by purchasing a contract
to exchange one currency for another on
some future date at a specified exchange
rate. In certain circumstances, a "proxy
currency" may be substituted for the
currency in which the investment is
denominated, a strategy known as "proxy
hedging." The fund may also use these
contracts to create a synthetic bond--
issued by a U.S. company, for example, but
with the dollar component transformed into
PAGE 293
a foreign currency. Although foreign
currency transactions will be used
primarily to protect the fund's foreign
securities from adverse currency movements
relative to the dollar, they involve the
risk that anticipated currency movements
will not occur and the fund's total return
could be reduced.
Operating policy: The fund will not commit
more than 10% of its total assets to
forward currency contracts.
Lending of Portfolio Securities. Like other
mutual funds, the fund may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
insolvency of the broker-dealer or other
borrower. In this event, the fund could
experience delays in recovering its
securities and possibly capital losses.
Fundamental policy: The value of loaned
securities may not exceed 33 1/3% of the
fund's total assets.
When-Issued Securities and Forward
Commitment Contracts. The fund may purchase
securities on a when-issued or delayed
delivery basis or may purchase or sell
securities on a forward commitment basis.
There is no limit on the fund's investment
in these securities. The price of these
securities is fixed at the time of the
commitment to buy, but delivery and payment
can take place a month or more later.
During the interim period, the market value
of the securities can fluctuate, and no
interest accrues to the purchaser. At the
time of delivery, the value of the
securities may be more or less than the
purchase or sale price. To the extent the
fund remains fully or almost fully invested
(in securities with a remaining maturity of
more than one year) at the same time it
purchases these securities, there will be
PAGE 294
greater fluctuations in the fund's net
asset value than if the fund did not
purchase them.
Portfolio Transactions. Although the fund
will not generally trade for short-term
profits, circumstances may warrant a sale
without regard to the length of time a
security was held. A high turnover rate may
increase transaction costs and result in
additional taxable gains. The fund's
annualized portfolio turnover rate for the
three-month fiscal year ended May 31, 1994
was 222.8%. The fund's portfolio turnover
rates for the fiscal years ended February
28, 1994, February 28, 1993, and February
29, 1992, were 90.8%, 68.4%, and 380.7%,
respectively. In executing transactions,
the fund's Board has authorized T. Rowe
Price to use certain brokers who are
indirectly related to T. Rowe Price.
Equity Income Fund
Types of Portfolio Securities
In seeking to meet its investment
objective, the fund may invest in any type
of security whose investment
characteristics are consistent with the
fund's investment program. These and some
of the other investment techniques the fund
may use are described in the following
pages.
Fundamental policy. The fund will not
purchase a security if, as a result, with
respect to 75% of its total assets, more
than 5% of its total assets would be
invested in securities of the issuer or
more than 10% of the voting securities of
the issuer would be held by the fund.
Common and Preferred Stocks. Stocks
represent shares of ownership in a company.
Generally, preferred stock has a specified
dividend and ranks after bonds and before
PAGE 295
common stocks in its claim on income for
dividend payments and on assets should the
company be liquidated. After other claims
are satisfied, common stockholders
participate in company profits on a pro
rata basis; profits may be paid out in
dividends or reinvested in the company to
help it grow. Increases and decreases in
earnings are usually reflected in a
company's stock price, so common stocks
generally have the greatest appreciation
and depreciation potential of all corporate
securities. While most preferred stocks
pay a dividend, the fund may purchase
preferred stock where the issuer has
omitted, or is in danger of omitting,
payment of its dividend. Such investments
would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The
fund may invest in debt or preferred equity
securities convertible into or exchangeable
for equity securities. Traditionally,
convertible securities have paid dividends
or interest at rates higher than common
stocks but lower than non-convertible
securities. They generally participate in
the appreciation or depreciation of the
underlying stock into which they are
convertible, but to a lesser degree. In
recent years, convertibles have been
developed which combine higher or lower
current income with options and other
features. Warrants are options to buy a
stated number of shares of common stock at
a specified price any time during the life
of the warrants (generally, two or more
years).
Foreign Securities. The fund may invest in
foreign securities. These include non-
dollar-denominated securities traded
outside of the U.S. and dollar-denominated
securities traded in the U.S. (such as
ADRs). Such investments increase a
portfolio's diversification and may enhance
PAGE 296
return, but they also involve some special
risks such as exposure to potentially
adverse local political and economic
developments; nationalization and exchange
controls; potentially lower liquidity and
higher volatility; possible problems
arising from accounting, disclosure,
settlement, and regulatory practices that
differ from U.S. standards; and the chance
that fluctuations in foreign exchange rates
will decrease the investment's value
(favorable changes can increase its value).
Operating policy. The fund may invest up to
25% of its total assets in foreign
securities.
Fixed Income Securities. The fund may
invest in debt securities of any type
without regard to quality or rating. Such
securities would be purchased in companies
which meet the investment criteria for the
fund. The price of a bond fluctuates with
changes in interest rates, rising when
interest rates fall and falling when
interest rates rise. The fund will not
purchase a non-investment grade debt
security (or junk bond) if immediately
after such purchase the fund would have
more than 10% of its total assets invested
in such securities.
High Yield/High Risk Investing. The total
return and yield of lower quality (high
yield/high risk) bonds, commonly referred
to as "junk bonds," can be expected to
fluctuate more than the total return and
yield of higher quality, shorter-term
bonds, but not as much as common stocks.
Junk bonds are regarded as predominantly
speculative with respect to the issuer's
continuing ability to meet principal and
interest payments.
Operating policy. The fund may not invest
more than 10% in securities rated below-
investment grade.
PAGE 297
Hybrid Instruments. These instruments (a
type of derivative) can combine the
characteristics of securities, futures and
options. For example, the principal
amount, redemption or conversion terms of a
security could be related to the market
price of some commodity, currency or
securities index. Such securities may bear
interest or pay dividends at below market
(or even relatively nominal) rates. Under
certain conditions, the redemption value of
such an investment could be zero. Hybrids
can have volatile prices and limited
liquidity and their use by the fund may not
be successful.
Operating policy. The fund may invest up
to 10% of its total assets in hybrid
instruments.
Private Placements. These securities are
sold directly to a small number of
investors, usually institutions. Unlike
public offerings, such securities are not
registered with the SEC. Although certain
of these securities may be readily sold,
for example under Rule 144A, the sale of
others may involve substantial delays and
additional costs.
Operating policy. The fund will not invest
more than 15% of its net assets in illiquid
securities, and no more than 5% in certain
restricted securities.
Types of Management Practices
_________________________
Cash reserves provide
flexibility and serve as
a short-term defense
during periods of unusual
market volatility. Cash Position. The fund will hold a
certain portion of its assets in U.S. and
foreign dollar-denominated money market
securities, including repurchase
agreements, in the two highest rating
PAGE 298
categories, maturing in one year or less.
For temporary, defensive purposes, the fund
may invest without limitation in such
securities. This reserve position provides
flexibility in meeting redemptions,
expenses, and the timing of new
investments, and serves as a short-term
defense during periods of unusual market
volatility.
Borrowing Money and Transferring Assets.
The fund can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the fund's
investment objectives and program. Such
borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental policy. Borrowings may not
exceed 33 1/3% of total fund assets.
Operating policies. The fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of the fund's total
assets. The fund may not purchase
additional securities when borrowings
exceed 5% of total assets.
Futures and Options. Futures are often used
to manage risk, because they enable the
investor to buy or sell an asset in the
future at an agreed upon price. Options
give the investor the right, but not the
obligation, to buy or sell an asset at a
predetermined price in the future. The fund
may buy and sell futures contracts (and
options on such contracts) to manage its
exposure to changes in securities prices
and foreign currencies and as an efficient
means of adjusting its overall exposure to
certain markets. The fund may purchase,
sell, or write call and put options on
PAGE 299
securities, financial indices, and foreign
currencies.
Futures contracts and options may not
always be successful hedges; their prices
can be highly volatile; using them could
lower the fund's total return; and the
potential loss from the use of futures can
exceed the fund's initial investment in
such contracts.
Operating policies. Futures: Initial margin
deposits and premiums on options used for
non-hedging purposes will not equal more
than 5% of the fund's net asset value.
Options on securities: The total market
value of securities against which the fund
has written call or put options may not
exceed 25% of its total assets. The fund
will not commit more than 5% of its total
assets to premiums when purchasing call or
put options.
Managing Foreign Currency Risk. Investors
in foreign securities may "hedge" their
exposure to potentially unfavorable
currency changes by purchasing a contract
to exchange one currency for another on
some future date at a specified exchange
rate. In certain circumstances, a "proxy
currency" may be substituted for the
currency in which the investment is
denominated, a strategy known as "proxy
hedging." Although foreign currency
transactions will be used primarily to
protect the fund's foreign securities from
adverse currency movements relative to the
dollar, they involve the risk that
anticipated currency movements will not
occur and the fund's total return could be
reduced.
Lending of Portfolio Securities. Like other
mutual funds, the fund may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
PAGE 300
insolvency of the broker-dealer or other
borrower. In this event, the fund could
experience delays in recovering its
securities and possibly capital losses.
Fundamental policy. The value of loaned
securities may not exceed 33 1/3% of the
fund's total assets.
Portfolio Transactions. 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 1993, 1992, and 1992 were
31.2%, 30.0%, and 33.5%, respectively.
International Stock Fund
Types of Portfolio Securities
In seeking to meet its investment
objective, the fund may invest in any type
of security whose investment
characteristics are consistent with the
fund's investment program. These and some
of the other investment techniques the
funds may use are described in the
following pages.
Fundamental policy. The fund will not
purchase a security if, as a result, with
respect to 75% of the fund's total assets,
more than 5% of its total assets would be
invested in securities of the issuer or
more than 10% of the voting securities of
the issuer would be held by one fund.
Common and Preferred Stocks. Stocks
represent shares of ownership in a company.
Generally, preferred stock has a specified
dividend and ranks after bonds and before
common stocks in its claim on income for
dividend payments and on assets should the
company be liquidated. After other claims
are satisfied, common stockholders
PAGE 301
participate in company profits on a pro
rata basis; profits may be paid out in
dividends or reinvested in the company to
help it grow. Increases and decreases in
earnings are usually reflected in a
company's stock price, so common stocks
generally have the greatest appreciation
and depreciation potential of all corporate
securities. While most preferred stocks
pay a dividend, the fund may purchase
preferred stock where the issuer has
omitted, or is in danger of omitting,
payment of its dividend. Such investments
would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The
fund may invest in debt or preferred equity
securities convertible into or exchangeable
for equity securities. Traditionally,
convertible securities have paid dividends
or interest at rates higher than common
stocks but lower than non-convertible
securities. They generally participate in
the appreciation or depreciation of the
underlying stock into which they are
convertible, but to a lesser degree. In
recent years, convertibles have been
developed which combine higher or lower
current income with options and other
features. Warrants are options to buy a
stated number of shares of common stock at
a specified price any time during the life
of the warrants (generally, two or more
years).
Fixed Income Securities. The fund may
invest in any type of investment-grade
security. Such securities would be
purchased in companies which meet the
investment criteria for the fund. The
price of a bond fluctuates with changes in
interest rates, rising when interest rates
fall and falling when interest rates rise.
Hybrid Instruments. These instruments can
combine the characteristics of securities,
PAGE 302
futures and options. For example, the
principal amount, redemption or conversion
terms of a security could be related to the
market price of some commodity, currency or
securities index. Such securities may bear
interest or pay dividends at below market
(or even relatively nominal) rates. Under
certain conditions, the redemption value of
such an investment could be zero. Hybrids
can have volatile prices and limited
liquidity and their use by a fund may not
be successful.
Operating policy. The fund may invest up
to 10% of its total assets in hybrid
instruments.
Passive Foreign Investment Companies. The
fund may purchase the securities of certain
foreign investment funds or trusts called
passive foreign investment companies. Such
trusts have been the only or primary way to
invest in certain countries. In addition
to bearing their proportionate share of the
trust's expenses (management fees and
operating expenses) shareholders will also
indirectly bear similar expenses of such
trusts. Capital gains on the sale of such
holdings are considered ordinary income
regardless of how long the fund held 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 its 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.
PAGE 303
Private Placements (Restricted Securities).
These securities are sold directly to a
small number of investors, usually
institutions. Unlike public offerings, such
securities are not registered with the SEC.
Although certain of these securities may be
readily sold, for example, under Rule 144A,
the sale of others may involve substantial
delays and additional costs.
Operating policy. The fund will not invest
more than 15% of its net assets in illiquid
securities, but not more than 5% in
restricted securities (other than Rule 144A
securities).
Types of Management Practices
Cash Position. The fund will hold a certain
portion of its assets in money market
securities, including repurchase
agreements, in the two highest rating
categories, maturing in one year or less.
For temporary, defensive purposes, the fund
may invest without limitation in such
securities. This reserve position provides
flexibility in meeting redemptions,
expenses, and the timing of new
investments, and serves as a short-term
defense during periods of unusual market
volatility.
Borrowing Money and Transferring Assets.
The fund can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the funds'
investment objectives and program. Such
borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental policy. Borrowings may not
exceed 33 1/3% of the fund's total fund
assets.
PAGE 304
Operating policies. The fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of the fund's total
assets. The fund may not purchase
additional securities when borrowings
exceed 5% of total assets.
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
PAGE 305
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 a fund's total return could
be adversely affected as a result.
There are certain markets where it is
not possible to engage in effective foreign
currency hedging. This may be true, for
example, for the currencies of various
Latin American countries and other emerging
markets where the foreign exchange markets
are not sufficiently developed to permit
hedging activity to take place.
Futures and Options. Futures (a type of
derivative) are often used to manage risk,
because they enable the investor to buy or
sell an asset in the future at an agreed
upon price. Options (another type of
derivative) give the investor the right,
but not the obligation, to buy or sell an
asset at a predetermined price in the
future. The fund may buy and sell futures
contracts (and options on such contracts)
to manage its exposure to changes in
securities prices and foreign currencies
and as an efficient means of adjusting
overall exposure to certain markets. The
fund may purchase, sell, or write call and
put options on securities, financial
indices, and foreign currencies.
Futures Contracts and Options may not
always be successful hedges; their prices
can be highly volatile; using them could
lower the fund's total return; and the
potential loss from the use of futures can
exceed the fund's initial investment in
such contracts.
Operating policies. Futures: Initial margin
deposits and premiums on options used for
non-hedging purposes will not equal more
than 5% of the fund's net asset value.
PAGE 306
Options on securities: The total market
value of securities against which the fund
has written call or put options may not
exceed 25% of its total assets. The fund
will not commit more than 5% of its total
assets to premiums when purchasing call or
put options.
Tax Consequences of Hedging. Under
applicable tax law, the fund may be
required to limit their gains from hedging
in foreign currency forwards, futures and
options. Although the fund is expected to
comply with such limits, the extent to
which these limits apply is subject to tax
regulations as yet unissued. Hedging may
also result in the application of the mark-
to-market and 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 and could affect whether dividends
paid by the fund are classified as capital
gains or ordinary income.
Lending of Portfolio Securities. Like other
mutual funds, the fund may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
insolvency of the broker-dealer or other
borrower. In this event, the funds could
experience delays in recovering securities
and possibly capital losses.
Fundamental policy. The value of loaned
securities may not exceed 33 1/3% of the
fund's total assets.
Portfolio Transactions. Turnover is an
indication of frequency. 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
PAGE 307
for 1992, 1993, and 1994 were 37.8%, 29.8%,
and 22.9%, respectively.
4 Investing with T. Rowe Price
Meeting Requirements for New Accounts
Tax Identification Number
________________________
Always verify your
transactions by carefully
reviewing the
confirmation we send you.
Please report any
discrepancies to
Shareholder Services. 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 an
IRS fine. You will also 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.
Unless you request otherwise, one
shareholder report will be mailed to
multiple account owners with the same tax
identification number and same zip code and
to shareholders who have requested that
their account be combined with someone
else's for financial reporting.
Opening a New Account: $2,500 minimum
initial investment; $1,000 for retirement
plans or gifts or transfers to minors
(UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be
sure to register any new account just like
your existing accounts so you can exchange
PAGE 308
among them easily. (The name and account
type would have to be identical.)
________________________
Regular Mail
T. Rowe Price
Account Services
P.O. Box 17300
Baltimore, MD
21298-9353
Mailgram, Express,
Registered, or Certified
Mail
T. Rowe Price
Account Services
10090 Red Run Blvd.
Owings Mills, MD 21117 By Mail
Please make your check payable to T. Rowe
Price Funds otherwise it may be returned
(we do not accept third-party checks to
open new accounts) and send it together
with a completed New Account Form to one of
the appropriate addresses at left.
By Wire
o Call Investor Services for an account
number and give the following wire
address to your bank: Morgan Guaranty
Trust Co. of New York, ABA# 021000238, T.
Rowe Price [fund name], AC-00153938.
Provide fund name, account name(s), and
account number.
o Complete a New Account Form and mail it
to one of the appropriate addresses
listed at left. Note: No services will be
established and IRS penalty withholding
may occur until a signed New Account Form
is received. Also, retirement plans
cannot be opened by wire.
By Exchange
Call Shareholder Services. 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
PAGE 309
on the existing account. (See explanation
of "Excessive Trading " under "Transaction
Procedures.")
In Person
Drop off your completed New Account Form at
any of the investor center locations listed
below and obtain a receipt.
Drop-off locations
101 East Lombard St. T. Rowe Price
Baltimore, MD Financial Center
10090 Red Run Blvd.
Owings Mills, MD
Farragut Square ARCO Tower
900 17th St., N.W. 31st Floor
Washington, D.C. 515 South Flower St.
Los Angeles, CA
Note: Each fund and its agents reserve the
right to waive or lower investment
minimums; to accept initial purchases by
telephone or mailgram; cancel or rescind
any purchase or exchange upon notice to the
shareholder within five business days of
the trade or if the written confirmation
has not been received by the shareholder,
whichever is sooner (for example, if an
account has been restricted due to
excessive trading or fraud); to otherwise
modify the conditions of purchase or any
services at any time; or to act on
instructions believed to be genuine.
Purchasing Additional Shares: $100 minimum
purchase; $50 for retirement plans and
Automatic Asset Builder; $5,000 minimum for
telephone purchases
By ACH Transfer
Use Tele*Access (registered trademark),
PC*Access (registered trademark) or call
Investor Services if you have established
electronic transfers using the ACH network.
PAGE 310
By Wire
Call Shareholder Services or use the wire
address in "Opening a New Account."
________________________
Regular Mail
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD
21289-1500 By Mail
o Provide your account number and the fund
name on your check. Please make your
check payable to T. Rowe Price Funds
(otherwise it may be returned).
o Mail the check to the address shown at
left either with a reinvestment slip or a
note indicating the fund and account
number in which you wish to purchase
shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder
section on the New Account or Shareholder
Services form ($50 minimum).
By Phone
Call Shareholder Services to lock in that
day's closing price; payment is due within
five days ($5,000 minimum). Note: The
current, collected balance in your account
must equal at least 25% of your telephone
purchase for additional shares.
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our
phones busy during unusually volatile
markets, please consider placing your order
by Tele*Access, PC*Access or mailgram (if
you have previously authorized telephone
services), or by express mail. For exchange
policies, please see "Transaction
Procedures and Special Requirements -
Excessive Trading."
PAGE 311
Redemption proceeds can be mailed to your
account address, sent by ACH transfer, or
wired to your bank. For charges, see
"Electronic Transfers - By Wire" on page
__.
By Mail
________________________
Mailgram, Express,
Registered, or
Certified Mail
(See page __.) Provide account name(s) and numbers, fund
name(s), and exchange or redemption amount.
For exchanges, mail to the appropriate
address below or at left, indicate the fund
you are exchanging from and the fund(s) you
are exchanging into. T. Rowe Price requires
the signatures of all owners exactly as
registered, and possibly a signature
guarantee (see "Transaction Procedures and
Special Requirements - Signature
Guarantees").
Regular Mail
For Non-Retirement For Employer-
and IRA accounts: Sponsored Retirement
accounts:
T. Rowe Price Account T. Rowe Price Trust
Services Company
P.O. Box 89000 P.O. Box 89000
Baltimore, MD Baltimore, MD
21289-0220 21289-0300
_________________________
T. Rowe Price Trust
Company
1-800-492-7670
1-410-625-6585 Note: Redemptions 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.
_________________________
Shareholder Services
1-800-225-5132
1-410-625-6500
PAGE 312
Shareholder Services
Many services are available to you as a T.
Rowe Price shareholder; some you receive
automatically and others you must authorize
on the New Account Form. By signing up for
services on the New Account Form rather
than later, you avoid having to complete a
separate form and obtain a signature
guarantee. This section reviews some of the
principal services currently offered. Our
Services Guide contains detailed
descriptions of these and other services.
If you are a new T. Rowe Price investor,
you will receive a Services Guide with our
Welcome Kit. Note: Corporate and other
entity accounts require an original or
certified resolution to establish services
and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for
individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs,
Keoghs (profit sharing, money purchase
pension), 401(k), and 403(b)(7). For
information on IRAs, call Investor
Services. For information on all other
retirement plans, please call our Trust
Company at 1-800-492-7670.
Exchange Service
_________________________
Investor Services
1-800-638-5660
1-410-547-2308 You can move money from one account to an
existing identically registered account, or
open a new identically registered account.
Remember, exchanges are purchases and sales
for tax purposes. (Exchanges into a state
tax-free fund are limited to investors
living in states where the funds are
registered.) Some of the T. Rowe Price
funds may impose a redemption fee of .50%
to 2%, payable to such funds, on shares
held for less than one year, or in some
funds, six months.
PAGE 313
Note: Shares purchased by telephone may
not be exchanged to another fund until
payment for the original purchase has been
received.
Automated Services
Tele*Access. 24-hour service via toll-free
number provides information such as yields,
prices, dividends, account balances, the
date and amount of your latest transaction,
as well as the ability to request
prospectuses and account forms, reorder
checks and initiate purchase, redemption
and exchange orders in your accounts (see
"Electronic Transfers" below).
PC*Access. 24-hour service via dial-up
modem provides the same information as
Tele*Access, but on a personal computer.
Please call Investor Services for an
information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling
one of our service representatives or by
visiting one of our four investor center
locations. For Investor Center addresses,
see "Drop-off locations" on page __.
Electronic Transfers
By ACH. With no charges to pay, you can
initiate a purchase or redemption for as
little as $100 or as much as $100,000
between your bank account and fund account
using the ACH network. Enter instructions
via Tele*Access, PC*Access or call
Shareholder Services.
By Wire. Electronic transfers can also be
conducted via bank wire. There is currently
a $5 fee for wire redemptions under $5,000,
and your bank may charge for incoming or
outgoing wire transfers regardless of size.
PAGE 314
Checkwriting
You may write an unlimited number of free
checks on any money market fund, and most
bond funds, with a minimum of $500 per
check. Keep in mind, however that a check
results in a redemption; a check written on
a bond fund will create a taxable event
which you and we must report to the IRS.
Automatic Investing ($50 minimum)
You can invest automatically in several
different ways, including:
o Automatic Asset Builder. You instruct us
to move $50 or more once a month or less
often from your bank account, or you can
instruct your employer to send all or a
portion of your paycheck, to the fund or
funds you designate.
o Automatic Exchange. Enables you to set up
systematic investments of $50 or more
from one fund account into another, such
as from a money fund into a stock fund.
Discount Brokerage
You can trade stocks, bonds, options,
precious metals and other securities at a
substantial savings over regular commission
rates. Call Investor Services for
information.
Note: If you buy or sell T. Rowe Price
funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you
may be charged transaction or service fees
by those institutions. No such fees are
charged by T. Rowe Price Investment
Services or the fund for transactions
conducted directly with the fund.
PAGE 315
Prospectus
To Open an Account
Investor Services Prime Reserve
1-800-638-5660 Fund
1-410-547-2308 Short-Term Bond
Fund
For Existing Accounts To help you Equity Income
Shareholder Services achieve your Fund
1-800-225-5132 financial goals, International
1-410-625-6500 T. Rowe Price Stock Fund
offers a wide
For Yields & Prices range of stock,
Tele*Access(registered bond, and money
trademark) market
1-800-638-2587 investments, as T. Rowe Price
1-410-625-7676 well as Prime Reserve
24 hours, 7 days convenient Fund
services and Short-Term Bond
timely, Fund
Investor Centers informative Equity Income
reports. Fund
101 East Lombard St. International
Baltimore, MD Stock Fund
October 1, 1994
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD
Farragut Square
900 17th Street, N.W.
Washington, D.C.
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA
T. Rowe Price
Invest With
Confidence
(registered
trademark)
PAGE 316
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price Prime Reserve Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Equity Income Fund
T. Rowe Price International Stock FundR
(the "Funds")
This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Funds' prospectus
dated March 1, 1995, 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
March 1, 1995.
PAGE 317
TABLE OF CONTENTS
Page Page
Adjustable Rate Mortgages . . Investment Program . . . .
Adjustable Rate Securities . Investment Restrictions . .
Asset-Backed Securities . . . Legal Counsel . . . . . . .
Code of Ethics . . . . . . . Lending of Portfolio
Covered Call and Put Securities . . . . . . . .
Options . . . . . . . . . . Management of Funds . . . .
Custodian . . . . . . . . . . Net Asset Value Per Share .
Dealer Options . . . . . . . Organization of the Funds .
Distributor for Funds . . . . Portfolio Transactions . .
Dividends . . . . . . . . . . Pricing of Securities . . .
Federal and State Registration Principal Holders of
of Shares . . . . . . . . . Securities . . . . . . . .
Foreign Currency Ratings of Commercial
Transactions . . . . . . . . Paper . . . . . . . . . .
Foreign Securities . . . . . Ratings of Corporate Debt
Futures Contracts . . . . . . Securities . . . . . . . .
Illiquid or Restricted Repurchase Agreements . . .
Securities . . . . . . . . . Risk Factors . . . . . . .
Independent Accountants . . . Tax Status . . . . . . . .
Industry Concentration . . . Warrants . . . . . . . . .
Investment Management When-Issued Securities and
Services . . . . . . . . . . Forward Commitment
Investment Objectives and Contracts . . . . . . . .
Policies . . . . . . . . . . Yield Information . . . . .
Investment Performance . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objectives and policies discussed in the
prospectus. The International Stock Fund's investment objective
is a fundamental policy. The Prime Reserve, Short-Term Bond, and
Equity Income Funds will not make a material change in their
investment objectives without obtaining shareholder approval.
Unless otherwise specified, the investment program and
restrictions of each Fund are not fundamental policies. The
operating policies of each Fund are subject to change by its
Board of Directors/Trustees without shareholder approval.
However, shareholders will be notified of a material change in an
operating policy. The fundamental policies of each 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
PAGE 318
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
RISK FACTORS
General
Equity Income and Short-Term Bond Funds
Because of its investment policy, the Fund may or may not be
suitable or appropriate for all investors. The Funds are not
money market funds and are not an appropriate investment for
those whose primary objective is principal stability. The Equity
Income Fund will normally have substantially all of its assets in
equity securities (e.g., common stocks). This portion of the
Equity Income Fund's assets will be subject to all of the risks
of investing in the stock market. There is risk in all
investment. The value of the portfolio securities of the Funds
will fluctuate based upon market conditions. Although the Funds
seek to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. There can, of
course, be no assurance that the Funds will achieve their
investment objectives. Reference is also made to the sections
entitled "Types of Securities" and "Portfolio Management
Practices" for discussions of the risks associated with the
investments and practices described therein as they apply to the
Fund.
Prime Reserve Fund
There can be no assurance that the Fund will achieve its
investment objectives or be able to maintain its net asset value
per share at $1.00. The price of the Fund is not guaranteed or
insured by the U.S. Government, and its yield is not fixed. An
increase in interest rates could reduce the value of the Fund's
portfolio investments, and a decline in interest rates could
increase the value.
Equity Income and Short-Term Bond Funds
Debt Obligations
Although substantially all of the Equity Income Fund's
assets are invested in common stocks, the Fund may invest in
convertible securities, corporate debt securities and preferred
stocks which hold the prospect of contributing to the achievement
PAGE 319
of the Fund's objectives. Yields on short, intermediate, and
long-term securities are dependent on a variety of factors,
including the general conditions of the money and bond markets,
the size of a particular offering, the maturity of the
obligation, and the credit quality and rating of the issue. Debt
securities with longer maturities tend to have higher yields and
are generally subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities and
lower yields. The market prices of debt securities usually vary,
depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a
decline in interest rates will generally increase the value of
portfolio investments. The ability of each Fund to achieve its
investment objective is also dependent on the continuing ability
of the issuers of the debt securities in which the Fund invests
to meet their obligations for the payment of interest and
principal when due. The Equity Income Fund's investment program
permits it to purchase below investment grade securities. Since
investors generally perceive that there are greater risks
associated with investment in lower quality securities, the
yields from such securities normally exceed those obtainable from
higher quality securities. However, the principal value of
lower-rated securities generally will fluctuate more widely than
higher quality securities. Lower quality investments entail a
higher risk of default--that is, the nonpayment of interest and
principal by the issuer than higher quality investments. Such
securities are also subject to special risks, discussed below.
Although each Fund seeks to reduce risk by portfolio
diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not
eliminate all risk. There can, of course, be no assurance that
the Fund will achieve their investment objectives.
Equity Income, Prime Reserve and Short-Term Bond Funds
After purchase by each Fund, a debt security may cease to be
rated or its rating may be reduced below the minimum required for
purchase by the Fund. For the Prime Reserve Fund, the procedures
set forth in Rule 2a-7, under the Investment Company Act of 1940,
may require the prompt sale of any such security. For the other
Funds, neither event will require a sale of such security by the
Fund. However, T. Rowe Price will consider such event in its
determination of whether the Fund should continue to hold the
security. To the extent that the ratings given by Moody's or S&P
may change as a result of changes in such organizations or their
rating systems, the Fund will attempt to use comparable ratings
as standards for investments in accordance with the investment
PAGE 320
policies contained in the prospectus. When purchasing unrated
securities, T. Rowe Price, under the supervision of each Fund's
Board of Directors/Trustees, determines whether the unrated
security is of a quality comparable to that which the Fund is
allowed to purchase.
Equity Income Fund
Special Risks of High Yield Investing
The Fund may invest in low quality bonds commonly referred
to as "junk bonds." Junk bonds are regarded as predominantly
speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low
and lower-medium quality bonds involves greater investment risk,
to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on T. Rowe Price's
credit analysis than would be the case if the Fund was investing
in higher quality bonds. High yield bonds may be more
susceptible to real or perceived adverse economic conditions than
investment grade bonds. A projection of an economic downturn, or
higher interest rates, for example, could cause a decline in high
yield bond prices because the advent of such events could lessen
the ability of highly leverage issuers to make principal and
interest payments on their debt securities. In addition, the
secondary trading market for high yield bonds may be less liquid
than the market for higher grade bonds, which can adversely
affect the ability of a Fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be
more difficult to value inasmuch as objective pricing data may be
less available and judgment may play a greater role in the
valuation process.
Short-Term Bond Fund
Mortgage securities differ from conventional bonds in that
principal is paid back over the life of the security rather than
at maturity. As a result, the holder of a mortgage security
(i.e., the Fund) receives monthly scheduled payments of principal
and interest, and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. The
incidence of unscheduled principal payments is also likely to
increase in mortgage pools owned by the Fund when prevailing
mortgage loan rates fall below the mortgage rates of the
securities underlying the individual pool. The effect of such
prepayments in a falling rate environment is to (1) cause the
Fund to reinvest principal payments at the then lower prevailing
PAGE 321
interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security. Conversely,
the Fund may realize a gain on prepayments of mortgage pools
trading at a discount. Such prepayments will provide an early
return of principal which may then be reinvested at the then
higher prevailing interest rate.
The market value of adjustable rate mortgage securities
("ARMs"), like other U.S. government securities, will generally
vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline.
Because of their periodic adjustment feature, ARMs should be more
sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage
securities. Thus, while having less risk of a decline during
periods of rapidly rising rates, ARMs may also have less
potential for capital appreciation than other investments of
comparable maturities. Interest rate caps on mortgages
underlying ARM securities may prevent income on the ARM from
increasing to prevailing interest rate levels and cause the
securities to decline in value. In addition, to the extent ARMS
are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of the holders'
principal investment to the extent of the premium paid. On the
other hand, if ARMs are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of principal
will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will
be taxable as ordinary income.
All Funds, except Prime Reserve Fund
Foreign Securities
The Equity Income Fund may invest in U.S. dollar-denominated
and non U.S. dollar-denominated securities of foreign issuers.
Risk Factors of Foreign Investing
There are special risks in foreign investing. Certain of
these risks are inherent in any international mutual fund while
others relate more to the countries in which the Funds will
invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries
of Southeast Asia, Latin America, Eastern Europe and the Middle
East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which
PAGE 322
is in the initial stages of its industrialization cycle with a
per capita gross national product of less than $8,000.
General (International Stock Fund). 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 actively researched and managed portfolios, 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, in 1991, the
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached. In
addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim
sovereignty of one another and there is a demilitarized border
between North and South Korea.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.
Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Funds'
assets denominated in that currency. Such changes will also
affect the Funds' income. Generally, when a given currency
PAGE 323
appreciates against the dollar (the dollar weakens) the value of
the Fund's securities denominated in that currency will rise.
When a given currency depreciates against the dollar (the dollar
strengthens) the value of the Funds' securities denominated in
that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. It is contemplated that most
foreign securities, other than Latin American securities, will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Currently, it is anticipated
that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets and the
Funds' portfolio securities may be less liquid and subject to
more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable United States
securities and such levels may not be sustainable. Fixed
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
PAGE 324
differ from those in United States markets. Such differences may
include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.
Investment Funds. The Funds may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in securities
of companies listed and traded on the stock exchanges in these
respective countries. If the Funds invest in such investment
funds, the Funds' shareholders will bear not only their
proportionate share of the expenses of the Funds (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. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the
Funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' 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
Funds. (See "Tax Status," page __.)
Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the possibility
of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
PAGE 325
Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of a Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia
are considered illiquid, each Fund will be required to include
such securities within its 15% restriction on investing in
illiquid securities.
INVESTMENT PROGRAM
Types of Securities
Set forth below is additional information about certain of
the investments described in the Funds' prospectus.
PAGE 326
Debt Securities
Equity Income, Prime Reserve and Short-Term Bond Funds
Fixed-income securities in which the Funds may invest
include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds, and other
debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in the
length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by
U.S. Government sponsored enterprises and federal agencies.
These include securities issued by the Federal National Mortgage
Association, Government National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration,
Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; and the remainder are supported only by the credit of
the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates
of deposit are short-term obligations of commercial banks. A
bankers' acceptance is a time draft drawn on a commercial bank by
a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable
rates. The Funds may invest in U.S. banks, foreign branches of
U.S. banks, U.S. branches of foreign banks, and foreign branches
of foreign banks.
Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures).
Corporate notes may have fixed, variable, or floating rates.
Commercial Paper. Short-term promissory notes issued by
corporations primarily to finance short-term credit needs.
Certain notes may have floating or variable rates.
Foreign Government Securities. Issued or guaranteed by a
foreign government, a province, instrumentality or political
subdivision, or similar unit thereof.
PAGE 327
Savings and Loan Obligations. Negotiable certificates of
deposit and other short-term debt obligations of savings and loan
associations.
Supranational Agencies. Securities of certain supranational
entities, such as the International Development Bank.
Short-Term Bond Fund
Mortgage-Related Securities
Mortgage-related securities in which the Fund may invest
include, but are not limited to, those described below. The
GNMA, U.S. Treasury Intermediate and U.S. Treasury Long-Term
Funds may only invest in these securities to the extent they are
backed by the full faith and credit of the U.S. Government.
Mortgage-Backed Securities. Mortgage-backed securities are
securities representing an interest in a pool of mortgages. The
mortgages may be of a variety of types, including adjustable
rate, conventional 30-year fixed rate, graduated payment, and 15-
year. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the Fund. This
is in contrast to traditional bonds where principal is normally
paid back at maturity in a lump sum. Unscheduled prepayments of
principal shorten the securities' weighted average life and may
lower their total return. (When a mortgage in the underlying
mortgage pool is prepaid, an unscheduled principal prepayment is
passed through to the Fund. This principal is returned to the
Fund at par. As a result, if a mortgage security were trading at
a premium, its total return would be lowered by prepayments, and
if a mortgage security were trading at a discount, its total
return would be increased by prepayments.) The value of these
securities also may change because of changes in the market's
perception of the creditworthiness of the federal agency that
issued them. In addition, the mortgage securities market in
general may be adversely affected by changes in governmental
regulation or tax policies.
U.S. Government Agency Mortgage-Backed Securities. These
are obligations issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("Ginnie Mae" or
"GNMA"), the Federal National Mortgage Association ("Fannie Mae"
or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"), and the Federal Agricultural Mortgage
Corporation ("Farmer Mac" or "FAMC"). FNMA, FHLMC, and FAMC
PAGE 328
obligations are not backed by the full faith and credit of the
U.S. Government as GNMA certificates are, but they are supported
by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates
provide for the pass-through to investors of their pro-rata share
of monthly payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any
fees paid to the guarantor of such securities and the servicer of
the underlying mortgage loans. Each of GNMA, FNMA, FHLMC, and
FAMC guarantees timely distributions of interest to certificate
holders. GNMA and FNMA guarantee timely distributions of
scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying
mortgage loan; however, FHLMC now issues Mortgage-Backed
Securities (FHLMC Gold PCs) which also guarantee timely payment
of monthly principal reductions.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned
corporate instrumentality of the United States within the
Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes
Ginnie Mae to guarantee the timely payment of the principal of
and interest on certificates that are based on and backed by a
pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing
Act of 1949 ("FHA Loans"), or guaranteed by the Department of
Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit
of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In
order to meet its obligations under such guaranty, Ginnie Mae is
authorized to borrow from the United States Treasury with no
limitations as to amount.
Fannie Mae Certificates. Fannie Mae is a federally
chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act of
1938. FNMA Certificates represent a pro-rata interest in a group
of mortgage loans purchased by Fannie Mae. FNMA guarantees the
timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith
and credit of the U.S. Government.
Freddie Mac Certificates. Freddie Mac is a corporate
instrumentality of the United States created pursuant to the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act").
PAGE 329
Freddie Mac Certificates represent a pro-rata interest in a group
of mortgage loans (a "Freddie Mac Certificate group") purchased
by Freddie Mac. Freddie Mac guarantees timely payment of
interest and principal on certain securities it issues and timely
payment of interest and eventual payment of principal on other
securities is issues. The obligations of Freddie Mac are
obligations solely of Freddie Mac and are not backed by the full
faith and credit of the U.S. Government.
Farmer Mac Certificates. The Federal Agricultural Mortgage
Corporation ("Farmer Mac") is a federally chartered
instrumentality of the United States established by Title VIII of
the Farm Credit Act of 1971, as amended ("Charter Act"). Farmer
Mac was chartered primarily to attract new capital for financing
of agricultural real estate by making a secondary market in
certain qualified agricultural real estate loans. Farmer Mac
provides guarantees of timely payment of principal and interest
on securities representing interests in, or obligations backed
by, pools of mortgages secured by first liens on agricultural
real estate ("Farmer Mac Certificates"). Similar to Fannie Mae
and Freddie Mac, Farmer Mac's Certificates are not supported by
the full faith and credit of the U.S. Government; rather, Farmer
Mac may borrow up from the U.S. Treasury to meet its guaranty
obligations.
As discussed above, prepayments on the underlying mortgages
and their effect upon the rate of return of a Mortgage-Backed
Security, is the principal investment risk for a purchaser of
such securities, like the Fund. Over time, any pool of mortgages
will experience prepayments due to a variety of factors,
including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and
(3) increased amortization by the mortgagee. These factors, in
turn, depend upon general economic factors, such as level of
interest rates and economic growth. Thus, investors normally
expect prepayment rates to increase during periods of strong
economic growth or declining interest rates, and to decrease in
recessions and rising interest rate environments. Accordingly,
the life of the Mortgage-Backed Security is likely to be
substantially shorter than the stated maturity of the mortgages
in the underlying pool. Because of such variation in prepayment
rates, it is not possible to predict the life of a particular
Mortgage-Backed Security, but FHA statistics indicate that 25- to
30-year single family dwelling mortgages have an average life of
approximately 12 years. The majority of Ginnie Mae Certificates
are backed by mortgages of this type, and, accordingly, the
generally accepted practice treats Ginnie Mae Certificates as 30-
PAGE 330
year securities which prepay full in the 12th year. FNMA and
Freddie Mac Certificates may have differing prepayment
characteristics.
Fixed Rate Mortgage-Backed Securities bear a stated "coupon
rate" which represents the effective mortgage rate at the time of
issuance, less certain fees to GNMA, FNMA and FHLMC for providing
the guarantee, and the issuer for assembling the pool and for
passing through monthly payments of interest and principal.
Payments to holders of Mortgage-Backed Securities consist of
the monthly distributions of interest and principal less the
applicable fees. The actual yield to be earned by a holder of
Mortgage-Backed Securities is calculated by dividing interest
payments by the purchase price paid for the Mortgage-Backed
Securities (which may be at a premium or a discount from the face
value of the certificate).
Monthly distributions of interest, as contrasted to semi-
annual distributions which are common for other fixed interest
investments, have the effect of compounding and thereby raising
the effective annual yield earned on Mortgage-Backed Securities.
Because of the variation in the life of the pools of mortgages
which back various Mortgage-Backed Securities, and because it is
impossible to anticipate the rate of interest at which future
principal payments may be reinvested, the actual yield earned
from a portfolio of Mortgage-Backed Securities will differ
significantly from the yield estimated by using an assumption of
a certain life for each Mortgage-Backed Security included in such
a portfolio as described above.
U.S. Government Agency Multiclass Pass-Through Securities.
Unlike CMOs, U.S. Government Agency Multiclass Pass-Through
Securities, which include FNMA Guaranteed REMIC Pass-Through
Certificates and FHLMC Multi-Class Mortgage Participation
Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities.
Multi-Class Residential Mortgage Securities. Such
securities represent interests in pools of mortgage loans to
residential home buyers made by commercial banks, savings and
loan associations or other financial institutions. Unlike GNMA,
FNMA and FHLMC securities, the payment of principal and interest
on Multi-Class Residential Mortgage Securities is not guaranteed
by the U.S. Government or any of its agencies. Accordingly,
yields on Multi-Class Residential Mortgage Securities have been
PAGE 331
historically higher than the yields on U.S. government mortgage
securities. However, the risk of loss due to default on such
instruments is higher since they are not guaranteed by the U.S.
Government or its agencies. Additionally, pools of such
securities may be divided into senior or subordinated segments.
Although subordinated mortgage securities may have a higher yield
than senior mortgage securities, the risk of loss of principal is
greater because losses on the underlying mortgage loans must be
borne by persons holding subordinated securities before those
holding senior mortgage securities.
Privately-Issued Mortgage-Backed Certificates. These are
pass-through certificates issued by non-governmental issuers.
Pools of conventional residential mortgage loans created by such
issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or
indirect government guarantees of payment. Timely payment of
interest and principal of these pools is, however, generally
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance
and guarantees are issued by government entities, private
insurance or the mortgage poolers. Such insurance and guarantees
and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security
meets the Fund's quality standards. The Fund may buy mortgage-
related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers,
the investment manager determines that the securities meet the
Fund's quality standards.
Collateralized Mortgage Obligations (CMOs). CMOs are bonds
that are collateralized by whole loan mortgages or mortgage pass-
through securities. The bonds issued in a CMO deal are divided
into groups, and each group of bonds is referred to as a
"tranche." Under the traditional CMO structure, the cash flows
generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay
principal to the CMO bondholders. The bonds issued under a CMO
structure are retired sequentially as opposed to the pro rata
return of principal found in traditional pass-through
obligations. Subject to the various provisions of individual CMO
issues, the cash flow generated by the underlying collateral (to
the extent it exceeds the amount required to pay the stated
interest) is used to retire the bonds. Under the CMO structure,
the repayment of principal among the different tranches is
prioritized in accordance with the terms of the particular CMO
issuance. The "fastest-pay" tranche of bonds, as specified in
PAGE 332
the prospectus for the issuance, would initially receive all
principal payments. When that tranche of bonds is retired, the
next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are
retired. The sequential retirement of bond groups continues
until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash
flows of long maturity, monthly-pay collateral to formulate
securities with short, intermediate and long final maturities and
expected average lives.
CMO structures may also include floating rate CMOs, planned
amortization classes, accrual bonds and CMO residuals. These
structures affect the amount and timing of principal and interest
received by each tranche from the underlying collateral. Under
certain of these structures, given classes of CMOs have priority
over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which the
Fund invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related
securities.
The primary risk of any mortgage security is the uncertainty
of the timing of cash flows. For CMOs, the primary risk results
from the rate of prepayments on the underlying mortgages serving
as collateral. An increase or decrease in prepayment rates
(resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs.
The prices of certain CMOs, depending on their structure and the
rate of prepayments, can be volatile. Some CMOs may also not be
as liquid as other securities.
Stripped Mortgage-Backed Securities. Stripped Mortgage-
Backed securities represent interests in a pool of mortgages, the
cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive
the interest portion of the cash flow while "POs" (principal only
securities) receive the principal portion. IOs and POs are
usually structured as tranches of a CMO. Stripped
Mortgage-Backed Securities may be issued by U.S. Government
Agencies or by private issuers similar to those described above
with respect to CMOs and privately-issued mortgage-backed
certificates. As interest rates rise and fall, the value of IOs
tends to move in the same direction as interest rates. The value
of the other mortgage-backed securities described herein, like
other debt instruments, will tend to move in the opposite
direction compared to interest rates. Under the Internal Revenue
PAGE 333
Code of 1986, as amended (the "Code"), POs may generate taxable
income from the current accrual of original issue discount,
without a corresponding distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. In the
case of IOs, prepayments affect the amount, but not the timing,
of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of
cash flows received by investors in POs. A rapid or slow rate of
principal payments may have a material adverse effect on the
prices of IOs or POs, respectively. If the underlying mortgage
assets experience greater than anticipated prepayments of
principal, an investor may fail to recoup fully its initial
investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a
full faith and credit obligation. Conversely, if the underlying
mortgage assets experience slower than anticipated prepayments of
principal, the price on a PO class will be affected more severely
than would be the case with a traditional mortgage-backed
security.
The staff of the Securities and Exchange Commission has
advised the Fund that it believes the Fund should treat IOs and
POs, other than government-issued IOs or POs backed by fixed rate
mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. Under the Staff's
position, the determination of whether a particular
government-issued IO and PO backed by fixed rate mortgages may be
made on a case by case basis under guidelines and standards
established by the Fund's Board of Directors/Trustees. The
Fund's Board of Directors/Trustees has delegated to T. Rowe Price
the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of
collateral, including age and prepayment characteristics; rate of
interest on coupon relative to current market rates and the
effect of the rate on the potential for prepayments; complexity
of the issue's structure, including the number of tranches; size
of the issue and the number of dealers who make a market in the
IO or PO. The Fund will treat non-government-issued IOs and POs
not backed by fixed or adjustable rate mortgages as illiquid
unless and until the Securities and Exchange Commission modifies
its position.
PAGE 334
Adjustable Rate Mortgages. Adjustable rate mortgage (ARM)
securities are collateralized by adjustable rate, rather than
fixed rate, mortgages.
ARMs, like fixed rate mortgages, have a specified maturity
date, and the principal amount of the mortgage is repaid over the
life of the mortgage. Unlike fixed rate mortgages, the interest
rate on ARMs is adjusted at regular intervals based on a
specified, published interest rate "index" such as a Treasury
rate index. The new rate is determined by adding a specific
interest amount, the "margin," to the interest rate of the index.
Investment in ARM securities allows the Fund to participate in
changing interest rate levels through regular adjustments in the
coupons of the underlying mortgages, resulting in more variable
current income and lower price volatility than longer term fixed
rate mortgage securities. The ARM securities in which the Fund
expects to invest will generally adjust their interest rates at
regular intervals of one year or less. ARM securities are a less
effective means of locking in long-term rates than fixed rate
mortgages since the income from adjustable rate mortgages will
increase during periods of rising interest rates and decline
during periods of falling rates.
Characteristics of Adjustable Rate Mortgage Securities -
Interest Rate Indices. The interest rates paid on adjustable
rate securities are readjusted periodically to an increment over
some predetermined interest rate index. Such readjustments occur
at intervals ranging from one to 60 months. There are three main
categories of indexes: (1) those based on U.S. Treasury
securities (2) those derived from a calculated measure such as a
cost of funds index ("COFI") or a moving average of mortgage
rates and (3) those based on actively traded or prominently
posted short-term, interest rates. Commonly utilized indexes
include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month, three-month, six-month or
one-year London Interbank Offered Rate (LIBOR), the prime rate of
a specific bank, or commercial paper rates. Some indexes, such
as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels. The market value of the Fund's
assets and of the net asset value of the Fund's shares will be
affected by the length of the adjustment period, the degree of
volatility in the applicable indexes and the maximum increase or
PAGE 335
decrease of the interest rate adjustment on any one adjustment
date, in any one year and over the life of the securities. These
maximum increases and decreases are typically referred to as
"caps" and "floors", respectively.
A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move in a
manner different from indices based upon specific interest rates,
such as the One Year Treasury Index. Additionally, there can be
no assurance that the Cost of Funds Index will necessarily move
in the same direction or at the same rate as prevailing interest
rates. Furthermore, any movement in the Cost of Funds Index as
compared to other indices based upon specific interest rates may
be affected by changes instituted by the FHLB of San Francisco in
the method used to calculate the Cost of Funds Index. To the
extent that the Cost of Funds Index may reflect interest changes
on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later
than would be produced by such other indices, and in a period of
declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a
higher level of principal prepayments on mortgage loans which
adjust in accordance with the Cost of Funds Index than mortgage
loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest
rate that the most creditworthy international banks dealing in
U.S. dollar-denominated deposits and loans charge each other for
large dollar-denominated loans. LIBOR is also usually the base
rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or 12 month intervals.
Caps and Floors. ARMs will frequently have caps and floors
which limit the maximum amount by which the interest rate to the
residential borrower may move up or down, respectively, each
adjustment period and over the life of the loan. Interest rate
caps on ARM securities may cause them to decrease in value in an
increasing interest rate environment. Such caps may also prevent
their income from increasing to levels commensurate with
prevailing interest rates. Conversely, interest rate floors on
ARM securities may cause their income to remain higher than
prevailing interest rate levels and result in an increase in the
value of such securities. However, this increase may be tempered
by the acceleration of prepayments.
PAGE 336
Mortgage securities generally have a maximum maturity of up
to 30 years. However, due to the adjustable rate feature of ARM
securities, their prices are considered to have volatility
characteristics which approximate the average period of time
until the next adjustment of the interest rate. As a result, the
principal volatility of ARM securities may be more comparable to
short- and intermediate-term securities than to longer term fixed
rate mortgage securities. Prepayments, however, will increase
their principal volatility. See also the discussion of Mortgage-
Backed Securities on page __. Several characteristics of ARMs
may make them more susceptible to prepayments than other
Mortgage-Backed Securities. An adjustable rate mortgage has
greater incentives to refinance with a fixed rate mortgage during
favorable interest rate environments, in order to avoid interest
rate risk. Also, homes financed with adjustable rate mortgages
may be sold more frequently because of the prevalence of first-
time home buyers in the adjustable rate mortgage market. Also,
delinquency and foreclosure rates are higher in this market since
many buyers use adjustable rate mortgages to purchase homes that
they could not otherwise finance on a fixed rate basis.
Significant increases in the index rates for the adjustable rate
mortgages may also result in increased delinquency and default
rates, which in turn, may affect prepayment rates on the ARMs.
Other Mortgage Related Securities. The Fund expects that
governmental, government-related or private entities may create
mortgage loan pools offering pass-through investments in addition
to those described above. The mortgages underlying these
securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may
vary or whose terms to maturity may differ from customary long-
term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the investment
manager will, consistent with the Fund's objective, policies and
quality standards, consider making investments in such new types
of securities.
Asset-Backed Securities
Equity Income, Prime Reserve and Short-Term Bond Funds
The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated
from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on
PAGE 337
asset-backed securities generally depends on the rate of
principal payments received on the underlying assets which in
turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be
more or less than the anticipated yield to maturity. Asset-
backed securities may be classified either as pass-through
certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which
represent an undivided fractional ownership interest in an
underlying pool of assets. Pass-through certificates usually
provide for payments of principal and interest received to be
passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest
in the underlying assets, the holders thereof bear directly the
risk of any defaults by the obligors on the underlying assets not
covered by any credit support. See "Types of Credit Support".
Asset-backed securities issued in the form of debt
instruments, also known as collateralized obligations, are
generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card
or automobile receivables. The assets collateralizing such
asset-backed securities are pledged to a trustee or custodian for
the benefit of the holders thereof. Such issuers generally hold
no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments
on such asset-backed securities are obligations of the issuers,
in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing
entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed
securities are issued with only one class of security, many
asset-backed securities are issued in more than one class, each
with different payment terms. Multiple class asset-backed
securities are issued for two main reasons. First, multiple
classes may be used as a method of providing credit support.
This is accomplished typically through creation of one or more
classes whose right to payments on the asset-backed security is
made subordinate to the right to such payments of the remaining
class or classes. See "Types of Credit Support". Second,
multiple classes may permit the issuance of securities with
PAGE 338
payment terms, interest rates or other characteristics differing
both from those of each other and from those of the underlying
assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests
with respect to the allocation of interest and principal of the
assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of
non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark
changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those
described above may be issued in the future. The Fund may invest
in such asset-backed securities if such investment is otherwise
consistent with its investment objectives and policies and with
the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures by
obligors on underlying assets to make payments, such securities
may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to
ensure that scheduled payments on the underlying pool are made in
a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from
third parties, through various means of structuring the
transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising
out of the structure of the transaction include "senior-
subordinated securities" (multiple class asset-backed securities
with certain classes subordinate to other classes as to the
payment of principal thereon, with the result that defaults on
the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have
"reserve funds" (where cash or investments, sometimes funded from
a portion of the initial payments on the underlying assets, are
held in reserve against future losses) or that have been
"overcollateralized" (where the scheduled payments on, or the
principal amount of, the underlying assets substantially exceeds
that required to make payment of the asset-backed securities and
PAGE 339
pay any servicing or other fees). The degree of credit support
provided on each issue is based generally on historical
information respecting the level of credit risk associated with
such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-
backed security.
Automobile Receivable Securities. The Fund may invest in
Asset-Backed Securities which are backed by receivables from
motor vehicle installment sales contracts or installment loans
secured by motor vehicles ("Automobile Receivable Securities").
Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts")
typically have shorter durations and lower incidences of
prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to
prepayment risk.
Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile
Contracts only by filing a financing statement and by having the
servicer of the Automobile Contracts, which is usually the
originator of the Automobile Contracts, take custody thereof. In
such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that
such party could acquire an interest in the Automobile Contracts
superior to that of the holders of Automobile Receivable
Securities. Also although most Automobile Contracts grant a
security interest in the motor vehicle being financed, in most
states the security interest in a motor vehicle must be noted on
the certificate of title to create an enforceable security
interest against competing claims of other parties. Due to the
large number of vehicles involved, however, the certificate of
title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually
is not amended to reflect the assignment of the seller's security
interest for the benefit of the holders of the Automobile
Receivable Securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle
owner the right to assert against the holder of the owner's
Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the Automobile Receivable
Securities.
PAGE 340
Credit Card Receivable Securities. The Fund may invest in
Asset Backed Securities backed by receivables from revolving
credit card agreements ("Credit Card Receivable Securities").
Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile
Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order
to lengthen the maturity of Credit Card Receivable Securities,
most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through
to the security holder and principal payments received on such
Accounts are used to fund the transfer to the pool of assets
supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial
fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during
the initial period and the non-occurrence of specified events.
An acceleration in cardholders' payment rates or any other event
which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could
shorten the weighted average life and yield of the Credit Card
Receivable Security.
Credit cardholders are entitled to the protection of a
number of state and federal consumer credit laws, many of which
give such holder the right to set off certain amounts against
balances owed on the credit card, thereby reducing amounts paid
on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. T. Rowe Price anticipates that Asset Backed
Securities backed by assets other than those described above will
be issued in the future. The Fund may invest in such securities
in the future if such investment is otherwise consistent with its
investment objective and policies.
There are, of course, other types of securities that are, or
may become available, which are similar to the foregoing, and the
Fund reserves the right to invest in these securities.
PAGE 341
Industry Concentration
When the market for corporate debt securities is dominated
by issues in the gas utility, gas transmission utility, electric
utility, telephone utility, or petroleum industry, the Fund will
as a matter of fundamental policy concentrate 25% or more, but
not more than 50% of its assets, in any one such industry, if the
Fund has cash for such investment (i.e., the Fund will not sell
portfolio securities to raise cash) and, if in T. Rowe Price's
judgment, the return available and the marketability, quality,
and availability of the debt securities of such industry
justifies such concentration in light of the Fund's investment
objectives. Domination would exist with respect to any one such
industry, when, in the preceding 30-day period, more than 25% of
all new-issue corporate debt offerings (within the four highest
grades of Moody's or Standard & Poor's and with maturities of 10
years or less) of $25,000,000 or more consisted of issues in such
industry. Although the Fund will normally purchase corporate
debt securities in the secondary market as opposed to new
offerings, T. Rowe Price believes that the new issue-based
dominance standard, as defined above, is appropriate because it
is easily determined and represents an accurate correlation to
the secondary market. Investors should understand that
concentration in any industry may result in increased risk.
Investments in any of these industries may be affected by
environmental conditions, energy conservation programs, fuel
shortages, difficulty in obtaining adequate return on capital in
financing operations and large construction programs, and the
ability of the capital markets to absorb debt issues. In
addition, it is possible that the public service commissions
which have jurisdiction over these industries may not grant
future increases in rates sufficient to offset increases in
operating expenses. These industries also face numerous
legislative and regulatory uncertainties at both federal and
state government levels. Management believes that any risk to
the Fund which might result from concentration in any industry
will be minimized by the Fund's practice of diversifying its
investments in other respects. The Fund's policy with respect to
industry concentration is a fundamental policy. (For investment
restriction on industry concentration, see Investment Restriction
(3) on page __.)
PAGE 342
Equity Income and International Stock Funds
Warrants
The Fund may invest in warrants. Warrants are pure
speculation in that they have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but
only the right to buy them. Warrants differ from call options in
that warrants are issued by the issuer of the security which may
be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying
securities.
Hybrid Instruments (All Funds, except Prime Reserve)
Hybrid Instruments have been developed and combine the
elements of futures contracts or options with those of debt,
preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt
security, preferred stock, depository share, trust certificate,
certificate of deposit or other evidence of indebtedness on which
a portion of or all interest payments, and/or the principal or
stated amount payable at maturity, redemption or retirement, is
determined by reference to prices, changes in prices, or
differences between prices, of securities, currencies,
intangibles, goods, articles or commodities (collectively
"Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency
exchange rates, commodity indices, and securities indices
(collectively "Benchmarks"). Thus, Hybrid Instruments may take a
variety of forms, including, but not limited to, debt instruments
with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity
or securities index at a future point in time, preferred stock
with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating
exposure to a particular market, or segment of a market, with the
objective of enhancing total return. For example, a Fund may
wish to take advantage of expected declines in interest rates in
several European countries, but avoid the transactions costs
PAGE 343
associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar-
denominated Hybrid Instrument whose redemption price is linked to
the average three year interest rate in a designated group of
countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was
lower than a specified level, and payoffs of less than par if
rates were above the specified level. Furthermore, the Fund
could limit the downside risk of the security by establishing a
minimum redemption price so that the principal paid at maturity
could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an embedded put
option, would be to give the Fund the desired European bond
exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Fund could
lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the
Hybrid.
The risks of investing in Hybrid Instruments reflect a
combination of the risks of investing in securities, options,
futures and currencies. Thus, an investment in a Hybrid
Instrument may entail significant risks that are not associated
with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars or
bears interest either at a fixed rate or a floating rate
determined by reference to a common, nationally published
Benchmark. The risks of a particular Hybrid Instrument will, of
course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the
instrument is linked. Such risks generally depend upon factors
which are unrelated to the operations or credit quality of the
issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events,
the supply and demand for the Underlying Assets and interest rate
movements. In recent years, various Benchmarks and prices for
Underlying Assets have been highly volatile, and such volatility
may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for
a discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry
greater market risks than traditional debt instruments.
Depending on the structure of the particular Hybrid Instrument,
PAGE 344
changes in a Benchmark may be magnified by the terms of the
Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices
of the Hybrid Instrument and the Benchmark or Underlying Asset
may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred
dividends at below market (or even relatively nominal) rates.
Alternatively, Hybrid Instruments may bear interest at above
market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used to
structure the Hybrid Instrument. Leverage risk occurs when the
Hybrid Instrument is structured so that a given change in a
Benchmark or Underlying Asset is multiplied to produce a greater
value change in the Hybrid Instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs of
a particular investor, and therefore, the number of investors
that are willing and able to buy such instruments in the
secondary market may be smaller than that for more traditional
debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market
without the guarantee of a central clearing organization or in a
transaction between the Fund and the issuer of the Hybrid
Instrument, the creditworthiness of the counter party or issuer
of the Hybrid Instrument would be an additional risk factor which
the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which
regulates the offer and sale of securities by and to U.S.
persons, or any other governmental regulatory authority.
The various risks discussed above, particularly the market
risk of such instruments, may in turn cause significant
fluctuations in the net asset value of the Fund. Accordingly,
the Fund will limit its investments in Hybrid Instruments to 10%
of net assets. However, because of their volatility, it is
possible that the Fund's investment in Hybrid Instruments will
account for more than 10% of the Fund's return (positive or
negative).
PAGE 345
Equity Income and Short-Term Bond Funds
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or
delayed delivery basis ("When-Issueds") and may purchase
securities on a forward commitment basis ("Forwards"). Any or
all of the Fund's investments in debt securities may be in the
form of When-Issueds and Forwards. The price of such securities,
which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs
within 90 days of the purchase for the When-Issueds, but may be
substantially longer for Forwards. During the period between
purchase and settlement, no payment is made by a Fund to the
issuer and no interest accrues to the Fund. The purchase of
these securities will result in a loss if their value declines
prior to the settlement date. This could occur, for example, if
interest rates increase prior to settlement. The longer the
period between purchase and settlement, the greater the risks
are. At the time the Fund makes the commitment to purchase these
securities, it will record the transaction and reflect the value
of the security in determining its net asset value. The Fund
will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value
to commitments for them during the time between the purchase and
the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not
available to the Fund (to the extent of the securities used for
cover). Such securities either will mature or, if necessary, be
sold on or before the settlement date.
To the extent the Fund remains fully or almost fully
invested (in securities with a remaining maturity of more than
one year) at the same time it purchases these securities, there
will be greater fluctuations in the Fund's net asset value than
if the Fund did not purchase them.
All Funds
Illiquid or Restricted Securities
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities
Act of 1933 (the "1933 Act"). Where registration is required, a
Fund may be obligated to pay all or part of the registration
PAGE 346
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,
a 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 Funds' Boards of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid
securities, a Fund should be in a position where more than 15%
(10% for Prime Reserve Fund) 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 Funds 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 Funds, to trade in
privately placed securities even though such securities are not
registered under the 1933 Act. T. Rowe Price or Price-Fleming,
under the supervision of the Funds' Boards of Directors/Trustees,
will consider whether securities purchased under Rule 144A are
illiquid and thus subject to each Fund's restriction of investing
no more than 15% (10% for Prime Reserve Fund) 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, T. Rowe Price or Price-Fleming will consider the
trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, T.
Rowe Price or Price-Fleming could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchases,
(3) dealer undertakings to make a market, and (4) the nature of
the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the
mechanics of transfer). The liquidity of Rule 144A securities
would be monitored, and if as a result of changed conditions it
is determined that a Rule 144A security is no longer liquid, a
Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the
Fund does not invest more than 15% (10% for Prime Reserve Fund)
of its assets in illiquid securities. Investing in Rule 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.
PAGE 347
Prime Reserve and Short-Term Bond Funds
Additional Adjustable Rate Securities
Certain securities may be issued with adjustable interest
rates that are reset periodically by pre-determined formulas or
indexes in order to minimize movements in the principal value of
the investment. Such securities may have long-term maturities,
but may be treated as a short-term investment under certain
conditions. Generally, as interest rates decrease or increase,
the potential for capital appreciation or depreciation on these
securities is less than for fixed-rate obligations. These
securities may take the following forms:
Variable Rate Securities. Variable rate instruments are
those whose terms provide for the adjustment of their
interest rate on set dates and which, upon adjustment, can
reasonably be expected to have a market value which
approximates its par value. A variable rate instrument, the
principal amount of which is scheduled to be paid in 397
calendar days or less, is deemed to have a maturity equal to
the period remaining until the next readjustment of the
interest rate. A variable rate instrument which is subject
to a demand feature entitles the purchaser to receive the
principal amount of the underlying security or securities,
either (i) upon notice of no more than 30 days, or (ii) at
specified intervals not exceeding 397 calendar days and upon
no more than 30 days' notice, is deemed to have a maturity
equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining
until the principal amount can be recovered through demand.
Floating Rate Securities. Floating rate instruments are
those whose terms provide for the adjustment of their
interest rates whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a
market value that approximates its par value. The maturity
of a floating rate instrument is deemed to be the period
remaining until the date (noted on the face of the
instrument) on which the principal amount must be paid, or
in the case of an instrument called for redemption, the date
on which the redemption payment must be made. Floating rate
instruments with demand features are deemed to have a
maturity equal to the period remaining until the principal
amount can be recovered through demand.
PAGE 348
Put Option Bonds. Long-term obligations with maturities
longer than one year may provide purchasers an optional or
mandatory tender of the security at par value at
predetermined intervals, often ranging from one month to
several years (e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a maturity
equal to the period remaining to the put date.
There are, of course, other types of securities that are, or
may become, available, which are similar to the foregoing.
International Stock Fund
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, Hungary, Poland,
Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, Latin America, 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.
PAGE 349
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.
PORTFOLIO MANAGEMENT PRACTICES
All Funds
Lending of Portfolio Securities
Securities loans are made to broker-dealers, institutional
investors or other persons, pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash,
U.S. government securities, letters of credit or such other
collateral as may be permitted under its investment program.
While the securities are being lent, each 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. Each 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 Funds will
not have the right to vote securities while they are being lent,
but it will call a loan in anticipation of any important vote.
The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by T. Rowe Price or Price-Fleming to be of good standing
and will not be made unless, in the judgment of T. Rowe Price or
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, each Fund may make loans to, or borrow funds from,
other mutual funds sponsored or advised by T. Rowe Price or
Price-Fleming (collectively, "Price Funds"). The Funds have no
current intention of engaging in these practices at this time.
PAGE 350
Repurchase Agreements
Each Fund may enter into a repurchase agreement through
which an investor (such as the Fund) purchases a security (known
as the "underlying security") from a well-established securities
dealer or a bank that is a member of the Federal Reserve System.
Any such dealer or bank will be on T. Rowe Price's approved list.
At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified
interest. Repurchase agreements are generally for a short period
of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be treated as
illiquid securities. Each Fund will only enter into repurchase
agreements where (i) Prime Reserve Fund -- the underlying
securities are either U.S. government securities or securities
that, at the time the repurchase agreement is entered into, are
rated in the highest rating category by the requisite number of
NRSROs (as required by Rule 2a-7 under the 1940 Act) and
otherwise are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase
directly, Short-Term Bond, Equity Income, and International Stock
Funds -- the underlying securities are of the type (excluding
maturity limitations) which each 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, a Fund could experience both delays in liquidating the
underlying security and losses, including: (a) possible decline
in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
Short-Term Bond, Equity Income and International Stock Funds
Writing Covered Call Options
Each Fund may write (sell) "covered" call options and
purchase options to close out options previously written by a
Fund. In writing covered call options, a Fund expects to
generate additional premium income which should serve to enhance
the Fund's total return and reduce the effect of any price
PAGE 351
decline of the security or currency involved in the option.
Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's or Price-Fleming's opinion,
are not expected to have any major price increases or moves in
the near future but which, over the long term, are deemed to be
attractive investments for a 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 Funds will write only covered call options. This means
that a Fund will own the security or currency subject to the
option or an option to purchase the same underlying security or
currency, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to the
fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with each 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 Funds
will not do), but capable of enhancing a Fund's total return.
When writing a covered call option, a Fund, in return for the
premium, gives up the opportunity for profit from a price
increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should
the price of the security or currency decline. Unlike one who
PAGE 352
owns securities or currencies not subject to an option, a 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 a 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 Funds do not consider a security or currency
covered by a call to be "pledged" as that term is used in the
Funds' policy which limits the pledging or mortgaging of its
assets.
The premium received is the market value of an option. The
premium a Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made,
T. Rowe Price or 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 a 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 a 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 a Fund to write another call
option on the underlying security or currency with either a
different exercise price or expiration date or both. If a 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
PAGE 353
to, or concurrently with, the sale of the security or currency.
There is, of course, no assurance that a Fund will be able to
effect such closing transactions at favorable prices. If a Fund
cannot enter into such a transaction, it may be required to hold
a security or currency that it might otherwise have sold. When a
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. Each 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 a 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, a 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.
A 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.
In order to comply with the requirements of several states,
each 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 each Fund obtain a waiver of their application, each
Fund reserves the right to increase this percentage. In
calculating the 25% limit, each 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.
PAGE 354
Writing Covered Put Options
The Funds may write American or European style covered put
options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at
the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
Each 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 each
Fund will own an option to sell the underlying security or
currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all
times while the put option is outstanding. (The rules of a
clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)
A Fund would generally write covered put options in
circumstances where T. Rowe Price or 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 a 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 a Fund would also receive interest on debt securities
or currencies maintained to cover the exercise price of the
option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a
transaction would be that the market price of the underlying
security or currency would decline below the exercise price less
the premiums received. Such a decline could be substantial and
result in a significant loss to the Fund. In addition, a 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.
PAGE 355
In order to comply with the requirements of several states,
the Funds 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 each Fund's net assets. Should these state laws change
or should each Fund obtain a waiver of their application, each
Fund reserves the right to increase this percentage. In
calculating the 25% limit, each 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
Each Fund may purchase American or European style put
options. As the holder of a put option, each Fund has the right
to sell the underlying security or currency at the exercise price
at any time during the option period (American style) or at the
expiration of the option (European style). Each Fund may enter
into closing sale transactions with respect to such options,
exercise them or permit them to expire. Each 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.
A 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 a 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 T. Rowe Price or 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.
Each Fund may also purchase put options at a time when the
Fund does not own the underlying security or currency. Although
the Equity Income Fund has no current intention, in the
foreseeable future, of purchasing put options at a time when the
Fund does not own the underlying security, it reserves the right
PAGE 356
to do so. By purchasing put options on a security or currency it
does not own, a 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, a 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, each
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing put and call options. Should these
state laws change or should each Fund obtain a waiver of their
application, each Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The premium paid
by a 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 each
Fund is computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset will be
terminated upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery
of the underlying security or currency upon the exercise of the
option.
Purchasing Call Options
The Funds may purchase American or European style call
options. As the holder of a call option, each 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). Each Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. Each Fund may
purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its
current return. Each 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 a Fund for the purpose of
acquiring the underlying securities or currencies for its
PAGE 357
portfolio. Utilized in this fashion, the purchase of call
options enables a 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 a 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, a 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, each
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 each Fund obtain a waiver of their
application, each Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. Each Fund may
also purchase call options on underlying securities or currencies
it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for
this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Short-Term Bond, Equity Income, and International Stock
Funds may engage in transactions involving dealer options.
Certain risks are specific to dealer options. While a 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 a 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, a 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 a 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
PAGE 358
with the dealer to which the Fund originally wrote the option.
While each Fund will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of
entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Until a
Fund, as a covered dealer call option writer, is able to effect a
closing purchase transaction, it will not be able to liquidate
securities (or other assets) or currencies used as cover until
the option expires or is exercised. In the event of insolvency
of the contra party, a Fund may be unable to liquidate a dealer
option. With respect to options written by a Fund, the inability
to enter into a closing transaction may result in material losses
to the Fund. For example, since a Fund must maintain a secured
position with respect to any call option on a security it writes,
the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This
requirement may impair a Fund's ability to sell portfolio
securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased
dealer options and the assets used to secure the written dealer
options are illiquid securities. The Funds 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, each 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, each Fund will change its treatment
of such instrument accordingly.
Equity Income, International Stock and Short-Term Bond Funds
Futures Contracts
Transactions in Futures
The Funds may enter into futures contracts, including stock
index interest rate and currency futures ("futures or futures
contracts").
Stock index futures contracts may be used to provide a hedge
for a portion of the Equity Income and International Stock Funds'
PAGE 359
portfolios, 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 a Fund. In this regard, a 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. Futures can also be used as an efficient means of
regulating the Fund's exposure to the market.
The Funds will enter into futures contracts which are traded
on national or foreign futures exchange and are standardized as
to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the CFTC. Futures are traded in
London at the London International Financial Futures Exchange, in
Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes,
futures contracts offer an effective and relatively low cost
means of implementing each 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 Funds may not purchase or sell futures contracts or
related options if, with respect to positions which do not
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
PAGE 360
these positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy,
options on futures contracts and foreign currency options traded
on a commodities exchange will be considered "related options."
This policy may be modified by the Board of Directors/Trustees
without a shareholder vote and does not limit the percentage of
the Fund's assets at risk to 5%.
In accordance with the rules of the State of California, the
Fund may have to apply the above 5% test without excluding the
value of initial margin and premiums paid for bona fide hedging
positions.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by each 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
identified in an account with the Fund's custodian to cover the
position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover or held in an
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures
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 with respect
to the Equity Income and International Stock Funds, and a debt
security with respect to the Short-Term Bond Fund) for a
specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures
PAGE 361
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 a 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 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." Each 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
PAGE 362
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 the Short-Term Bond Fund, as an example of an offsetting
transaction in which the underlying instrument is not delivered,
the contractual obligations arising from the sale of one contract
of September Treasury Bills on an exchange may be fulfilled at
any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the
purchase of one contract of September Treasury Bills on the same
exchange. In such instance, the difference between the price at
which the futures contract was sold and the price paid for the
offsetting purchase, after allowance for transaction costs,
represents the profit or loss to the Fund.
With respect to the Equity Income Fund, for example, the
Standard & Poor's 500 Stock Index is composed of 500 selected
common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the
common stocks included in the Index, and the Index fluctuates
with changes in the market values of those common stocks. In the
case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $75,000 (500 units x $150). The stock
index futures contract specifies that no delivery of the actual
stock making up the index will take place. Instead, settlement
in cash occurs. Over the life of the contract, the gain or loss
realized by the Fund will equal the difference between the
purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into
a futures contract to buy 500 units of the S&P 500 Index at a
specified future date at a contract price of $150 and the S&P 500
Index is at $154 on that future date, the Fund will gain $2,000
(500 units x gain of $4). If the Fund enters into a futures
contract to sell 500 units of the stock index at a specified
future date at a contract price of $150 and the S&P 500 Index is
at $152 on that future date, the Fund will lose $1,000 (500 units
x loss of $2).
PAGE 363
With respect to the International Stock Fund, 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 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
PAGE 364
losses in excess of the amount invested in the futures contract.
However, a 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 a 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. Each Fund may elect to close some or all of its
futures positions at any time prior to their expiration. A Fund
would do so to reduce exposure represented by long futures
positions or increase exposure represented by short futures
positions. Each 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 Funds intend 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, a 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, a
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
PAGE 365
risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. T. Rowe Price
and 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 Funds for hedging
purposes is also subject to T. Rowe Price's and Price-Fleming's
ability to correctly predict movements in the direction of the
market. It is possible that, when a 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, T. Rowe
Price and Price-Fleming believe that over time the value of a
Fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It
is also possible that if a 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 a 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). A Fund
might have to sell underlying instruments at a time when it would
be disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
PAGE 366
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by T.
Rowe Price or Price-Fleming might not result in a successful
hedging transaction over a very short time period.
Options on Futures Contracts
The Funds may purchase and sell options on the same types of
futures in which they may invest.
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. 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 with respect to the Equity
Income and International Stock Funds, or financial indices with
respect to the Short-Term Bond Funds. 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 Funds
and other T. Rowe Price Funds. Such aggregated orders would be
PAGE 367
allocated among the Funds and the other T. Rowe Price Funds in a
fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Funds seek to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instruments, or
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 each Fund has no current intention of engaging in
financial futures or options transactions other than those
described above, it reserves the right to do so. Such futures
and options trading might involve risks which differ from those
involved in the futures and options described above.
PAGE 368
Foreign Futures and Options-Equity Income, International Stock,
and Short-Term Bond Funds
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.
Equity Income, International Stock, and Short-Term Bond Funds
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.
PAGE 369
The Funds may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
First, when a 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, a Fund will be
able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
Second, when T. Rowe Price or Price-Fleming believe that the
currency of a particular foreign country may experience a
substantial movement against another currency, including the U.S.
dollar, it may enter into a forward contract to sell or buy the
amount of the former foreign currency, approximating the value of
some or all of a Fund's portfolio securities denominated in such
foreign currency. Alternatively, where appropriate, each Fund
may hedge all or part of its foreign currency exposure through
the use of a basket of currencies or a proxy currency where such
currency or currencies act as an effective proxy for other
currencies. In such a case, the Fund may enter into a forward
contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency.
The use of this basket hedging technique may be more efficient
and economical than entering into separate forward contracts for
each currency held in the Fund. The precise matching of the
forward contract amounts and the value of the securities involved
will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the
date the forward contract is entered into and the date it
matures. The projection of short-term currency market movement
is extremely difficult, and the successful execution of a short-
term hedging strategy is highly uncertain. Under normal
circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment
decisions made with regard to overall diversification strategies.
However, T. Rowe Price and Price-Fleming believe that it is
important to have the flexibility to enter into such forward
PAGE 370
contracts when either determines that the best interests of the
Fund will be served.
Third, the Short-Term Bond Fund may use forward contracts
when the Fund wishes to hedge out of the dollar into a foreign
currency in order to create a synthetic bond or money market
instrument -- the security would be issued by a U.S. issuer but
the dollar component would be transformed into a foreign currency
through a forward contract.
A Fund may enter into forward contracts for any other
purpose consistent with the Fund's investment objective and
program. However, a Fund will not enter into a forward contract,
or maintain exposure to any such contract(s), if the amount of
foreign currency required to be delivered thereunder would exceed
the Fund's holdings of liquid, high-grade debt securities and
currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, a Fund
may net offsetting positions.
At the maturity of a forward contract, a Fund may either
sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and either extend the
maturity of the forward contract (by "rolling" that contract
forward) or may initiate a new forward contract.
If a 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 a 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 a Fund's entering into a
forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices
increase, a 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.
A Fund's dealing in forward foreign currency exchange
contracts will generally be limited to the transactions described
above. However, the Funds reserve the right to enter into
forward foreign currency contracts for different purposes and
under different circumstances. Of course, a Fund is not required
PAGE 371
to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed
appropriate by T. Rowe Price or 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 each 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 a 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 discussion herein may refer to transactions in which the
Equity Income Fund does not engage. The Fund's prospectus sets
forth the types of transactions permissible for the Fund.
The Funds may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures
on currencies, which may 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 a 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.
A 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.
PAGE 372
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.
In order for each 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 a Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, a 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 a 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.
PAGE 373
INVESTMENT RESTRICTIONS
Fundamental policies 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 each
Fund's Board of Directors/Trustees without shareholder approval.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after,
and is caused by, an acquisition of securities or assets of, or
borrowings by, a Fund.
All Funds
Fundamental Policies
As a matter of fundamental policy, each Fund may not:
(1) Borrowing. Borrow money except that each Fund may
(i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments
or engage in other transactions, which may involve
a borrowing, in a manner consistent with a Fund's
investment objective and program, provided that
the combination of (i) and (ii) shall not exceed
33 1/3% of the value of a Fund's total assets
(including the amount borrowed) less liabilities
(other than borrowings) or such other percentage
permitted by law. Any borrowings which come to
exceed this amount will be reduced in accordance
with applicable law. Each Fund may borrow from
banks, other Price Funds or other persons to the
extent permitted by applicable law;
(2) Commodities. Purchase or sell physical
commodities; except that the Funds (other than the
Prime Reserve Fund) may enter into futures
contracts and options thereon;
(3) (a) Industry Concentration (Equity Income and
International Stock Funds). Purchase the
securities of any issuer if, as a result, more
than 25% of the value of each Fund's total assets
PAGE 374
would be invested in the securities of issuers
having their principal business activities in the
same industry;
(b) Industry Concentration (Prime Reserve Fund).
Purchase the securities of any issuer if, as a
result, more than 25% of the value of the Fund's
total assets would be invested in the securities
of issuers having their principal business
activities in the same industry; provided,
however, that this limitation does not apply to
securities of the banking industry including, but
not limited to, certificates of deposit and
bankers' acceptances; and
(c) Industry Concentration (Short-Term Bond
Fund). Purchase the securities of any issuer if,
as a result, more than 25% of the value of the
Fund's total assets would be invested in the
securities of issuers having their principal
business activities in the same industry;
provided, however, that the Fund will normally
invest more than 25% of its total assets in the
securities of the banking industry including, but
not limited to, bank certificates of deposit and
bankers' acceptances when the Fund's position in
issues maturing in one year or less equals 35% or
more of the Fund's total assets; provided,
further, that the Fund will invest more than 25%
of its total assets, but not more than 50%, in any
one of the gas utility, gas transmission utility,
electric utility, telephone utility, and petroleum
industries under certain circumstances;
(4) Loans. Make loans, although each Fund may (i)
lend portfolio securities and participate in an
interfund lending program with other Price Funds
provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed
33 1/3% of the value of a Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt
securities and purchase debt;
PAGE 375
(5) Percent Limit on Assets Invested in Any One
Issuer. Purchase a security if, as a result, with
respect to 75% of the value of its total assets,
more than 5% of the value of each Fund's total
assets would be invested in the securities of a
single issuer, except securities issued or
guaranteed by the U.S. Government or any of its
agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One
Issuer. Purchase a security if, as a result, with
respect to 75% of the value of each Fund's total
assets, more than 10% of the outstanding voting
securities of any issuer would be held by a Fund
(other than obligations issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities);
(7) Real Estate. Purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prevent each
Fund from investing in securities or other
instruments backed by real estate or in securities
of companies engaged in the real estate business);
(8) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940; or
(9) Underwriting. Underwrite securities issued by
other persons, except to the extent that each 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.
NOTES
The following notes should be read in connection with
the above-described fundamental policies. The notes are
not fundamental policies.
With respect to investment restrictions (1) and (4),
each Fund will not borrow from or lend to any other
Price Fund unless each Fund applies for and receives an
exemptive order from the SEC or the SEC issues rules
PAGE 376
permitting such transactions. Each Fund has no current
intention of engaging in any such activity and there is
no assurance the SEC would grant any order requested by
a Fund or promulgate any rules allowing the
transactions.
With respect to investment restriction (1), the Prime
Reserve Fund has no current intention of engaging in any
borrowing transactions.
With respect to investment restriction (2), each Fund
does not consider currency contracts or hybrid
investments to be commodities.
For purposes of investment restriction (3), U.S., state
or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industries are determined by reference to the
classifications of industries set forth in each Fund's
semi-annual and annual reports.
For purposes of investment restriction (4), each Fund
will consider the acquisition of a debt security to
include the execution of a note or other evidence of an
extension of credit with a term of more than nine
months.
For purposes of investment restriction (5), the Prime
Reserve and Short-Term Bond Funds will consider a
repurchase agreement fully collateralized with U.S.
government securities to be U.S. government securities.
Operating Policies
As a matter of operating policy, each Fund may not:
(1) Borrowing. Each Fund will not purchase additional
securities when money borrowed exceeds 5% of its
total assets;
(2) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
PAGE 377
(3) Equity Securities (Prime Reserve and Short-Term
Bond Funds). Purchase any common stocks or other
equity securities, or securities convertible into
equity securities except as set forth in its
operating policy on investment companies;
(4) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not
represent bona fide hedging, the aggregate initial
margin and premiums on such positions would exceed
5% of each Fund's net asset value;
(5) (a) Illiquid Securities (Equity Income and
International Stock Funds). Purchase illiquid
securities and securities of unseasoned issuers
if, as a result, more than 15% of its net assets
would be invested in such securities, provided
that each Fund will not invest more than 5% of its
total assets in restricted securities and not more
than 5% in securities of unseasoned issuers.
Securities eligible for resale under Rule 144A of
the Securities Act of 1933 are not included in the
5% limitation but are subject to the 15%
limitation; and
(b) Illiquid Securities (Prime Reserve and Short-
Term Bond Funds). Purchase illiquid securities
if, as a result, more than 15% (10% for Prime
Reserve Fund) of its net assets would be invested
in such securities;
(6) 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, and in the case of
the Prime Reserve Fund, only securities of other
money market funds. Duplicate fees may result
from such purchases;
(7) Margin. Purchase securities on margin, except (i)
for use of short-term credit necessary for
clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection
with futures contracts or other permissible
investments;
PAGE 378
(8) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by each
Fund as security for indebtedness except as may be
necessary in connection with permissible
borrowings or investments and then such
mortgaging, pledging or hypothecating may not
exceed 33 1/3% of a Fund's total assets at the
time of borrowing or investment;
(9) Oil and Gas Programs. Purchase participations or
other direct interests in or enter into leases
with respect to, oil, gas, or other mineral
exploration or development programs;
(10) Options, Etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement
of Additional Information;
(11) Ownership of Portfolio Securities by Officers and
Directors/Trustees. Purchase or retain the
securities of any issuer if those officers and
directors/trustees of a 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;
(12) Short Sales. Effect short sales of securities;
(13) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any foreign, state or local government, their
agencies or instrumentalities) if, as a result,
more than 5% of the value of each Fund's total
assets would be invested in the securities of
issuers which at the time of purchase had been in
operation for less than three years (for this
purpose, the period of operation of any issuer
shall include the period of operation of any
predecessor or unconditional guarantor of such
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or
PAGE 379
(14) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net
assets of each Fund would be invested in warrants
which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of
the value of the net assets of a Fund would be
invested in warrants whether or not so listed.
For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or
market and warrants acquired by each Fund in units
or attached to securities may be deemed to be
without value.
International Stock Fund
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 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.
MANAGEMENT OF FUNDS
The officers and directors/trustees of each 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/trustees who are considered "interested persons" of T.
Rowe Price or the Funds as defined under Section 2(a)(19) of the
Investment Company Act of 1940 are noted with an asterisk (*).
The directors/trustees are referred to as inside
directors/trustees by virtue of their officership, directorship
and/or employment with T. Rowe Price.
PAGE 380
Prime Reserve Fund
ROBERT P. BLACK, Director--Retired; formerly President, Federal
Reserve Bank of Richmond; Address: 10 Dahlgren Road, Richmond,
Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State
College; Director, Maryland Chamber of Commerce and Provident
Bank of Maryland; Former President, Baltimore Area Council Boy
Scouts of America; Vice President, Board of Directors, The
Walters Art Gallery; Address: 2000 North Warwick Avenue,
Baltimore, Maryland 21216
*GEORGE J. COLLINS, Vice President and Director--President, Chief
Executive Officer and Managing Director, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Retirement
Plan Services, Inc. and T. Rowe Price Trust Company; Chartered
Investment Counselor
ANTHONY W. DEERING, Director--Director, President and Chief
Executive 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
*CARTER O. HOFFMAN, Chairman of the Board--Managing Director, T.
Rowe Price; Chartered Investment Counselor
F. PIERCE LINAWEAVER, Director--President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
President, EA Engineering, Inc., Baltimore, Maryland; Address:
The Legg Mason Tower, 111 South Calvert Street, Suite 2700,
Baltimore, Maryland 21202
JAMES S. RIEPE, Vice President and Director--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.
JOHN G. SCHREIBER, Director--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMLI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (12/70-12/90) Executive
Vice President, JMB Realty Corporation, a national real estate
investment manager and developer; Address: 1115 East Illinois
Road, Lake Forest, Illinois 60045
ANNE MARIE WHITTEMORE, Director--Partner, law firm of McGuire,
Woods, Battle & Boothe, Richmond, Virginia; formerly, Chairman
(1991-1993) and Director (1989-1993), Federal Reserve Bank of
Richmond; Director, Owens & Minor, Inc., USF&G Corporation, Old
Dominion University, and James River Corporation; Member,
Richmond Bar Association and American Bar Association; Address:
PAGE 381
One James Center, 901 East Cary Street, Richmond, Virginia 23219-
4030
EDWARD A. WIESE, President--Vice President, T. Rowe Price, Rowe
Price-Fleming International, Inc. and T. Rowe Price Trust Company
ROBERT P. CAMPBELL, Executive 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
JAMES M. MCDONALD, Executive Vice President--Vice President, T.
Rowe Price
PATRICE L. BERCHTENBREITER, Vice President--Vice President, T.
Rowe Price
PAUL W. BOLTZ, Vice President--Vice President and Financial
Economist of T. Rowe Price
MICHAEL J. CONELIUS, Vice President--Vice President, Rowe-Price
Fleming and Assistant Vice President, T. Rowe Price
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
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant 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
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
PAGE 382
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Group
Person, from Fund Accrued as Paid to
Position Expensesa Part of Fundb Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $7,263 N/A $52,667
Director
Calvin W. Burnett, 7,263 N/A 55,583
PH.D, Director
Anthony W. Deering, 7,263 N/A 66,333
Director
F. Pierce Linaweaver, 7,263 N/A 55,583
Director
John G. Schreiber, 7,263 N/A 55,667
Director
Anne Marie Whittemore, 7,263 N/A 32,667
Director
George J. Collins, 0 N/A 0
Directord
Carter O. Hoffman, 0 N/A 0
Chairman of the Boardd
James S. Riepe, 0 N/A 0
Directord
a Amounts in this Column are for the period June 1, 1993
through May 31, 1994.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994, included
64 funds at December 31, 1994.
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no renumeration from the
Fund.
PAGE 383
Short-Term Bond Fund
ROBERT P. BLACK, Director--Retired; formerly President, Federal
Reserve Bank of Richmond; Address: 10 Dahlgren Road, Richmond,
Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State
College; Director, Maryland Chamber of Commerce and Provident
Bank of Maryland; Former President, Baltimore Area Council Boy
Scouts of America; Vice President, Board of Directors, The
Walters Art Gallery; Address: 2000 North Warwick Avenue,
Baltimore, Maryland 21216
*GEORGE J. COLLINS, Chairman of the Board--President, Chief
Executive Officer and Managing Director, Price Associates;
Director, Rowe Price-Fleming International, Inc., T. Rowe Price
Retirement Plan Services, Inc. and T. Rowe Price Trust Company;
Chartered Investment Counselor
ANTHONY W. DEERING, Director--Director, President and Chief
Executive 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
F. PIERCE LINAWEAVER, Director--President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
President, EA Engineering, Inc., Baltimore, Maryland; Address:
The Legg Mason Tower, 111 South Calvert Street, Suite 2700,
Baltimore, Maryland 21202
*JAMES S. RIEPE, Vice President and Director--Managing Director,
Price Associates; 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.
JOHN G. SCHREIBER, Director--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMLI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (12/70-12/90) Executive
Vice President, JMB Realty Corporation, a national real estate
investment manager and developer; Address: 1115 East Illinois
Road, Lake Forest, Illinois 60045
ANNE MARIE WHITTEMORE, Director--Partner, law firm of McGuire,
Woods, Battle & Boothe, Richmond, Virginia; formerly, Chairman
(1991-1993) and Director (1989-1993), Federal Reserve Bank of
Richmond; Director, Owens & Minor, Inc., USF&G Corporation, Old
Dominion University, and James River Corporation; Member,
Richmond Bar Association and American Bar Association; Address:
One James Center, 901 East Cary Street, Richmond, Virginia 23219-
4030
PAGE 384
VEENA A. KUTLER, President--Vice President, T. Rowe Price and
Rowe Price-Fleming International, Inc.
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
CHRISTY M. DIPIETRO, Vice President--Vice President, T. Rowe
Price and T. Rowe Price Trust Company
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
JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Rowe Price-Fleming International, 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
PATRICIA S. BUTCHER, Assistant Secretary--Assistant 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
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Group
Person, from Fund Accrued as Paid to
Position Expensesa Part of Fundb Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $2,069 N/A $52,667
Director
PAGE 385
Calvin W. Burnett, 2,069 N/A 55,583
PH.D, Director
Anthony W. Deering, 2,069 N/A 66,333
Director
F. Pierce Linaweaver, 2,069 N/A 55,583
Director
John G. Schreiber, 2,069 N/A 55,667
Director
Anne Marie Whittemore, 2,069 N/A 32,667
Director
George J. Collins, 0 N/A 0
Chairman of the Boardd
James S. Riepe, 0 N/A 0
Directord
a Amounts in this Column are for the period June 1, 1993
through May 31, 1994.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994, included
64 funds at December 31, 1994.
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no renumeration from the
Fund.
Equity Income Fund
*THOMAS H. BROADUS, JR., Vice President and Trustee--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
LEO C. BAILEY, Trustee--Retired; Address: 3396 South Placita
Fabula, Green Valley, Arizona 85614
DONALD W. DICK, JR., Trustee--Principal, Overseas Partners,
Inc., a financial investment firm; formerly (6/65-3/89) Director
and Vice President-Consumer Products Division, McCormick &
Company, Inc., international food processors; Director, Waverly,
Inc., Baltimore, Maryland; Address: 111 Pavonia Avenue, Suite
334, Jersey City, New Jersey 07310
DAVID K. FAGIN, Trustee--Chairman, Chief Executive Officer and
Director, Golden Star Resources, Ltd.; formerly (1986-7/91)
President, Chief Operating Officer and Director, Homestake Mining
PAGE 386
Company; Address: One Norwest Center, 1700 Lincoln Street, Suite
1950, Denver, Colorado 80203
ADDISON LANIER, Trustee--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
JOHN K. MAJOR, Trustee--Chairman of the Board and President, KCMA
Incorporated, Tulsa, Oklahoma; Address: 126 E. 26 Place, Tulsa,
Oklahoma 74114-2422
HANNE M. MERRIMAN, Trustee--Retail business consultant; formerly
President and Chief Operating Officer (1991-92), Nan Duskin,
Inc., a women's specialty store, Director (1984-1990) and
Chairman (1989-90) Federal Reserve Bank of Richmond, and
President and Chief Executive Officer (1988-89), Honeybee, Inc.,
a division of Spiegel, Inc.; Director, Central Illinois Public
Service Company, CIPSCO Incorporated, The Rouse Company, State
Farm Mutual Automobile Insurance Company and USAir Group, Inc.
*JAMES S. RIEPE, Vice President and Trustee--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc. and T. Rowe Price Retirement Plan Services, Inc.; President
and Director, T. Rowe Price Investment Services, Inc; President
and Trust Officer, T. Rowe Price Trust Company; Director, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Trustee--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
HUBERT D. VOS, Trustee--President, Stonington Capital
Corporation, a private investment company; Address: 1231 State
Street, Suite 210, Santa Barbara, California 93190-0409
PAUL M. WYTHES, Trustee--Founding General Partner, Sutter Hill
Ventures, a venture capital limited partnership, providing equity
capital to young high technology companies throughout the United
States; Director, Teltone Corporation, Interventional
Technologies Inc. and Stuart Medical, Inc.; Address: 755 Page
Mill Road, Suite A200, Palo Alto, California 94304
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, Rowe Price-Fleming International,
Inc. and T. Rowe Price Retirement Plan Services, Inc.
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
DENISE S. JEVNE, Vice President-Vice President, T. Rowe Price
PAGE 387
ROBERT W. SMITH, Vice President-Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc., Boston, Massachusetts
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price
MARK J. VASELKIV, Vice President-Vice President, T. Rowe Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant 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
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Group
Person, from Fund Accrued as Paid to
Position Expensesa Part of Fundb Trusteesc
_________________________________________________________________
Leo C. Bailey, N/A $64,583
Trustee
Donald W. Dick, Jr., N/A 64,833
Trustee
David K. Fagin, N/A 53,833
Trustee
Addison Lanier, N/A 64,583
Trustee
John K. Major, N/A 54,583
Trustee
Hanne M. Merriman, N/A 42,083
Trustee
PAGE 388
Hubert D. Vos, N/A 54,583
Trustee
Paul M. Wythes, N/A 54,333
Trustee
Thomas H. Broadus, Jr., 0 N/A 0
Trusteed
James S. Riepe, 0 N/A 0
Trusteed
M. David Testa, 0 N/A 0
Trusteed
a Amounts in this Column are for the period June 1, 1993
through May 31, 1994.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994, included
64 funds at December 31, 1994.
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no renumeration from the
Fund.
International Stock Fund
*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--Principal, Overseas Partners,
Inc., a financial investment firm; Director, Waverly Press, Inc.,
Baltimore, Maryland; Address: 375 Park Avenue, Suite 2201, New
York, New York 10152
PAGE 389
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
CHRISTOPHER D. ALDERSON, Vice President--Vice President,
Price-Fleming
PETER B. ASKEW, Vice President--Executive Vice President,
Price-Fleming
RICHARD J. BRUCE, Vice President--Vice President, Price-Fleming;
formerly (1985-1990) Investment Manager, Jardine Fleming
Advisers, Tokyo
ROBERT P. CAMPBELL, Vice President--Vice President, Price-Fleming
and T. Rowe Price; 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 Service
JAMES S. RIEPE, Vice President--Director, Price-Fleming and
Rhone-Poulenc Rorer, Inc.; Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc. and T. Rowe
Price Retirement Plan Services, Inc.; President and Director, T.
Rowe Price Investment Services, Inc.; President and Trust
Officer, T. Rowe Price Trust Company
CHRISTOPHER ROTHERY, Vice President--Vice President,
Price-Fleming; formerly (1987-1989) employee of Robert Fleming
Holdings Limited, London
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
CHARLES P. SMITH, Vice President--Vice President, Price-Fleming;
Managing Director, T. Rowe Price
BENEDICT R. F. THOMAS, Vice President--Vice President,
Price-Fleming
PETER VAN DYKE, Vice President--Vice President, Price-Fleming;
Managing Director, T. Rowe Price
PAGE 390
DAVID J. L. WARREN, Vice President--Executive Vice President,
Price-Fleming
WILLIAM F. WENDLER, II, Vice President--Vice President,
Price-Fleming and T. Rowe Price, and T. Rowe Price Investment
Services, Inc.
EDWARD A. WIESE, Vice President--Vice President, Price-Fleming,
T. Rowe Price 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, III, Assistant Vice President--Vice President,
Price-Fleming
LEAH P. HOLMES, Assistant Vice President--Vice President,
Price-Fleming and Assistant Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Group
Person, from Fund Accrued as Paid to
Position Expensesa Part of Fundb Directorsc
_________________________________________________________________
Leo C. Bailey, $11,299 N/A $64,583
Director
Anthony W. Deering, 11,299 N/A 66,333
Director
Donald W. Dick, 11,299 N/A 64,833
Director
Addison Lanier, 11,299 N/A 64,583
Director
M. David Testa, 0 N/A 0
Chairman of the Boardd
PAGE 391
Martin G. Wade, 0 N/A 0
Directord
a Amounts in this Column are for the period June 1, 1993
through May 31, 1994.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994, included
64 funds at December 31, 1994.
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no renumeration from the
Fund.
Each Fund's Executive Committee has been authorized by
its Board of Directors/Trustees to exercise all powers of the
Board to manage the Fund in the intervals between meetings of the
Board, except the powers prohibited by statute from being
delegated. The members of each Fund's Executive Committee are as
follows:
Prime Reserve Fund--Messrs. Collins and Hoffman
Short-Term Bond Fund--Messrs. Collins and Riepe
Equity Income Fund- Messrs. Broadus, Riepe, and Testa
International Stock Fund--Messrs. Testa and Wade
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and
directors/trustees of each Fund, as a group, owned less than 1%
of the outstanding shares of the Fund.
As of January 31, 1995, the following shareholder
beneficially owned more than 5% of the outstanding shares of the
International Stock Fund: Charles Schwab & Co., Inc.,
Reinvestment Account, Attn: Mutual Fund Dept., 101 West
Montgomery Street, San Francisco, California 94104-4122.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price or Price-
Fleming provides each Fund with discretionary investment
services. Specifically, T. Rowe Price or Price-Fleming is
responsible for supervising and directing the investments of each
PAGE 392
Fund in accordance with the Fund's investment objective, program,
and restrictions as provided in its prospectus and this Statement
of Additional Information. T. Rowe Price or Price-Fleming is
also responsible for effecting all security transactions on
behalf of each Fund, including the negotiation of commissions and
the allocation of principal business and portfolio brokerage. In
addition to these services, T. Rowe Price or Price-Fleming
provides each Fund with certain administrative services,
including: maintaining each Fund's existence, records, and
registering and qualifying a Fund's shares under federal and
state laws; monitoring the financial, accounting, and
administrative functions of each Fund; maintaining liaison with
the agents employed by each Fund such as the Fund's custodian and
transfer agent; assisting each Fund in the coordination of such
agents' activities; and permitting T. Rowe Price's or Price-
Fleming's employees to serve as officers, directors/trustees, and
committee members of each Fund without cost to the Fund.
The Management Agreement also provides that T. Rowe
Price or Price-Fleming, its directors, officers, employees, and
certain other persons performing specific functions for each Fund
will only be liable to a Fund for losses resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard
of duty.
Management Fee
Each Fund pays T. Rowe Price or 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 the T. Rowe Price or 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 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:
PAGE 393
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 individual Fund Fee Rate for
the Prime Reserve, Short-Term Bond, Equity Income and
International Stock Funds of .05%, .10%, .25% and .35%,
respectively, 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.
Listed below are the total amounts paid to T. Rowe Price by
the Prime Reserve and Short-Term Bond Funds (for the fiscal years
ended February 28, 1994, February 28, 1993, and February 29,
1992), and Equity Income Fund (for the fiscal years ended
December 31, 1993, 1992, and 1991), and amounts paid to Price-
Fleming by the International Stock Fund (for the fiscal year
ended October 31, 1994, for the ten-month fiscal year ended
October 31, 1993 and for the fiscal year ended December 31, 1992)
PAGE 394
under an investment management agreement, in effect at that time,
for each of the last three fiscal years or year ends.
Prime Short-Term Equity International
Reserve Fund Bond Fund Income Fund Stock Fund
Fiscal Fiscal
Year Amount Year Amount Year Amount Year Amount
1994$13,617,000 1994$2,873,000 1993$15,154,800 1994 $35,176,000
1993 15,620,000 19932,136,000 1992 10,430,000 1993* 14,955,000
1992 18,486,000 19921,398,000 1991 6,829,000 1992 12,522,000
*For the ten-month fiscal year ended October 31, 1993.
Limitation on Fund Expenses
The Management Agreement between each Fund and T. Rowe Price
or Price-Fleming provides that each Fund will bear all expenses
of its operations not specifically assumed by T. Rowe Price or
Price-Fleming. However, in compliance with certain state
regulations, T. Rowe Price or Price-Fleming will reimburse a 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 such assets, and 1.5% of net assets in excess of $100 million.
For the purpose of determining whether a Fund is entitled to
reimbursement, the expenses of the Fund are calculated on a
monthly basis. If a 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 Funds are 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
Funds, are funds in which Spectrum Fund invests (collectively all
such funds "Underlying Price Funds").
The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund determines that
such Underlying Fund's share of the aggregate expenses of
Spectrum Fund is less than the estimated savings to the
PAGE 395
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.
International Stock Fund
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") and Jardine
Fleming Investment Holdings Limited ("JFIH"), wherein FIM and
JFIH have agreed to render investment research and administrative
support to Price-Fleming. FIM is a wholly-owned subsidiary of
Robert Fleming Asset Management Limited which is a wholly-owned
subsidiary of Robert Fleming Holdings Limited ("Robert Fleming").
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
PAGE 396
each receives a fee of .075% of the market value of all assets in
equity accounts under Price-Fleming's management. 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.
DISTRIBUTOR FOR FUNDS
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 Funds'
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 each Fund's shares is continuous.
Investment Services is located at the same address as the
Funds and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to each Fund
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that each 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
PAGE 397
expenses specifically assumed by each Fund. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of each 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 Funds.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the
custodian for each 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 Short-Term Bond, Equity Income, and
International Stock Funds have entered into a Custodian Agreement
with The Chase Manhattan Bank, N.A., London, pursuant to which
portfolio securities which are purchased outside the United
States are maintained in the custody of various foreign branches
of The Chase Manhattan Bank and such other custodians, including
foreign banks and foreign securities depositories as are approved
by each Fund's Board of Directors 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.
CODE OF ETHICS
Equity Income, Prime Reserve and Short-Term Bond Funds
The Fund's investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; a change has occurred in T. Rowe Price's
PAGE 398
rating of the security within five days; or the security is
subject to internal trading restrictions. In addition, employees
are prohibited from engaging in short-term trading (e.g.,
purchases and sales involving the same security within 60 days).
Any material violation of the Code of Ethics is reported to the
Board of the Fund. The Board also reviews the administration of
the Code of Ethics on an annual basis.
International Stock Fund
The Funds' investment adviser (Price-Fleming) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; the security is subject to internal
trading restrictions. In addition, employees are prohibited from
engaging in short-term trading (e.g., purchases and sales
involving the same security within 60 days. Any material
violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of
Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Funds are made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business. Each Fund's
purchases and sales of fixed income portfolio securities are
normally done on a principal basis and do not involve the payment
of a commission although they may involve the designation of
selling concessions. That part of the discussion below relating
solely to brokerage commissions would not normally apply to the
Prime Reserve and Short-Term Bond Funds. However, it is included
because T. Rowe Price does manage a significant number of common
stock portfolios which do engage in agency transactions and pay
commissions and because some research and services resulting from
the payment of such commissions may benefit the Funds.
PAGE 399
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities,
it is T. Rowe Price's policy to obtain quality execution at the
most favorable prices through responsible brokers and dealers
and, in the case of agency transactions, at competitive
commission rates. However, under certain conditions, the Fund may
pay higher brokerage commissions in return for brokerage and
research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among
market-makers, T. Rowe Price generally seeks to select those it
believes to be actively and effectively trading the security
being purchased or sold. In selecting broker-dealers to execute
the Fund's portfolio transactions, consideration is given to such
factors as the price of the security, the rate of the commission,
the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and brokerage and
research services provided by them. It is not the policy of T.
Rowe Price to seek the lowest available commission rate where it
is believed that a broker or dealer charging a higher commission
rate would offer greater reliability or provide better price or
execution.
Fixed Income Securities
Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe
Price may effect principal transactions on behalf of a Fund with
a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances, or otherwise deal
with any such broker or dealer in connection with the acquisition
of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions,
including designations in fixed priced underwritings.
PAGE 400
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
transactions executed on behalf of the Funds. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services
from brokers and dealers. These services include information on
the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law
interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement
analysis, performance analysis and analysis of corporate
responsibility issues. These services provide both domestic and
international perspective. Research services are received
primarily in the form of written reports, computer generated
services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form
of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some
cases, research services are generated by third parties but are
provided to T. Rowe Price by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays
PAGE 401
cash for certain research services received from external
sources. T. Rowe Price also allocates brokerage for research
services which are available for cash. While receipt of research
services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could
be materially increased if it attempted to generate such
additional information through its own staff. To the extent that
research services of value are provided by brokers or dealers, T.
Rowe Price may be relieved of expenses which it might otherwise
bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage
and execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, T.
Rowe Price has adopted a brokerage allocation policy embodying
the concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause an account to
pay commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates charged by broker-dealers reflect the value of
their research services, T. Rowe Price would expect to assess the
reasonableness of commissions in light of the total brokerage and
research services provided by each particular broker. T. Rowe
Price may receive research, as defined in Section 28(e), in
connection with selling concessions and designations in fixed
price offerings in which the Funds participate.
PAGE 402
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage business where
special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet
the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers and dealers,
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers and dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers and dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
research services they provide. Actual brokerage business
received by any firm may be less than the suggested allocations
but can, and often does, exceed the suggestions, because the
total business is allocated on the basis of all the
considerations described above. In no case is a broker or dealer
excluded from receiving business from T. Rowe Price because it
has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers or dealers through which T. Rowe
Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe
Price. Conversely, research services received from brokers or
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.
From time to time, orders for clients may be placed through
a computerized transaction network.
PAGE 403
Each Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Funds. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Funds. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
At the present time, T. Rowe Price does not recapture commissions
or underwriting discounts or selling group concessions in
connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
elimination of all or a portion of the selling-group concession
or underwriting discount when purchasing tax-exempt municipal
securities on behalf of its clients in underwritten offerings.
Transactions with Related Brokers and Dealers - Equity Income and
Short-Term Bond Funds
As provided in the Investment Management Agreement between
the Fund and T. Rowe Price, T. Rowe Price is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
PAGE 404
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that T. Rowe Price may place orders for the Fund's
portfolio transactions with broker-dealers through the same
trading desk T. Rowe Price uses for portfolio transactions in
domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities
are located. These brokers and dealers may include of certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"), persons
indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary,
owns 25% of the common stock of Rowe Price-Fleming International,
Inc. ("RPFI"), an investment adviser registered under the
Investment Advisers Act of 1940. Fifty percent of the common
stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming International Holdings Limited, a subsidiary of
JFG. JFG is 50% owned by Robert Fleming Holdings and 50% owned
by Jardine Matheson Holdings Limited. Orders for the Fund's
portfolio transactions placed with affiliates of Robert Fleming
Holdings and JFG will result in commissions being received by
such affiliates.
The Board of Directors/Trustees of the Funds has authorized
T. Rowe Price to utilize certain affiliates of Robert Fleming and
JFG in the capacity of broker in connection with the execution of
the Fund's portfolio transactions. These affiliates include, but
are not limited to, Jardine Fleming (Securities) Limited ("JFS"),
a wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and
Robert Fleming, Inc. (a New York brokerage firm). Other
affiliates of Robert Fleming Holdings and JFG also may be used.
Although it does not believe that the Funds' use of these brokers
would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors/Trustees of the Funds has agreed
that the procedures set forth in Rule 17(e)(1) under that Act
will be followed when using such brokers.
Other
Prime Reserve Fund
For the fiscal years February 28, 1994, February 28, 1993,
and February 29, 1992, the Fund engaged in portfolio transactions
involving broker-dealers totaling $29,024,172,000,
$36,478,989,278, and $29,975,769,142, respectively. The entire
PAGE 405
amount for each of these years represented principal transactions
as to which the Fund has no knowledge of the profits or losses
realized by the respective broker-dealers. Of all such portfolio
transactions, approximately 87%, 81%, and 76%, respectively, were
placed with firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Fund or, in some cases, to the Fund.
Short-Term Bond Fund
For the fiscal years February 28, 1994, February 28, 1993,
and February 29, 1992, the Fund engaged in portfolio transactions
involving broker-dealers totaling $4,266,837,000, $5,805,957,978,
and $5,534,535,154, respectively. For the fiscal years ended
February 28, 1994 and February 29, 1992, $4,266,837,000 and
$5,034,535,154 consisted of principal transactions as to which
the Fund has no knowledge of the profits or losses realized by
the respective broker-dealers; and for the year February 29,
1992, $5,000,000 involved trades with brokers acting as agents or
underwriters, in which such brokers received total commissions,
including discounts received in connection with underwritings, of
$15,000. For the fiscal year ended February 28, 1993, the entire
amount represented principal transactions as to which the Fund
has no knowledge of the profits or losses realized by the
respective broker-dealers. Of all such portfolio transactions,
approximately 61%, 84%, and 79%, respectively, were placed with
firms which provided research, statistical, or other services to
T. Rowe Price in connection with the management of the Fund or,
in some cases, to the Fund.
The portfolio turnover rate of the Fund for the fiscal years
ended February 28, 1994, February 28, 1993, and February 29,
1992, was 1994--90.8%, 1993--68.4%, and 1992--380.7%,
respectively.
Equity Income Fund
For the years 1993, 1992, and 1991, the total brokerage
commissions paid by the Fund, including the discounts received by
securities dealers in connection with underwritings, were
$4,660,406, $3,419,000, and $3,087,000, respectively. Of these
commissions, approximately 42%, 37%, and 36%, respectively, were
paid to firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Fund, or, in some cases, to the Fund.
PAGE 406
On December 31, 1993, the Fund held 250,000 shares of the
common stock of J.P. Morgan with a value of $17,344,000. In
1993, J.P. Morgan was among the Fund's regular brokers or dealers
as defined in Rule 10b-1 under the Investment Company Act of
1940.
The portfolio turnover rate of the Fund for each of the last
three years has been as follows: 1993--31.2%, 1992--30.0%, and
1991--33.5%.
International Stock Fund
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
PAGE 407
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 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 receive research services in connection with brokerage
transactions, including designations in fixed price offerings.
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.
PAGE 408
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
PAGE 409
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 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
PAGE 410
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") and Robert Fleming & Co. Limited ("RF&Co."). FIM
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 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 1994, the Fund paid JFS and RF&Co.
$1,608,031 and $145,770, respectively, in total brokerage
commissions in connection with their portfolio transactions. The
brokerage commissions paid to JFS and RF&Co. represented 9% and
2%, respectively, of the Fund's aggregate brokerage commissions
paid during 1994. The aggregate dollar amount of transactions
PAGE 411
effected through JFS and RF&Co., involving the payment of
commissions, represented 18% and 1%, respectively, of the
aggregate dollar amount of all transactions involving the payment
of commissions during 1994. In accordance with the written
procedures adopted pursuant to Rule 17e-1, the independent
directors of the Fund reviewed the 1994 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 1994, 1993, and 1992, the total brokerage
commissions paid by the Fund, including the discounts received by
securities dealers in connection with underwritings, were
$9,684,485, $5,419,000, and $4,052,000, respectively. Of these
commissions, approximately 83%; 76%, and 85%, 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: 1994--22.9%, 1993--29.8%, and
1992--37.8%.
PRICING OF SECURITIES
Prime Reserve Fund
Securities with more than 60 days remaining to maturity are
stated at fair value which is determined by using a matrix system
that establishes a value for each security based on money market
yields. Securities originally purchased with remaining
maturities of 60 days or less are valued at amortized cost. In
addition, securities purchased with maturities in excess of 60
days, but which currently have maturities of 60 days or less, are
valued at their amortized cost for the 60 days prior to maturity-
-such amortization being based on the fair value of the
securities on the 61st day prior to maturity.
Maintenance of Net Asset Value Per Share
It is the policy of the Fund to attempt to maintain a net
asset value of $1.00 per share by rounding to the nearest one
cent. This method of valuation is commonly referred to as "penny
PAGE 412
rounding" and is permitted by Rule 2a-7 under the Investment
Company Act of 1940. Under Rule 2a-7:
(a)the Board of Directors of the Fund must undertake to
assure, to the extent reasonably practical taking into
account current market conditions affecting the Fund's
investment objectives, that the Fund's net asset value will
not deviate from $1.00 per share;
(b)the Fund must (i) maintain a dollar-weighted average
portfolio maturity appropriate to its objective of
maintaining a stable price per share, (ii) not purchase any
instrument with a remaining maturity greater than 397 days
(or in the case of U.S. government securities greater than
762 days), and (iii) maintain a dollar-weighted average
portfolio maturity of 90 days or less;
(c)the Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to those U.S.
dollar-denominated instruments which the Fund's Board of
Directors determines present minimal credit risks, and which
are eligible securities as defined by Rule 2a-7; and
(d)the Board of Directors must determine that (i) it is in
the best interest of the Fund and its shareholders to
maintain a stable price per share under the penny rounding
method; and (ii) the Fund will continue to use the penny
rounding method only so long as the Board of Directors
believes that it fairly reflects the market based net asset
value per share.
Although the Fund believes that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do so
on a continuous basis. If the Fund's net asset value per share
declined, or was expected to decline, below $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of
such reduction or suspension of dividends, an investor would
receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption,
a price per share lower than that which he paid. On the other
hand, if the Fund's net asset value per share were to increase,
or were anticipated to increase above $1.00 (rounded to the
PAGE 413
nearest one cent), the Board of Directors of the Fund might
supplement dividends in an effort to maintain the net asset value
at $1.00 per share.
Prime Money Market Securities Defined. Prime money market
securities are those which are described as First Tier Securities
under Rule 2a-7 of the Investment Company Act of 1940. These
include any security with a remaining maturity of 397 days or
less that is rated (or that has been issued by an issuer that is
rated with respect to a class of short-term debt obligations, or
any security within that class that is comparable in priority and
security with the security) by any two nationally recognized
statistical rating organizations (NRSROs) (or if only one NRSRO
has issued a rating, that NRSRO) in the highest rating category
for short-term debt obligations (within which there may be sub-
categories). First Tier Securities also include unrated
securities comparable in quality to rated securities, as
determined by T. Rowe Price under the supervision of the Fund's
Board of Directors.
Short-Term Bond Fund
Fixed income securities are generally traded in the over-
the-counter market. Investments in domestic securities with
remaining maturities of one year or more and foreign securities
are stated at fair value using bid-side valuation as furnished by
dealers who make markets in such securities or by an independent
pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices
quoted by dealers who make markets in such securities. Domestic
securities with remaining maturities less than one year are
stated at fair value which is determined by using a matrix system
that establishes a value for each security based on bid-side
money market yields.
There are a number of pricing services available, and the
Board of Directors, on the basis of an ongoing evaluation of
these services, may use or may discontinue the use of any pricing
service in whole or in part.
Equity Income and International Stock Funds
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
PAGE 414
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/Trustees or by persons delegated
by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter
market and are valued at a price deemed best to reflect fair
value as quoted by dealers who make markets in these securities
or by an independent pricing service. Short-term debt securities
are valued at their cost in local currency which, when combined
with accrued interest, approximates fair value.
All Funds
For purposes of determining the Fund's net asset value per
share, all assets and liabilities initially expressed in foreign
currencies are converted into U.S. dollars at the mean of the bid
and offer prices of such currencies against U.S. dollars quoted
by a major bank.
Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value as determined in good faith by or
under the supervision of the officers of the Fund, as authorized
by the Board of Directors/Trustees.
International Stock Fund
Trading in the portfolio securities of the International
Stock 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 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.
PAGE 415
NET ASSET VALUE PER SHARE
The purchase and redemption price of each Fund's shares is
equal to the Fund's net asset value per share or share price.
Each Fund determines its net asset value per share by subtracting
the Fund's liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of each 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 net asset value of the Prime Reserve Fund is
also calculated as of 12:00 noon (Eastern time) 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 the net asset value (and the offering, sale
redemption and repurchase of shares) for a 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 a Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable
for a Fund fairly to determine the value of its net assets, or
(d) during which a governmental body having jurisdiction over a
Fund may by order permit such a suspension for the protection of
a 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, the Funds' dividends and, with
respect to the Equity Income and International Stock Funds,
capital gain distributions, if any, and the Equity Income Fund's
final quarterly dividend, will be invested 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.
PAGE 416
TAX STATUS
Each 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 Prime Reserve and
Short-Term Bond Funds are not eligible for the dividends-received
deduction for corporate shareholders. A portion of the dividends
paid by the Equity Income Fund may be eligible for the dividends-
received deduction for corporate shareholders. 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. Each Fund must declare dividends by December
31 of each year equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to
avoid a federal excise tax and distribute within 12 months 100%
of ordinary income and capital gains as of its tax year-end to
avoid federal income tax.
Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations are taxable as ordinary
income. If the net effect of these transactions is a gain, the
ordinary income dividend paid by the International Stock Fund
will be increased; if the result is a loss, a portion of its
ordinary income dividend may be classified as a return of
capital. Adjustments, to reflect these gains and losses will be
made at the end of the Fund's taxable year.
At the time of your purchase, each Fund's net asset value
may reflect undistributed income, with respect to the Equity
Income and International Stock Funds, undistributed capital gains
or net unrealized appreciation of securities held by the Fund. A
subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable either
as dividends or capital gain distributions. For federal income
tax purposes, each 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 May 31,
PAGE 417
1994, the books of the Prime Reserve Fund indicated that the
Fund's aggregate net assets included realized capital gains of
$1,900 and unrealized appreciation of $203,760. On May 31, 1994,
the books of the Short-Term Bond Fund indicated that the Fund's
aggregate net assets included realized capital losses of
$4,542,864 and unrealized depreciation of $15,924,117. On March
31, 1994, the books of the Equity Income Fund indicated that the
Fund's aggregate net assets included undistributed net income of
$132,075, net realized capital gains of $36,563,108, and
unrealized appreciation of $153,387,691. On October 31, 1994,
the books of the International Stock Fund indicated that the
Fund's aggregate net assets included undistributed net income of
$54,550,000, net realized capital losses of $302,445,000 and
unrealized appreciation of $806,617,000.
If, in any taxable year, a 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 with respect to the
International Stock Fund, may qualify for the 70% deduction for
dividends received by corporation; and (iii) foreign tax credits
would not "pass through" to International Stock Fund
shareholders.
To the extent the Fund invests in foreign securities, the
following would apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. Capital gains on the sale of such holdings will be
deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition to bearing their proportionate
share of the fund's expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses
of such funds. In addition, the Fund may be subject to corporate
income tax and an interest charge on certain dividends and
capital gains earned from these investments, regardless of
whether such income and gains are distributed to shareholders.
PAGE 418
In accordance with tax regulations, the Fund intends to
treat these securities as sold on the last day of the Fund's
fiscal year and recognize any gains for tax purposes at that
time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received
cash to pay such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations, are taxable as ordinary
income. If the net effect of these transactions is a gain, the
dividend paid by a 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 each Fund's taxable year.
Taxation of Foreign Shareholders-Equity Income and International
Stock Funds
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 International Stock Fund--see
discussion of "pass through" of the foreign tax credit 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 dividends
in the absence of a Tax Treaty providing for a reduced rate or
exemption from U.S. taxation. Distributions of net long-term
capital gains realized each 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.
International Stock Fund
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 or
governments, the Fund may file an election with the Internal
Revenue Service to "pass through" to the Fund's shareholders the
amount of foreign income taxes paid by the Fund. Pursuant to
this election, shareholders will be required to: (i) include in
PAGE 419
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.
YIELD INFORMATION
Prime Reserve Fund
The Prime Reserve Fund's current and historical yield for a
period is calculated by dividing the net change in value of an
account (including all dividends accrued and dividends reinvested
in additional shares) by the account value at the beginning of
the period to obtain the base period return. This base period
return is divided by the number of days in the period then
multiplied by 365 to arrive at the annualized yield for that
period. The Fund's annualized compound yield for such period is
compounded by dividing the base period return by the number of
days in the period, and compounding that figure over 365 days.
The seven-day yield ending May 31, 1994 for the Fund was
3.33% and the Fund's compound yield for the same period was
3.38%.
Short-Term Bond Fund
From time to time, the Short-Term Bond Fund may advertise a
yield figure calculated in the following manner:
PAGE 420
An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with
regulation of the Securities and Exchange Commission. The income
factors are then totalled for all securities in the portfolio.
Next, expenses of the Fund for the period net of expected
reimbursement are deducted from the income to arrive at net
income, which is then converted to a per-share amount by dividing
net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset
value on the last day of the period to produce a monthly yield
which is then annualized. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future
performance or forecast the dividend per share of the Fund.
The yield of the Fund calculated under the above described
method for the month ended May 31, 1994 was 5.55%.
INVESTMENT PERFORMANCE
Total Return Performance-Short-Term Bond, Equity Income, and
International Stock Funds
Each 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 each 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 a Fund.
Each average annual compound rate of return is derived from the
cumulative performance of each Fund over the time period
specified. The annual compound rate of return for each Fund over
any other period of time will vary from the average.
PAGE 421
Short-Term Bond Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years Inception
Ended Ended 3/2/84-
2/28/94 2/28/94 2/28/94
________ _______ _________
T. Rowe Price Short-Term Bond Fund 4.36% 47.78% 122.71%
T. Rowe Price Prime Reserve Fund 2.60 30.24 88.03
Donoghue Average of all Taxable
Money Funds 2.70 30.32 86.25
Lehman Bros. 1-3 Year Govt./Corp.
Bond Index 3.62 50.11 139.27
Lipper Short Investment Grade
Debt Funds Average 3.95 49.71 136.46
Average Annual Compound Rates of Return
Since
1 Year 5 Years Inception
Ended Ended 3/2/84-
2/28/94 2/28/94 2/28/94
________ _______ _________
T. Rowe Price Short-Term Bond Fund 4.36% 8.12% 8.34%
T. Rowe Price Prime Reserve Fund 2.60 5.42 6.52
Donoghue Average of all Taxable
Money Funds 2.70 5.44 6.42
Lehman Bros. 1-3 Year Govt./Corp.
Bond Index 3.62 8.46 9.12
Lipper Short Investment Grade Debt
Funds Average 3.95 8.40 8.99
PAGE 422
Equity Income Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 10/31/85 to
12/31/93 12/31/93 12/31/93 12/31/93
________ _________ ________ ___________
Equity Income Fund 14.84% 74.08% 220.77%
S&P 500 10.07% 97.34% 301.77%
Dow Jones Industrial
Average 16.99% 105.25% 333.86%
Lipper Equity Income
Fund Average 13.38% 78.00% 160.86%
CPI 2.75% 21.00% 43.93%
Average Annual Compound Rates of Return
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 10/31/85 to
12/31/93 12/31/93 12/31/93 12/31/93
________ ________ ________ __________
Equity Income Fund 14.84% 11.72% 15.34%
S&P 500 10.07% 14.56% 14.92%
Dow Jones Industrial
Average 16.99% 15.47% 15.81%
Lipper Equity Income
Fund Average 13.38% 12.14% 12.17%
CPI 2.75% 3.89% 3.71%
The Lipper Equity Income Fund Average is the average
performance of 40 equity income funds reported by Lipper
Analytical Service.
PAGE 423
International Stock Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/94+ 12/31/94 12/31/94 12/31/94++
_________ ________ __________ __________
International
Stock Fund -0.76% 41.69% 423.20% 672.93%
S&P 500 1.32 51.74 281.99 603.09+++
Dow Jones Industrial
Average 4.98 63.03 349.26 704.86+++
Lipper International
Funds Average -0.71 31.13 328.06 482.54
EAFE Index 8.06 9.42 418.72 648.22+++
CPI 2.95 19.03 42.55 81.50
Financial Times
Actuaries World
Index++++ 5.83 22.17 N/A N/A
Average Annual Compound Rates of Return
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/94+ 12/31/94 12/31/94 12/31/94++
________ _______ __________ __________
International Stock
Fund -0.76% 7.22% 18.00% 14.98%
S&P 500 1.32 8.70 14.34 14.39+++
Dow Jones Industrial
Average 4.98 10.27 16.21 15.46+++
Lipper International
Funds Average -0.71 5.35 15.24 12.60+++
EAFE Index 8.06 1.82 17.89 14.88+++
CPI 2.95 3.55 3.61 4.20+++
Financial Times
Actuaries World
Index++++ 5.83 4.09 N/A N/A
+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $992.40 ($1,000 x
0.9924).
PAGE 424
++ 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 - 12/31/94[/R]
++++ 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
________________
Average
1976-85 1986 1987 1988 1989 1990 1991 1992 1993
_______ ____ ____ ____ ____ ____ ____ ____ ____
World 3.4 3.6 4.0 4.7 3.4 2.2 0.9 1.7 2.3
Industrialized 2.8 2.9 3.2 4.4 3.3 2.4 0.8 1.5 1.3
Developing (Asia)6.4 6.7 8.0 9.2 5.7 5.8 6.2 8.2 8.5
Source: World Economic Outlook, IMF, October 1994
Outside Sources of Information
Prime Reserve and Short-Term Bond Funds
From time to time, in reports and promotional literature,
one or more of the T. Rowe Price funds, including this Fund, may
compare its performance to Overnight Government Repurchase
Agreements, Treasury bills, notes, and bonds, certificates of
deposit, and six-month money market certificates. Performance
may also be compared to (1) indices of broad groups of managed
and unmanaged securities considered to be representative of or
similar to Fund portfolio holdings; (2) other mutual funds; or
(3) other measures of performance set forth in publications such
as:
Advertising News Service, Inc., "Bank Rate Monitor+ - The
Weekly Financial Rate Reporter" is a weekly publication
which lists the yields on various money market instruments
offered to the public by 100 leading banks and thrift
institutions in the U.S., including loan rates offered by
these banks. Bank certificates of deposit differ from
mutual funds in several ways: the interest rate established
by the sponsoring bank is fixed for the term of a CD; there
PAGE 425
are penalties for early withdrawal from CDs; and the
principal on a CD is insured.
Donoghue Organization, Inc., "Donoghue's Money Fund Report"
is a weekly publication which tracks net assets, yield,
maturity and portfolio holdings on approximately 380 money
market mutual funds offered in the U.S. These funds are
broken down into various categories such as U.S. Treasury,
Domestic Prime and Euros, Domestic Prime and Euros and
Yankees, and Aggressive.
First Boston High Yield Index. It shows statistics on the
Composite Index and analytical data on new issues in the
marketplace and low-grade issuers.
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund
Performance Analysis" is a monthly publication which tracks
net assets, total return, principal return and yield on over
1900 fixed income mutual funds offered in the United States.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices" is a monthly publication which lists principal,
coupon and total return on over 100 different taxable bond
indices tracked by Merrill Lynch, together with the par
weighted characteristics of each Index. The index used as a
benchmark for the High Yield Fund is the High Yield Index.
The two indices used as benchmarks for the Short-Term Bond
Fund are the 91-Day Treasury Bill Index and the 1-2.99 Year
Treasury Note Index.
Morningstar, Inc. - is a widely used independent research
firm which rates mutual funds by overall performance,
investment objectives, and assets.
Salomon Brothers Inc., "Analytical Record of Yields and
Yield Spreads" is a publication which tracks historical
yields and yield spreads on short-term market rates, public
obligations of the U.S. Treasury and agencies of the U.S.
Government, public corporate debt obligations, municipal
debt obligations and preferred stocks.
Salomon Brothers Inc., "Bond Market Round-up" is a weekly
publication which tracks the yields and yield spreads on a
large, but select, group of money market instruments, public
corporate debt obligations, and public obligations of the
U.S. Treasury and agencies of the U.S. Government.
PAGE 426
Salomon Brothers Inc., "High Yield Composite Index" is an
index which provides performance and statistics for the high
yield market place.
Salomon Brothers Inc., "Market Performance" - a monthly
publication which tracks principal return, total return and
yield on the Salomon Brothers Broad investment - Grade Bond
Index and the components of the Index.
Shearson Lehman Brothers, Inc., "The Bond Market Report" - a
monthly publication which tracks principal, coupon and total
return on the Shearson Lehman Govt./Corp.Index and Shearson
Lehman Aggregate Bond Index, as well as all the components
of these Indices.
Telerate Systems, Inc. is a market data distribution network
which tracks a broad range of financial markets including,
the daily rates on money market instruments, public
corporate debt obligations and public obligations of the
U.S. Treasury and agencies of the U.S. Government.
Wall Street Journal, is a national daily financial news
publication which lists the yields and current market values
on money market instruments, public corporate debt
obligations, public obligations of the U.S. Treasury and
agencies of the U.S. Government as well as common stocks,
preferred stocks, convertible preferred stocks, options and
commodities; in addition to indices prepared by the research
departments of such financial organizations as Shearson
Lehman/American Express Inc., and Merrill Lynch, Pierce,
Fenner and Smith, Inc., including information provided by
the Federal Reserve Board.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, etc. will also be used.
Benefits of Investing in High-Quality Bond Funds - Short-Term
Bond Fund
o Higher Income
Bonds have generally provided a higher income than money
market securities because yield usually increased with
longer maturities. For instance, the yield on the 30-year
Treasury bond usually exceeds the yield on the 1-year
Treasury bill or 5-year Treasury note. However, securities
PAGE 427
with longer maturities fluctuate more in price than those
with shorter maturities. Therefore, the investor must weigh
the advantages of higher yields against the possibility of
greater fluctuation in the principal value of your
investment.
o Income Compounding
Investing in bond mutual funds allows investors to benefit
from easy and convenient compounding because you can
automatically reinvest monthly dividends in additional fund
shares. Each month investors earn interest on a larger
number of shares. Also, reinvesting dividends removes the
temptation to spend the income.
o Broad Diversification
Each share of a mutual fund represents an interest in a
large pool of securities, so even a small investment is
broadly diversified by maturity. Since most bonds trade
efficiently only in very large blocks, mutual funds provide
a degree of diversification that may be difficult for
individual investors to achieve on their own.
o Lower Portfolio Volatility
Investing a portion of one's assets in longer term, high-
quality bonds can help smooth out the fluctuations in your
overall investment results, because bond prices do not
necessarily move with stock prices. Also, bonds usually
have higher income yields than stocks, thus increasing the
total income component of your portfolio. This strategy
should also add stability to overall results, as income is
always a positive component of total return.
o Liquidity
A bond fund can supplement a money market fund or bank
account as a source of capital for unexpected contingencies.
T. Rowe Price fixed-income funds offer you easy access to
money through free checkwriting and convenient redemption
and exchange features. Of course, the value of a bond
fund's shares redeemed through checkwriting may be worth
more or less than their value at the time of their original
purchase.
PAGE 428
Suitability
High-quality bond funds are most suitable for the following
objectives: obtaining a higher current income with minimal
credit risk; compounding of income over time; or
diversifying overall investments to reduce volatility.
Equity Income and International Stock Funds
From time to time, in reports and promotional literature:
(1) each 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 a Fund's results with those of a
group of unmanaged securities widely regarded by investors as
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) indices of stocks comparable to those in which
the Equity Income Fund invests; with respect to the International
Stock Fund (iv) 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); (v) Morgan Stanley Capital
International Indices, including the EAFE Index, Pacific Basin
Index, Japan Index and Pacific Ex Japan Index which is a widely-
recognized series of indices in international market performance;
(vi) Baring International Investment Management Limited (an
international securities trading, research, and investment
management firm), as a source for market capitalization, GDP and
GNP; (vii) 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; (viii) the
Nikkei Average, a generally accepted benchmark for performance of
the Japanese stock market; (ix) indices of stocks comparable to
those in which the International Stock Fund invests including the
Topix Index, which reflects the performance of the First Section
of the Tokyo Stock Exchange; and (x) the performance of U.S.
PAGE 429
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 each 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 a Fund or the general economic, business,
investment, or financial environment in which a Fund operates;
(4) the effect of tax-deferred compounding on each 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 each 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 each Fund
invests may be compared to relevant indices or surveys (e.g. S&P
Industry Surveys) in order to evaluate each 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-All Funds
An IRA is a long-term investment whose objective is to
accumulate personal savings for retirement. Due to the long-term
nature of the investment, even slight differences in performance
will result in significantly different assets at retirement.
Mutual funds, with their diversity of choice, can be used for IRA
investments. Generally, individuals may need to adjust their
PAGE 430
underlying IRA investments as their time to retirement and
tolerance for risk changes.
Other Features and Benefits-All Funds
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. Personal Strategy Planner simplifies
investment decision making by helping investors define personal
financial goals, establish length of time the investor intends to
invest, determine risk "comfort zone" and select diversified
investment mix.
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.
PAGE 431
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/94
50 years 20 years 10 years 5 years
Small-Company Stocks 14.4% 20.3% 11.1% 11.8%
Large-Company Stocks 11.9 14.6 14.4 8.7
Foreign Stocks N/A 16.3 17.9 1.8
Long-Term Corporate Bonds 5.3 10.0 11.6 8.4
Intermediate-Term U.S.
Gov't. Bonds 5.6 9.3 9.4 7.5
Treasury Bills 4.7 7.3 5.8 4.7
U.S. Inflation 4.5 5.5 3.6 3.5
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how these
historical indices would have performed in various combinations
over a specified time period in terms of return. An example of
this is shown below.
PAGE 432
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/94 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real Best Worst
Portfolio GrowthIncomeSafety ReturnReturn**Year Year
I. Low
Risk 40% 40% 20% 12.4% 6.9% 24.9% 0.1% $ 92,515
II. Moderate
Risk 60% 30% 10% 13.5% 8.1% 29.1% -1.8% $118,217
III. High
Risk 80% 20% 0% 14.5% 9.1% 33.4% -5.2% $149,200
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-94 and Lehman Brothers Government/Corporate Bond
Index from 1975), and 30-day Treasury bills from January 1975
through December 1994. Past performance does not guarantee
future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is
maintained each year. This exhibit is for illustrative
purposes only and is not representative of the performance of
any T. Rowe Price fund.
** Based on inflation rate of 5.5% for the 20-year period ended
12/31/94.
Insights
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,
PAGE 433
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
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.
ORGANIZATION OF THE FUNDS
International, Prime Reserve and Short-Term Bond Funds
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
PAGE 434
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 eleven 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,
Short-Term Global Income, Latin America, Emerging Markets Bond
and Emerging Markets Stock Funds were added as separate series of
the Corporation in 1991, 1992, 1993, 1994, and 1995,
respectively. The Charter also provides that the Board of
Directors may issue additional series of shares.
Each 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, each class 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, and provided that the authorized shares of
any class shall not be decreased below the number then
outstanding and the authorized shares of all classes shall not
exceed 15,000,000,000 for the Prime Reserve Fund and
1,000,000,000 for the Short-Term Bond Fund. The shares of any
such additional classes might therefore differ from the shares of
the present class of capital stock and from each other as to
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or
PAGE 435
terms or conditions of redemption, subject to applicable law, and
might thus be superior or inferior to the capital stock or to
other classes in various characteristics. Each Fund's 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
authorized to be issued without shareholder approval.
Except to the extent that the Prime Reserve and Short-Term
Bond Fund's Board of Directors might provide by resolution that
holders of shares of a particular class are entitled to vote as a
class on specified matters presented for a vote of the holders of
all shares entitled to vote on such matters, there would be no
right of class vote unless and to the extent that such a right
might be construed to exist under Maryland law. The Charter
contains no provision entitling the holders of the present class
of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics
attaching to any class of shares, including the present class of
capital stock, might be altered or eliminated, or the class might
be combined with another class or classes, by action approved by
the vote of the holders of a majority of all the shares of all
classes entitled to be voted on the proposal, without any
additional right of vote as a class by the holders of the capital
stock or of another affected class or classes.
Each share of each series of the International Fund 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 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.
PAGE 436
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 each Fund, a special meeting of shareholders of
a Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of
all the votes of the Fund entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Fund the
reasonably estimated costs of preparing and mailing the notice of
the meeting. Each Fund, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Fund to the extent required by
Section 16(c) of the Investment Company Act of 1940.
Equity Income Fund
For tax and business reasons, the Fund was organized in 1985
as a Massachusetts Business Trust and is registered with the
Securities and Exchange Commission under the Investment Company
Act of 1940 as diversified, open-end investment companies,
commonly known as a "mutual funds."
The Fund's Declaration of Trust permits its Board of Trustees
to issue an unlimited number of full and fractional shares of a
single class. The Declarations of Trust also provides that the
Fund's Board of Trustees may issue additional series or classes
of shares. Each share represents an equal proportionate
beneficial interest in the Fund. In the event of the liquidation
of the Fund, each share is entitled to a pro rata share of the
net assets of the Fund.
Shareholders are entitled to one vote for each full share held
(and fractional votes for fractional shares held) and will vote
in the election of or removal of trustees (to the extent
PAGE 437
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing trustees unless and
until such time as less than a majority of the trustees holding
office have been elected by shareholders, at which time the
trustees then in office will call a shareholders' meeting for the
election of trustees. Pursuant to Section 16(c) of the
Investment Company Act of 1940, holders of record of not less
than two-thirds of the outstanding shares of a Fund may remove a
trustee by a vote cast in person or by proxy at a meeting called
for that purpose. Except as set forth above, the trustees shall
continue to hold office and may appoint successor trustees.
Voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in the election of trustees can, if
they choose to do so, elect all the trustees of the Trust, in
which event the holders of the remaining shares will be unable to
elect any person as a trustee. No amendments may be made to the
Declarations of Trust without the affirmative vote of a majority
of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of
redemption and the privilege of exchange are described in the
prospectus. Shares are fully paid and nonassessable, except as
set forth below. The Trust may be terminated (i) upon the sale
of its assets to another diversified, open-end management
investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon
liquidation and distribution of the assets of the Trust, if
approved by the vote of the holders of a majority of the
outstanding shares of the Trust. If not so terminated, the Trust
will continue indefinitely.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a
Fund. However, the Declarations of Trust disclaim shareholder
liability for acts or obligations of a Fund and requires that
notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Fund or a Trustee.
The Declarations of Trust provide for indemnification from Fund
property for all losses and expenses of any shareholder held
personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the
Fund itself would be unable to meet its obligations, a
possibility which T. Rowe Price believes is remote. Upon payment
of any liability incurred by the Fund, the shareholders of a Fund
paying such liability will be entitled to reimbursement from the
PAGE 438
general assets of the Fund. The Trustees intend to conduct the
operations of each Fund in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities
of such Fund.
Shareholders are entitled to one vote for each full share held
(and fractional votes for fractional shares held) and will vote
in the election of or removal of 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
Each 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, L.L.P., whose address
is 919 Third Avenue, New York, New York 10022, is legal counsel
to the Funds.
PAGE 439
INDEPENDENT ACCOUNTANTS
Price Waterhouse, LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the
Funds. The financial statements of the Prime Reserve and Short-
Term Bond Funds for the year ended May 31, 1994, and the report
of independent accountants are included in the Fund's Annual
Report for the year ended May 31, 1994. Also included are the
unaudited financial statements of the Funds dated November 30,
1994. A copy of the Annual and Semi-Annual Reports accompany
this Statement of Additional Information. The financial
statements of the Equity Income Fund for the year ended December
31, 1993, and the report of independent accountants are included
in the Fund's Annual Report for the year ended December 31, 1993.
Also included are the unaudited financial statements of the Fund
dated June 30, 1994. A copy of the Annual and Semi-Annual
Reports accompany this Statement of Additional Information. The
financial statements of the International Stock Fund for the year
ended October 31, 1994, and the report of independent accountants
are included in the Fund's Annual Report for the year ended
October 31, 1994. 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 Reports for the fiscal year ended May 31, 1994, and
the unaudited financial statements for the Fund's Semi-Annual
Report dated November 30, 1994, for the year ended December 31,
1993, and the unaudited financial statements for the Fund's Semi-
Annual Report dated June 30, 1994, and for the fiscal year ended
October 31, 1994, are incorporated into this Statement of
Additional Information by reference:
PAGE 440
Prime Short-Term
Reserve Fund Bond Fund
Annual Report Annual Report
Page Page
___________ ____________
Report of Independent Accountants 11 17
Statement of Net Assets, May 31, 1994 5-8 6-11
Statement of Operations, three months
ended May 31, 1994 and year ended
February 28, 1994 8 12
Statement of Changes in Net
Assets, three months
ended May 31, 1994 and
years ended February 28,
1994 and February 28, 1993 9 13
Notes to Financial Statements
May 31, 1994 9-10 14-15
Financial Highlights 11 16
Equity
Income Fund
Annual Report
Page
____________
Report of Independent Accountants 15
Statement of Net Assets, December 31, 1993 5-9
Statement of Operations, year ended
December 31, 1993 10
Statement of Changes in Net Assets, years ended
December 31, 1993 and December 31, 1992 11
Notes to Financial Statements, December 31, 199312-13
Financial Highlights 14
PAGE 441
International
Stock Fund
Annual Report
Page
______________
Report of Independent Accountants 19
Statement of Net Assets, October 31, 1994 8-14
Statement of Operations, year ended
October 31, 1994 14
Statement of Changes in Net Assets, year ended
October 31, 1994, ten months ended October 31,
1993, and year ended December 31, 1992 15
Notes to Financial Statements
October 31, 1994 16-18
Financial Highlights 18
SEMI-ANNUAL REPORT REFERENCES:
Prime Short-Term
Reserve Fund Bond Fund
Semi-Annual Semi-Annual
Report Page Report Page
___________ ____________
Statement of Net Assets,
November 30, 1994 (unaudited) 4-7 4-8
Statement of Operations, six months ended
November 30, 1994 (unaudited) 8 9
Statement of Changes in Net Assets, six
months ended November 30, 1994, three
months ended May 31, 1994 and year
ended February 28, 1994 (unaudited) 9 10
Notes to Financial Statements,
November 30, 1994 (unaudited) 9-10 11-12
Financial Highlights (unaudited) 11 13
PAGE 442
Equity
Income Fund
Semi-Annual
Report Page
____________
Statement of Net Assets, June 30, 1994 (unaudited)4-8
Statement of Operations, six months ended
June 30, 1993 (unaudited) 9
Statement of Changes in Net Assets,
six months ended June 30, 1994 and year
ended December 31, 1993 (unaudited) 10
Notes to Financial Statements,
June 30, 1993 (unaudited) 11-12
Financial Highlights (unaudited) 13
RATINGS OF COMMERCIAL PAPER
Prime Reserve and Short-Term Bond Funds
Moody's Investors Service, Inc. The rating of Prime-1 is the
highest commercial paper rating assigned by Moody's. Among the
factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in
certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and
quality of long-term debt; trend of earnings over a period of 10
years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the
management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such
obligations. These factors are all considered in determining
whether the commercial paper is rated P1, P2, or P3.
Standard & Poor's Corporation. Commercial paper rated A (highest
quality) by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; long-term senior
debt is rated "A" or better, although in some cases "BBB" credits
may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. The
PAGE 443
relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A1, A2, or A3.
Prime Reserve Fund
Fitch Investors Service, Inc.: Fitch 1 - Highest grade.
Commercial paper assigned this rating is regarded as having the
strongest degree of assurance for timely payment. Fitch 2 - Very
good grade. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest
issues.
RATINGS OF CORPORATE DEBT SECURITIES
Equity Income and Short-Term Bond Funds
Moody's Investors Service, Inc.
Aaa - Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge."
Aa - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A - Bonds rated A possess many favorable investment
attributes and are to be considered as upper-medium grade
obligations.
Baa - Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba - Bonds rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
PAGE 444
B - Bonds rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments of or maintenance of other terms of the contract over
any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked short-comings.
C - Lowest rated, extremely poor prospects of ever attaining
investment standing.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong.
A - Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC, and CC are regarded
on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
PAGE 445
D - In default.
Fitch Investors Service, Inc.
AAA - High grade, broadly marketable, suitable for
investment by trustees and fiduciary institutions, and liable to
but slight market fluctuation other than through changes in the
money rate. The prime feature of a "AAA" bond is the showing of
earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond
reasonable question whenever changes occur in conditions. Other
features may enter, such as a wide margin of protection through
collateral, security or direct lien on specific property.
Sinking funds or voluntary reduction of debt by call or purchase
or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA - Of safety virtually beyond question and readily
salable. Their merits are not greatly unlike those of "AAA"
class but a bond so rated may be junior though of strong lien, or
the margin of safety is less strikingly broad. The issue may be
the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the
enterprise and more local type of market.
PAGE 446
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements.
International Stock, International Discovery, European
Stock, New Asia, Japan, and Latin America Funds
Condensed Financial Information (Financial Highlights) for
the Funds is included in Part A of the Registration
Statement.
Statement of Net Assets, Statement of Operations, and
Statement of Changes in Net Assets of the International
Stock, International Discovery, European Stock, New Asia,
Japan, and Latin America Funds are included in each Fund's
Annual Report to Shareholders, the pertinent portions of
which are incorporated by reference in Part B of the
Registration Statement.
(b) Exhibits.
(1)(a) Articles of Amendment and Restatement of T. Rowe
Price International Funds, Inc., dated February 16,
1990 (electronically filed with Amendment No. 42
dated February 28, 1994)
(1)(b) Articles Supplementary of T. Rowe Price
International Funds, Inc., dated March 4, 1991
(1)(c) Articles of Amendment of T. Rowe Price International
Funds, Inc., dated May 1, 1991
(1)(d) Articles Supplementary of T. Rowe Price
International Funds, Inc., dated October 18, 1991
(1)(e) Articles Supplementary of T. Rowe Price
International Funds, Inc., dated May 4, 1992
(electronically filed with Amendment No. 44 dated
December 22, 1994)
(1)(f) Articles Supplementary of T. Rowe Price
International Funds, Inc., dated November 4, 1993
(electronically filed with Amendment No. 41 dated
December 16, 1993)
PAGE 447
(1)(g) Articles Supplementary of T. Rowe Price
International Funds, Inc. dated February 18, 1994
(electronically filed with Amendment No. 42 dated
February 28, 1994)
(1)(h) Articles Supplementary of T. Rowe Price
International Funds, Inc. dated November 2, 1994
(electronically filed with Amendment No. 44 dated
December 22, 1994)
(2) By-Laws of Registrant, as amended to May 1, 1991 and
September 30, 1993 (electronically filed with
Amendment No. 41 dated December 16, 1993)
(3) Inapplicable
(4)(a) Specimen Stock Certificate for International Bond
Fund (filed with Amendment No. 10)
(4)(b) Specimen Stock Certificate for International Stock
Fund (filed with Amendment No. 10)
(4)(c) Specimen Stock Certificate for International
Discovery Fund (filed with Amendment No. 14)
(4)(d) Specimen Stock Certificate for European Stock Fund
(filed with Amendment No. 18)
(4)(e) Specimen Stock Certificate for New Asia Fund (filed
with Amendment No. 21)
(4)(f) Specimen Stock Certificate for Global Government
Bond Fund (filed with Amendment No. 24)
(4)(g) T. Rowe Price Japan Fund and T. Rowe Price Short-
Term Global Income Fund. See Article FIFTH, Capital
Stock, Paragraphs (A)-(E) of the Articles of
Amendment and Restatement electronically filed with
Amendment No. 19, Article II, Shareholders, Sections
2.01-2.11 and Article VIII, Capital Stock, Sections
8.01-8.06 of the Bylaws (filed with Amendment No.
19)
PAGE 448
(5)(a) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price International Bond Fund,
dated May 1, 1990 (electronically filed with
Amendment No. 42 dated February 28, 1994)
(5)(b) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price International Stock Fund,
dated May 1, 1990 (electronically filed with
Amendment No. 42 dated February 28, 1994)
(5)(c) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price International Discovery
Fund, dated May 1, 1991 (electronically filed with
Amendment No. 42 dated February 28, 1994)
(5)(d) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price European Stock Fund, dated
May 1, 1990 (electronically filed with Amendment No.
42 dated February 28, 1994)
(5)(e) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price New Asia Fund, dated May 1,
1991 (electronically filed with Amendment No. 42
dated February 28, 1994)
(5)(f) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price Global Government Bond Fund,
dated November 7, 1990 (electronically filed with
Amendment No. 42 dated February 28, 1994)
(5)(g) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price Japan Fund, dated November
6, 1991 (electronically filed with Amendment No. 42
dated February 28, 1994)
(5)(h) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price Short-Term Global Income
Fund, dated April 23, 1992 (electronically filed
with Amendment No. 42 dated February 28, 1994)
PAGE 449
(5)(i) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price Latin America Fund, dated
November 3, 1993 (electronically filed with
Amendment No. 41 dated December 16, 1993)
(5)(j) Investment Management Agreement between Registrant
and Rowe Price-Fleming International, Inc., on
behalf of T. Rowe Price Emerging Markets Bond Fund,
dated November 2, 1994 (electronically filed with
Amendment No. 44 dated December 22, 1994)
(6) Underwriting Agreement between Registrant and T.
Rowe Price Investment Services, Inc., dated May 1,
1990 (electronically filed with Amendment No. 42
dated February 28, 1994)
(7) Inapplicable
(8)(a) Custodian Agreement between T. Rowe Price Funds and
State Street Bank and Trust Company dated September
28, 1987, as amended June 24, 1988, October 19,
1988, February 22, 1989, July 19, 1989, September
15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990,
July 18, 1990, October 15, 1990, February 13, 1991,
March 6, 1991, September 12, 1991, November 6, 1991,
April 23, 1992, September 2, 1992, November 3, 1992,
December 16, 1992, December 21, 1992, January 28,
1993, April 22, 1993, September 16, 1993, November
3, 1993, March 1, 1994, April 21, 1994, July 27,
1994, September 21, 1994, November 1, 1994, and
November 2, 1994
(8)(b) Global Custody Agreement between The Chase Manhattan
Bank, N.A. and T. Rowe Price Funds, dated January 3,
1994, as amended April 18, 1994, August 15, 1994,
and November 28, 1994
(9)(a) Transfer Agency and Service Agreement between T.
Rowe Price Services, Inc. and T. Rowe Price Funds,
dated January 1, 1994, as amended March 1, 1994,
April 21, 1994, July 27, 1994, September 21, 1994,
November 1, 1994, and November 2, 1994 (to be filed
by amendment)
PAGE 450
(9)(b) Agreement between T. Rowe Price Associates, Inc. and
T. Rowe Price Funds for Fund Accounting Services,
dated January 1, 1994, as amended March 1, 1994,
April 21, 1994, July 27, 1994, September 21, 1994,
November 1, 1994, and November 2, 1994 (to be filed
by amendment)
(9)(c) Agreement between T. Rowe Price Retirement Plan
Services, Inc. and the Taxable Funds, dated January
1, 1994, as amended March 1, 1994, April 21, 1994,
July 27, 1994, September 21, 1994, and November 2,
1994 (to be filed by amendment)
(10) Inapplicable
(11) Consent of Independent Accountants
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16)(a) Total Return Performance Methodology
(16)(b) T. Rowe Price Global Government Bond Fund; T. Rowe
Price International Bond Fund; and T. Rowe Price
Short-Term Global Income Fund. The Registrant
hereby incorporates by reference the methodology
used in calculating the performance information
included in Post-Effective Amendment No. 34 and
Amendment No. 12 of the T. Rowe Price New Income
Fund, Inc. (SEC. File Nos. 2-48848 and 811-2396)
dated April 27, 1988.
(17) Financial Data Schedule for T. Rowe Price
International Discovery Fund, T. Rowe Price
International Stock Fund, T. Rowe Price European
Stock Fund, T. Rowe Price New Asia Fund, T. Rowe
Price Japan Fund, and T. Rowe Price Latin America
Fund as of February 7, 1995.
Item 25. Persons Controlled by or Under Common Control With
Registrant.
None.
PAGE 451
Item 26. Number of Holders of Securities
As of December 31, 1994, there were 265,286 shareholders in
the T. Rowe Price International Stock Fund.
As of December 31, 1994, there were 42,556 shareholders in
the T. Rowe Price International Discovery Fund.
As of December 31, 1994, there were 34,618 shareholders in
the T. Rowe Price European Stock Fund.
As of December 31, 1994, there were 182,914 shareholders in
the T. Rowe Price New Asia Fund.
As of December 31, 1994, there were 2,466 shareholders in
the T. Rowe Price Global Government Bond Fund.
As of December 31, 1994, there were 27,360 shareholders in
the T. Rowe Price International Bond Fund.
As of December 31, 1994, there were 3,318 shareholders in
the T. Rowe Price Short-Term Global Income Fund.
As of December 31, 1994, there were 17,523 shareholders in
the T. Rowe Price Japan Fund.
As of December 31, 1994, there were 25,288 shareholders in
the T. Rowe Price Latin America Fund.
As of December 31, 1994 there were two shareholders in the
T. Rowe Price Emerging Markets Bond Fund.
Item 27. Indemnification
The Registrant maintains comprehensive Errors and Omissions and
Officers and Directors insurance policies written by the Evanston
Insurance Company, The Chubb Group and ICI Mutual. These
policies provide coverage for the named insureds, which include
T. Rowe Price Associates, Inc. ("Price Associates"), Rowe Price-
Fleming International, Inc., T. Rowe Price Investment Services,
Inc., T. Rowe Price Services, Inc., T. Rowe Price Trust Company,
T. Rowe Price Stable Asset Management, Inc., RPF International
Bond Fund and thirty-nine other investment companies, namely, T.
Rowe Price Growth Stock Fund, Inc., T. Rowe Price New Horizons
Fund, Inc., T. Rowe Price New Era Fund, Inc., T. Rowe Price New
Income Fund, Inc., T. Rowe Price Prime Reserve Fund, Inc., T.
PAGE 452
Rowe Price Tax-Free Income Fund, Inc., T. Rowe Price Tax-Exempt
Money Fund, Inc., T. Rowe Price Growth & Income Fund, Inc., T.
Rowe Price Tax-Free Short-Intermediate Fund, Inc., T. Rowe Price
Short-Term Bond Fund, Inc., T. Rowe Price High Yield Fund, Inc.,
T. Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe Price New
America Growth Fund, T. Rowe Price Equity Income Fund, T. Rowe
Price GNMA Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe
Price State Tax-Free Income Trust, T. Rowe Price California Tax-
Free Income Trust, T. Rowe Price Science & Technology Fund, Inc.,
T. Rowe Price Small-Cap Value Fund, Inc., Institutional
International Funds, Inc., T. Rowe Price U.S. Treasury Funds,
Inc., T. Rowe Price Index Trust, Inc., T. Rowe Price Spectrum
Fund, Inc., T. Rowe Price Balanced Fund, Inc., T. Rowe Price
Adjustable Rate U.S. Government Fund, Inc., T. Rowe Price Mid-Cap
Growth Fund, Inc., T. Rowe Price OTC Fund, Inc., T. Rowe Price
Tax-Free Insured Intermediate Bond Fund, Inc., T. Rowe Price
Dividend Growth Fund, Inc., T. Rowe Price Blue Chip Growth Fund,
Inc., T. Rowe Price Summit Funds, Inc., T. Rowe Price Summit
Municipal Funds, Inc., T. Rowe Price Equity Series, Inc., T. Rowe
Price International Series, Inc., T. Rowe Price Fixed Income
Series, Inc., T. Rowe Price Personal Strategy Funds, Inc., T.
Rowe Price Value Fund, Inc., and T. Rowe Price Capital
Opportunity Fund, Inc. The Registrant and the thirty-nine
investment companies listed above, with the exception of T. Rowe
Price Equity Series, Inc., T. Rowe Price Fixed Income Series,
Inc., T. Rowe Price International Series, Inc. and Institutional
International Funds, Inc., will be collectively referred to as
the Price Funds. With respect to all such Price Funds excluding
the Registrant, T. Rowe Price International Series, Inc. and
Institutional International Funds, Inc., their investment manager
is Price Associates. The investment manager to the Registrant,
T. Rowe Price International Series, Inc., and Institutional
International Funds, Inc. is Rowe Price-Fleming International,
Inc. ("Manager") which is 50% owned by TRP Finance, Inc., a
wholly-owned subsidiary of Price Associates, 25% owned by
Copthall Overseas Limited, a wholly-owned subsidiary of Robert
Fleming Holdings Limited, and 25% owned by Jardine Fleming
International Holdings Limited. In addition to the corporate
insureds, the policies also cover the officers, directors, and
employees of each of the named insureds. The premium is
allocated among the named corporate insureds in accordance with
the provisions of Rule 17d-1(d)(7) under the Investment Company
Act of 1940.
PAGE 453
Article X, Section 10.01 of the Registrant's By-Laws
provides as follows:
Section 10.01. Indemnification and Payment of Expenses
in Advance: The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer,
employee, or agent of the Corporation, or who is or has been
serving at the request of the Corporation as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, who,
by reason of his position was, is, or is threatened to be
made a party to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter collectively
referred to as a "Proceeding") against any judgments,
penalties, fines, settlements, and reasonable expenses
(including attorneys' fees) incurred by such Indemnitee in
connection with any Proceeding, to the fullest extent that
such indemnification may be lawful under Maryland law. The
Corporation shall pay any reasonable expenses so incurred by
such Indemnitee in defending a Proceeding in advance of the
final disposition thereof to the fullest extent that such
advance payment may be lawful under Maryland law. Subject
to any applicable limitations and requirements set forth in
the Corporation's Articles of Incorporation and in these By-
Laws, any payment of indemnification or advance of expenses
shall be made in accordance with the procedures set forth in
Maryland law.
Notwithstanding the foregoing, nothing herein shall
protect or purport to protect any Indemnitee against any
liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of
his office ("Disabling Conduct").
Anything in this Article X to the contrary
notwithstanding, no indemnification shall be made by the
Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court
or other body before whom the Proceeding was
brought that the Indemnitee was not liable by
reason of Disabling Conduct; or
PAGE 454
(b) in the absence of such a decision, there is a
reasonable determination, based upon a review of
the facts, that the Indemnitee was not liable by
reason of Disabling Conduct, which determination
shall be made by:
(i) the vote of a majority of a quorum of
directors who are neither "interested
persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company
Act of 1940, nor parties to the Proceeding;
or
(ii) an independent legal counsel in a written
opinion.
Anything in this Article X to the contrary
notwithstanding, any advance of expenses by the Corporation
to any Indemnitee shall be made only upon the undertaking by
such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to
indemnification as above provided, and only if one of the
following conditions is met:
(a) the Indemnitee provides a security for his
undertaking; or
(b) the Corporation shall be insured against losses
arising by reason of any lawful advances; or
(c) there is a determination, based on a review of
readily available facts, that there is reason to
believe that the Indemnitee will ultimately be
found entitled to indemnification, which
determination shall be made by:
(i) a majority of a quorum of directors who are
neither "interested persons" of the
Corporation as defined in Section 2(a)(19) of
the Investment Company Act, nor parties to
the Proceeding; or
(ii) an independent legal counsel in a written
opinion.
Section 10.02 of the Registrant's By-Laws provides as
follows:
PAGE 455
Section 10.02. Insurance of Officers, Directors,
Employees and Agents: To the fullest extent permitted by
applicable Maryland law and by Section 17(h) of the
Investment Company Act, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or
agent of the Corporation, or who is or was serving at the
request of the Corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against any liability asserted
against him and incurred by him in or arising out of his
position, whether or not the Corporation would have the
power to indemnify him against such liability.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
M. David Testa, who is Chairman of the Board of the Manager,
is presently a Director and Managing Director of Price Associates
and a Director of T. Rowe Price Trust Company.
George J. Collins, a Director of the Manager, is Chief Executive
Officer, President, and a Managing Director of Price Associates.
D. William J. Garrett, a Director of the Manager, is Chairman of
Robert Fleming Securities Limited, a Director of Robert Fleming
PAGE 456
Holdings Limited ("Robert Fleming Holdings"), a parent of the
Manager which is a United Kingdom holding company duly organized
and existing under the laws of the United Kingdom, Robert Fleming
Management Services Limited, Robert Fleming Management Services
Limited, Robert Fleming & Co. Limited, and Fleming Investments
Limited. Mr. Garrett also serves as Director and/or officer of
other companies related to or affiliated with the above listed
companies.
P. John Manser, a Director of the Manager, is Chief Executive of
Robert Fleming Holdings, Chairman of Robert Fleming & Co.
Limited, Director of Jardine Fleming Group Limited, Robert
Fleming Management Services Limited, Fleming Investment
Management Limited, Robert Fleming Asset Management Limited,
Jardine Fleming Holdings Limited, and Robert Fleming Asset
Management Limited and also serves as a director of the U.K.
Securities and Investments Board. Mr. Manser also serves as
Director and/or officer of other companies related to or
affiliated with the above listed companies.
James S. Riepe, a Director of 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.
George A. Roche, a Vice President and a Director of the Manager,
is Chief Financial Officer and a Managing Director of Price
Associates.
Alan H. Smith, a Director of the Manager, is Managing Director of
Jardine Fleming Group Limited and Jardine Fleming Holdings
Limited, Chairman of Jardine Fleming Investment Management
Limited, Jardine Fleming & Company Limited and Jardine Fleming
Securities Limited and a Director of Robert Fleming Holdings.
Mr. Smith also serves as Director and/or officer of other
companies related to or affiliated with the above listed
companies.
Henry C. T. Strutt, a Director of the Manager, is Managing
Director and General Manager of Jardine Fleming Holdings Ltd. and
Director of Robert Fleming Holdings Ltd.
Alvin M. Younger, Jr., the Secretary and Treasurer of the
Manager, is a Managing Director and the Secretary and Treasurer
of Price Associates.
PAGE 457
Martin G. Wade, President, Price-Fleming; Director, Robert
Fleming Holdings Limited.
With the exception of Christopher D. Alderson, Peter B. Askew,
Richard J. Bruce, Ann B. Cranmer, Mark J. T. Edwards, John R.
Ford, Christopher Rothery, James B. M. Seddon, Benedict R. F.
Thomas, David J. L. Warren, and Martin G. Wade, all officers of
the Manager are officers and/or employees of Price Associates and
may also be officers and/or directors of one or more subsidiaries
of Price Associates and/or one or more of the registered
investment companies which Price Associates or the Manager serves
as investment adviser. Mr. Ilott is an employee of Fleming
Investment Management Limited, an investment adviser registered
under the Investment Advisers Act of 1940. Ms. Cranmer is an
employee of Fleming Investment Management Limited. Mr. Wade, who
is President of the Manager, is also a Non-Executive Director of
Robert Fleming Holdings.
RPFI International Partners, Limited Partnership, is a
Delaware limited partnership organized in 1985 for the purpose of
investing in a diversified group of small and medium-sized non-
U.S. companies. The Manager is the general partner of this
partnership, and certain institutional investors, including
advisory clients of the Manager are its limited partners.
See also "Management of Fund," in the Registrant's Statement of
Additional Information.
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is
Investment Services. Investment Services acts as the principal
underwriter for the other thirty-nine Price Funds. Investment
Services is a wholly-owned subsidiary of the Manager, 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. Investment Services has been formed for the
limited purpose of distributing the shares of the Price Funds and
will not engage in the general securities business. Since the
Price Funds are sold on a no-load basis, Investment Services will
not receive any commissions or other compensation for acting as
principal underwriter.
(b) The address of each of the directors and officers of
Investment Services listed below is 100 East Pratt Street,
Baltimore, Maryland 21202.
PAGE 458
Positions and
Name and Principal Positions and Offices Offices With
Business Address With Underwriter Registrant
__________________ ______________________ ______________
James S. Riepe President and Director Vice President
Henry H. Hopkins Vice President and Vice President
Director
Mark E. Rayford Director None
PAGE
Charles E. Vieth Vice President and None
Director
Patricia M. Archer Vice President None
Edward C. Bernard Vice President None
Joseph C. Bonasorte Vice President None
Meredith C. Callanan Vice President None
Laura H. Chasney Vice President None
Victoria C. Collins Vice President None
Christopher W. Dyer Vice President None
Forrest R. Foss Vice President None
Patricia O. Goodyear Vice President None
James W. Graves Vice President None
Andrea G. Griffin Vice President None
David J. Healy Vice President None
Joseph P. Healy Vice President None
Walter J. Helmlinger Vice President None
Eric G. Knauss Vice President None
Douglas G. Kremer Vice President None
Sharon Renae Krieger Vice President None
Keith Wayne Lewis Vice President None
David A. Lyons Vice President None
Sarah McCafferty Vice President None
Maurice A. Minerbi Vice President None
Nancy M. Morris Vice President None
George A. Murnaghan Vice President Vice President
Steven E. Norwitz Vice President None
Kathleen M. O'Brien Vice President None
Pamela D. Preston Vice President None
Lucy B. Robins Vice President None
John R. Rockwell Vice President None
Monica R. Tucker Vice President None
William F. Wendler, II Vice President Vice President
Terrie L. Westren Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Alvin M. Younger, Jr. Secretary and Treasurer None
Mark S. Finn Controller None
PAGE 459
Richard J. Barna Assistant Vice President None
Catherine L. Berkenkemper Assistant Vice President None
Ronae M Brock Assistant Vice President None
Brenda E. Buhler Assistant Vice President None
Patricia S. Butcher Assistant Vice President None
John A. Galateria Assistant Vice President None
Janelyn A. Healey Assistant Vice President None
Keith J. Langrehr Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Janice D. McCrory Assistant Vice President None
Sandra J. McHenry Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Kristin E. Seeberger Assistant Vice President None
Arthur J. Siber Assistant Vice President None
Anne B. Winter Assistant Vice President None
Linda C. Wright Assistant Vice President None
Nolan L. North Assistant Treasurer None
Barbara A. VanHorn Assistant Secretary None
(c) Not applicable. Investment Services will not receive
any compensation with respect to its activities as underwriter
for the Price Funds since the Price Funds are sold on a no-load
basis.
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be
maintained by T. Rowe Price International Funds, Inc. under
Section 31(a) of the Investment Company Act of 1940 and the rules
thereunder will be maintained by T. Rowe Price International
Funds, Inc. at its offices at 100 East Pratt Street, Baltimore,
Maryland 21202. Transfer, dividend disbursing, and shareholder
service activities are performed by T. Rowe Price Services, Inc.,
at 100 East Pratt Street, Baltimore, Maryland 21202. Custodian
activities for T. Rowe Price International Funds, Inc. are
performed at State Street Bank and Trust Company's Service Center
(State Street South), 1776 Heritage Drive, Quincy, Massachusetts
02171. Custody of Fund portfolio securities which are purchased
outside the United States is maintained by The Chase Manhattan
Bank, N.A., London in its foreign branches or with other U.S.
banks. The Chase Manhattan Bank, N.A., London is located at
Woolgate House, Coleman Street, London EC2P 2HD, England.
Item 31. Management Services.
Registrant is not a party to any management related service
contract, other than as set forth in the Prospectus.
PAGE 460
Item 32. Undertakings.
(a) Each series of the Registrant agrees to furnish, upon
request and without charge, a copy of its latest Annual
Report to each person to whom its prospectus is
delivered.
PAGE 461
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, State of Maryland, this 7th
day of February, 1995.
T. ROWE PRICE INTERNATIONAL FUNDS,
INC.
/s/M. David Testa
By: M. David Testa
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
_________ ______ _____
/s/M. David Testa Chairman of the Board February 7, 1995
M. David Testa (Chief Executive Officer)
/s/Carmen F. Deyesu Treasurer February 7, 1995
Carmen F. Deyesu (Chief Financial Officer)
/s/Martin G. Wade President and Director February 7, 1995
Martin G. Wade
/s/Leo C. Bailey Director February 7, 1995
Leo C. Bailey
/s/Anthony W. Deering Director February 7, 1995
Anthony W. Deering
/s/Donald W. Dick, Jr. Director February 7, 1995
Donald W. Dick, Jr.
/s/Addison Lanier Director February 7, 1995
Addison Lanier
The Custodian Agreement dated September 28, 1987, as
amended, between State Street Bank and Trust Company and T. Rowe
Price Funds should be inserted here.
PAGE 1
CUSTODIAN CONTRACT
Between
STATE STREET BANK AND TRUST COMPANY
and
EACH OF THE PARTIES INDICATED
ON APPENDIX A
DATED: SEPTEMBER 28, 1987
FRF 07/87
PAGE 2
TABLE OF CONTENTS
1. Employment of Custodian and Property to be Held By It1
2. Duties of the Custodian with Respect to Property of the Fund
Held by the Custodian in the United States. . . 2
2.1 Holding Securities . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . 2
1) Sale . . . . . . . . . . . . . . . . . . 2
2) Repurchase Agreement . . . . . . . . . . 2
3) Securities System . . . . . . . . . . . . 3
4) Tender Offer . . . . . . . . . . . . . . 3
5) Redemption by Issuer . . . . . . . . . . 3
6) Transfer to Issuer, Nominee, Exchange . . 3
7) Sale to Broker . . . . . . . . . . . . . 3
8) Exchange or Conversion . . . . . . . . . 4
9) Warrants, Rights . . . . . . . . . . . . 4
10) Loans of Securities . . . . . . . . . . . 4
11) Borrowings . . . . . . . . . . . . . . . 4
12) Options . . . . . . . . . . . . . . . . . 5
13) Futures . . . . . . . . . . . . . . . . . 5
14) In-Kind Distributions . . . . . . . . . . 5
15) Miscellaneous . . . . . . . . . . . . . . 5
16) Type of Payment . . . . . . . . . . . . . 6
2.3 Registration of Securities . . . . . . . . . 6
2.4 Bank Accounts . . . . . . . . . . . . . . . . 7
2.5 Sale of Shares and Availability of Federal Funds7
2.6 Collection of Income, Dividends . . . . . . . 7
2.7 Payment of Fund Monies . . . . . . . . . . . 8
1) Purchases . . . . . . . . . . . . . . . . 8
2) Exchanges . . . . . . . . . . . . . . . . 9
3) Redemptions . . . . . . . . . . . . . . . 9
4) Expense and Liability . . . . . . . . . . 9
5) Dividends . . . . . . . . . . . . . . . . 9
6) Short Sale Dividend . . . . . . . . . . . 10
7) Loan . . . . . . . . . . . . . . . . . . 10
8) Miscellaneous . . . . . . . . . . . . . . 10
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased . . . . . . . . . . . 10
2.9 Appointment of Agents . . . . . . . . . . . . 10
2.10 Deposit of Securities in Securities System . 10
1) Account of Custodian . . . . . . . . . . 11
2) Records . . . . . . . . . . . . . . . . . 11
3) Payment of Fund Monies, Delivery of
Securities . . . . . . . . . . . . . . 11
4) Reports . . . . . . . . . . . . . . . . . 12
5) Annual Certificate . . . . . . . . . . . 12
6) Indemnification . . . . . . . . . . . . . 12
2.11 Fund Assets Held in the Custodian's Direct Paper
System . . . . . . . . . . . . . . . . . . 13
2.12 Segregated Account . . . . . . . . . . . . . 14
PAGE 3
2.13 Ownership Certificates for Tax Purposes . . . 15
2.14 Proxies . . . . . . . . . . . . . . . . . . . 15
2.15 Communications Relating to Fund Portfolio
Securities . . . . . . . . . . . . . . . . 15
2.16 Reports to Fund by Independent Public
Accountants . . . . . . . . . . . . . . . . 16
3. Duties of the Custodian with Respect to Property
of the Fund Held Outside of the United States . 16
3.1 Appointment of Foreign Sub-Custodians . . . . 16
3.2 Assets to be Held . . . . . . . . . . . . . . 17
3.3 Foreign Securities Depositories . . . . . . . 17
3.4 Segregation of Securities . . . . . . . . . . 17
3.5 Access of Independent Accountants of the Fund 17
3.6 Reports by Custodian . . . . . . . . . . . . 18
3.7 Transactions in Foreign Assets of the Fund . 18
3.8 Responsibility of Custodian, Sub-Custodian and
Fund . . . . . . . . . . . . . . . . . . . 18
3.9 Monitoring Responsibilities . . . . . . . . . 19
3.10 Branches of U.S. Banks . . . . . . . . . . . 19
4. Payments for Repurchases or Redemptions and Sales of
Shares of the Fund . . . . . . . . . . . . . . . 19
5. Proper Instructions . . . . . . . . . . . . . . . 20
6. Actions Permitted Without Express Authority . . . 21
7. Evidence of Authority, Reliance on Documents . . . 21
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income . . . . . . . . . . . . . . . . . . . 22
9. Records, Inventory . . . . . . . . . . . . . . . . 22
10. Opinion of Fund's Independent Accountant . . . . . 23
11. Compensation of Custodian . . . . . . . . . . . . 23
12. Responsibility of Custodian . . . . . . . . . . . 23
13. Effective Period, Termination and Amendment . . . 25
14. Successor Custodian . . . . . . . . . . . . . . . 26
15. Interpretive and Additional Provisions . . . . . . 28
16. Notice . . . . . . . . . . . . . . . . . . . . . . 28
17. Bond . . . . . . . . . . . . . . . . . . . . . . . 28
18. Confidentiality . . . . . . . . . . . . . . . . . 29
19. Exemption from Liens . . . . . . . . . . . . . . . 29
20. Massachusetts Law to Apply . . . . . . . . . . . . 29
21. Prior Contracts . . . . . . . . . . . . . . . . . 29
22. The Parties . . . . . . . . . . . . . . . . . . . 30
23. Governing Documents . . . . . . . . . . . . . . . 30
24. Subcustodian Agreement . . . . . . . . . . . . . . 30
25. Directors and Trustees . . . . . . . . . . . . . . 30
26. Massachusetts Business Trust . . . . . . . . . . . 30
27. Successors of Parties . . . . . . . . . . . . . . 31
PAGE 4
CUSTODIAN CONTRACT
This Contract by and between State Street Bank and Trust
Company, a Massachusetts trust company, having its principal
place of business at 225 Franklin Street, Boston, Massachusetts,
02110 (hereinafter called the "Custodian"), and each fund which
is listed on Appendix A (as such Appendix may be amended from
time to time) and which evidences its agreement to be bound
hereby by executing a copy of this Contract (each such fund
individually hereinafter called the "Fund," whose definition may
be found in Section 22),
WITNESSETH: That in consideration of the mutual covenants
and agreements hereinafter contained, the parties hereto agree as
follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of
its assets, including securities it desires to be held in places
within the United States ("domestic securities") and securities
it desires to be held outside the United States ("foreign
securities") pursuant to the Governing Documents of the Fund.
The Fund agrees to deliver to the Custodian all securities and
cash now or hereafter owned or acquired by it, and all payments
of income, payments of principal or capital distributions
received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for
such new or treasury shares of capital stock ("Shares") of the
Fund as may be issued or sold from time to time. The Custodian
shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian.
With respect to domestic securities, upon receipt of "Proper
Instructions" (within the meaning of Article 5), the Custodian
shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable
vote by the Board of Directors/Trustees of the Fund, and provided
that the Custodian shall have no more or less responsibility or
liability to the Fund on account of any actions or omissions of
any sub-custodian so employed than any such sub-custodian has to
the Custodian, and further provided that the Custodian shall not
release the sub-custodian from any responsibility or liability
unless mutually agreed upon by the parties in writing. With
respect to foreign securities and other assets of the Fund held
outside the United States, the Custodian shall employ Chase
Manhattan Bank, N.A., as a sub-custodian for the Fund in
accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund
Held By the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and
physically segregate for the account of the Fund all
PAGE 5
non-cash property, to be held by it in the United States,
including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section
2.10 in a clearing agency which acts as a securities
depository or in a book-entry system authorized by the U.S.
Department of the Treasury, collectively referred to herein
as "Securities System," and (b) commercial paper of an
issuer for which the Custodian acts as issuing and paying
agent ("Direct Paper") which is deposited and/or maintained
in the Direct Paper System of the Custodian pursuant to
Section 2.11.
2.2 Delivery of Securities. The Custodian shall release
and deliver domestic securities owned by the Fund held by
the Custodian or in a Securities System account of the
Custodian or in the Custodian's Direct Paper book entry
system account ("Direct Paper System Account") only upon
receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by mutual agreement of
the parties, and only in the following cases:
1) Sale. Upon sale of such securities for the
account of the Fund and receipt of payment
therefor;
2) Repurchase Agreement. Upon the receipt of payment
in connection with any repurchase agreement
related to such securities entered into by the
Fund;
3) Securities System. In the case of a sale effected
through a Securities System, in accordance with
the provisions of Section 2.10 hereof;
4) Tender Offer. To the depository agent or other
receiving agent in connection with tender or other
similar offers for portfolio securities of the
Fund;
5) Redemption by Issuer. To the issuer thereof or
its agent when such securities are called,
redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) Transfer to Issuer, Nominee. Exchange. To the
issuer thereof, or its agent, for transfer into
the name of the Fund or into the name of any
nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or
nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other
evidence representing the same aggregate face
amount or number of units and bearing the same
interest rate, maturity date and call provisions,
PAGE 6
if any; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Sale to Broker or Dealer. Upon the sale of such
securities for the account of the Fund, to the
broker or its clearing agent or dealer, against a
receipt, for examination in accordance with
"street delivery" custom; provided that in any
such case, the Custodian shall have no
responsibility or liability for any loss arising
from the delivery of such securities prior to
receiving payment for such securities except as
may arise from the Custodian's failure to act in
accordance with its duties as set forth in
Section 12.
8) Exchange or Conversion. For exchange or
conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization,
split-up of shares, change of par value or
readjustment of the securities of the issuer of
such securities, or pursuant to provisions for
conversion contained in such securities, or
pursuant to any deposit agreement provided that,
in any such case, the new securities and cash, if
any, are to be delivered to the Custodian;
9) Warrants, Rights. In the case of warrants, rights
or similar securities, the surrender thereof in
the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or
temporary securities for definitive securities;
provided that, in any such case, the new
securities and cash, if any, are to be delivered
to the Custodian;
10) Loans of Securities. For delivery in connection
with any loans of securities made by the Fund, but
only against receipt of adequate collateral as
agreed upon from time to time by the Custodian and
the Fund, which may be in the form of cash,
obligations issued by the United States
government, its agencies or instrumentalities, or
such other property as mutually agreed by the
parties, except that in connection with any loans
for which collateral is to be credited to the
Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury,
the Custodian will not be held liable or
responsible for the delivery of securities owned
by the Fund prior to the receipt of such
collateral, unless the Custodian fails to act in
accordance with its duties set forth in
Article 12;
PAGE 7
11) Borrowings. For delivery as security in
connection with any borrowings by the Fund
requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed, except where
additional collateral is required to secure a
borrowing already made, subject to Proper
Instructions, further securities may be released
for that purpose;
12) Options. For delivery in accordance with the
provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing
Corporation, any registered national securities
exchange, any similar organization or
organizations, or the Investment Company Act of
1940, regarding escrow or other arrangements in
connection with transactions by the Fund;
13) Futures. For delivery in accordance with the
provisions of any agreement among the Fund, the
Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act,
relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any
Contract Market, any similar organization or
organizations, or the Investment Company Act of
1940, regarding account deposits in connection
with transactions by the Fund;
14) In-Kind Distributions. Upon receipt of
instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the Fund's
currently effective prospectus and statement of
additional information ("prospectus"), in
satisfaction of requests by holders of Shares for
repurchase or redemption;
15) Miscellaneous. For any other proper corporate
purpose, but only upon receipt of, in addition to
Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or
of the Executive Committee signed by an officer of
the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities to
be delivered, setting forth the purpose for which
such delivery is to be made, declaring such
PAGE 8
purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of
such securities shall be made; and
16) Type of Payment. In any or all of the above
cases, payments to the Fund shall be made in cash,
by a certified check upon or a treasurer's or
cashier's check of a bank, by effective bank wire
transfer through the Federal Reserve Wire System
or, if appropriate, outside of the Federal Reserve
Wire System and subsequent credit to the Fund's
Custodian account, or, in case of delivery through
a stock clearing company, by book-entry credit by
the stock clearing company in accordance with the
then current street custom, or such other form of
payment as may be mutually agreed by the parties,
in all such cases collected funds to be promptly
credited to the Fund.
2.3 Registration of Securities. Domestic securities held
by the Custodian (other than bearer securities) shall be
registered in the name of the Fund or in the name of any
nominee of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered
investment companies having the same investment adviser as
the Fund, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee
name of any sub-custodian appointed pursuant to Article 1.
All securities accepted by the Custodian on behalf of the
Fund under the terms of this Contract shall be in "street
name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the United States in
the name of the Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Contract, and
shall hold in such account or accounts, subject to the
provisions hereof all cash received by it from or for the
account of the Fund, other than cash maintained by the Fund
in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds
held by the Custodian for the Fund may be deposited for the
Fund's credit in the Banking Department of the Custodian or
in such other banks or trust companies as the Custodian may
in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company
Act of 1940 and that each such bank or trust company and the
funds to be deposited with each such bank or trust company
shall be approved by vote of a majority of the Board of
Directors/Trustees of the Fund. Such funds shall be
PAGE 9
deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that
capacity.
2.5 Sale of Shares and Availability of Federal Funds. Upon
mutual agreement between the Fund and the Custodian, the
Custodian shall, upon the receipt of Proper Instructions,
make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for
Shares of the Fund which are deposited into the Fund's
account.
2.6 Collection of Income, Dividends. The Custodian shall
collect on a timely basis all income and other payments with
respect to United States registered securities held
hereunder to which the Fund shall be entitled either by law
or pursuant to custom in the securities business, and shall
collect on a timely basis all income and other payments with
respect to United States bearer securities if, on the date
of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income
or other payments, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing,
the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on
securities held hereunder. The Custodian will also receive
and collect all stock dividends, rights and other items of
like nature as and when they become due or payable. Income
due the Fund on United States securities loaned pursuant to
the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty
or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Fund is
properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper
Instructions,
which may be continuing instructions when deemed appropriate
by mutual agreement of the parties, the Custodian shall pay
out monies of the Fund in the following cases only:
1) Purchases. Upon the purchase of domestic
securities, options, futures contracts or options
on futures contracts for the account of the Fund
but only (a) against the delivery of such
securities, or evidence of title to such options,
futures contracts or options on futures contracts,
to the Custodian (or any bank, banking firm or
trust company doing business in the United States
or abroad which is qualified under the Investment
PAGE 10
Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian
as its agent for this purpose in accordance with
Section 2.9 hereof) registered in the name of the
Fund or in the name of a nominee of the Fund or of
the Custodian referred to in Section 2.3 hereof or
in other proper form for transfer; (b) in the case
of a purchase effected through a Securities
System, in accordance with the conditions set
forth in Section 2.10 hereof or (c) in the case of
a purchase involving the Direct Paper System, in
accordance with the conditions set forth in
Section 2.11; or (d) in the case of repurchase
agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer
which is a member of NASD, (i) against delivery of
the securities either in certificate form or
through an entry crediting the Custodian's account
at the Federal Reserve Bank with such securities
or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the
Custodian along with written evidence of the
agreement by the Custodian to repurchase such
securities from the Fund. All coupon bonds
accepted by the Custodian shall have the coupons
attached or shall be accompanied by a check
payable on coupon payable date for the interest
due on such date.
2) Exchanges. In connection with conversion,
exchange or surrender of securities owned by the
Fund as set forth in Section 2.2 hereof;
3) Redemptions. For the redemption or repurchase of
Shares issued by the Fund as set forth in Article
4 hereof;
4) Expense and Liability. For the payment of any
expense or liability incurred by the Fund,
including but not limited to the following
payments for the account of the Fund: interest,
taxes, management, accounting, transfer agent and
legal fees, and operating expenses of the Fund
whether or not such expenses are to be in whole or
part capitalized or treated as deferred expenses;
5) Dividends. For the payment of any dividends or
other distributions to shareholders declared
pursuant to the Governing Documents of the Fund;
6) Short Sale Dividend. For payment of the amount of
dividends received in respect of securities sold
short;
7) Loan. For repayment of a loan upon redelivery of
pledged securities and upon surrender of the
PAGE 11
note(s), if any, evidencing the loan;
8) Miscellaneous. For any other proper purpose, but
only upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of
the Board of Directors/Trustees or of the
Executive Committee of the Fund signed by an
officer of the Fund and certified by its Secretary
or an Assistant Secretary, specifying the amount
of such payment, setting forth the purpose for
which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased. In any and every case where payment
for purchase of domestic securities for the account of the
Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time
or times in its discretion appoint (and may at any time
remove) any other bank or trust company, which is itself
qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out
such of the provisions of this Article 2 as the Custodian
may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of
its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The
Custodian may deposit and/or maintain domestic securities
owned by the Fund in a clearing agency registered with the
Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal
agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board
and Securities and Exchange Commission rules and
regulations, if any, and subject to the following
provisions:
1) Account of Custodian. The Custodian may keep
domestic securities of the Fund in a Securities
System provided that such securities are
represented in an account ("Account") of the
Custodian in the Securities System which shall not
include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
PAGE 12
for customers;
2) Records. The records of the Custodian, with
respect to domestic securities of the Fund which
are maintained in a Securities System, shall
identify by book-entry those securities belonging
to the Fund;
3) Payment of Fund Monies, Delivery of Securities.
Subject to Section 2.7, the Custodian shall pay
for domestic securities purchased for the account
of the Fund upon (i) receipt of advice from the
Securities System that such securities have been
transferred to the Account, and (ii) the making of
an entry on the records of the Custodian to
reflect such payment and transfer for the account
of the Fund. Subject to Section 2.2, the
Custodian shall transfer domestic securities sold
for the account of the Fund upon (i) receipt of
advice from the Securities System that payment for
such securities has been transferred to the
Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies
of all advices from the Securities System of
transfers of domestic securities for the account
of the Fund shall identify the Fund, be maintained
for the Fund by the Custodian and be provided to
the Fund at its request. The Custodian shall
furnish the Fund confirmation of each transfer to
or from the account of the Fund in the form of a
written advice or notice and shall furnish to the
Fund copies of daily transaction sheets reflecting
each day's transactions in the Securities System
for the account of the Fund;
4) Reports. The Custodian shall provide the Fund
with any report obtained by the Custodian on the
Securities System's accounting system, internal
accounting control and procedures for safeguarding
domestic securities deposited in the Securities
System, and further agrees to provide the Fund
with copies of any documentation it has relating
to its arrangements with the Securities Systems as
set forth in this Agreement or as otherwise
required by the Securities and Exchange
Commission;
5) Annual Certificate. The Custodian shall have
received the initial or annual certificate, as the
case may be, required by Article 13 hereof;
6) Indemnification. Anything to the contrary in this
Contract notwithstanding, the Custodian shall be
liable to the Fund for any loss or expense,
PAGE 13
including reasonable attorneys fees, or damage to
the Fund resulting from use of the Securities
System by reason of any failure by the Custodian
or any of its agents or of any of its or their
employees or agents or from failure of the
Custodian or any such agent to enforce effectively
such rights as it may have against the Securities
System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the
Custodian with respect to any claim against the
Securities System or any other person which the
Custodian may have as a consequence of any such
loss, expense or damage if and to the extent that
the Fund has not been made whole for any such
loss, expense or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper
System. The Custodian may deposit and/or maintain
securities owned by the Fund in the Direct Paper System of
the Custodian subject to the following provisions:
1) No transaction relating to securities in the
Direct Paper System will be effected in the
absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in
the Direct Paper System only if such securities
are represented in an account ("Account") of the
Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to
securities of the Fund which are maintained in the
Direct Paper System shall identify by book-entry
those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased
for the account of the Fund upon the making of an
entry on the records of the Custodian to reflect
such payment and transfer of securities to the
account of the Fund. The Custodian shall transfer
securities sold for the account of the Fund upon
the making of an entry on the records of the
Custodian to reflect such transfer and receipt of
payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation
of each transfer to or from the account of the
Fund, in the form of a written advice or notice,
of Direct Paper on the next business day following
such transfer and shall furnish to the Fund copies
of daily transaction sheets reflecting each day's
transaction in the Securities System for the
account of the Fund;
PAGE 14
6) The Custodian shall provide the Fund with any
report on its system of internal accounting
control as the Fund may reasonably request from
time to time;
2.12 Segregated Account. The Custodian shall, upon receipt
of Proper Instructions, which may be of a continuing nature
where deemed appropriate by mutual agreement of the parties,
establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts
may be transferred cash and/or securities, including
securities maintained in an account by the Custodian
pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian
and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization
or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes
of segregating cash or government securities in connection
with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or
sold by the Fund, (iii) for the purposes of compliance by
the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release, rule or
policy, of the Securities and Exchange Commission relating
to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt
of, in addition to Proper Instructions, a certified copy of
a resolution of the Board of Directors/Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate
purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian
shall execute ownership and other certificates and
affidavits for all federal and state tax purposes in
connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in
connection with transfers of such securities.
2.14 Proxies. If the securities are registered other than
in the name of the Fund or a nominee of the Fund, the
Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the
PAGE 15
registered holder of such securities, all proxies, without
indication of the manner in which such proxies are to be
voted, and shall promptly deliver to the Fund such proxies,
all proxy soliciting materials and all notices relating to
such securities.
2.15 Communications Relating to Fund Portfolio Securities.
The Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency
of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of
exercise of call and put options written by the Fund and the
maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the domestic
securities being held for the Fund by the Custodian, an
agent appointed under Section 2.9, or sub-custodian
appointed under Section 1. With respect to tender or
exchange offers, the Custodian shall transmit promptly to
the Fund all written information received by the Custodian,
an agent appointed under Section 2.9, or sub-custodian
appointed under Section 1 from issuers of the domestic
securities whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer.
If the Fund desires to take action with respect to any
tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian of such
desired action at least 72 hours (excluding holidays and
weekends) prior to the time such action must be taken under
the terms of the tender, exchange offer, or other similar
transaction, and it will be the responsibility of the
Custodian to timely transmit to the appropriate person(s)
the Fund's notice. Where the Fund does not notify the
Custodian of its desired action within the aforesaid 72 hour
period, the Custodian shall use its best efforts to timely
transmit the Fund's notice to the appropriate person.
2.16 Reports to Fund by Independent Public Accountants. The
Custodian shall provide the Fund, at such times as the Fund
may reasonably require, with reports by independent public
accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures
contracts and options on futures contracts, including
domestic securities deposited and/or maintained in a
Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of
sufficient scope and in sufficient detail, as may reasonably
be required by the Fund to provide reasonable assurance that
any material inadequacies existing or arising since the
prior examination would be disclosed by such examination.
The reports must describe any material inadequacies
disclosed and, if there are no such inadequacies, the
reports shall so state.
PAGE 16
3. Duties of the Custodian with Respect to Property of the Fund
Held Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Custodian
is authorized and instructed to employ Chase Manhattan Bank,
N.A, ("Chase") as sub-custodian for the Fund's securities,
cash and other assets maintained outside of the United
States ("foreign assets") all as described in the
Subcustodian Agreement between the Custodian and Chase.
Upon receipt of "Proper Instructions", together with a
certified resolution of the Fund's Board of
Directors/Trustees, the Custodian and the Fund may agree to
designate additional proper institutions and foreign
securities depositories to act as sub-custodians of the
Fund's foreign assets. Upon receipt of Proper Instructions
from the Fund, the Custodian shall cease the employment of
any one or more of such sub-custodians for maintaining
custody of the Fund's foreign assets.
3.2 Assets to be Held. The Custodian shall limit the
foreign assets maintained in the custody of foreign sub-
custodians to foreign assets specified under the terms of
the Subcustodian Agreement between the Custodian and Chase.
3.3 Foreign Securities Depositories. Except as may
otherwise be agreed upon in writing by the Custodian and the
Fund, foreign assets of the Fund shall be maintained in
foreign securities depositories only through arrangements
implemented by the banking institutions serving as sub-
custodians pursuant to the terms hereof.
3.4 Segregation of Securities. The Custodian shall
identify on its books as belonging to the Fund, the foreign
assets of the Fund held by Chase and by each foreign sub-
custodian.
3.5 Access of Independent Accountants of the Fund. Upon
request of the Fund, the Custodian will use its best efforts
(subject to applicable law) to arrange for the independent
accountants, officers or other representatives of the Fund
or the Custodian to be afforded access to the books and
records of Chase and any banking or other institution
employed as a sub-custodian for the Fund by Chase or the
Custodian insofar as such books and records relate to the
performance of Chase or such banking or other institution
under any agreement with the Custodian or Chase. Upon
request of the Fund, the Custodian shall furnish to the Fund
such reports (or portions thereof) of Chase's external
auditors as are available to the Custodian and which relate
directly to Chase's system of internal accounting controls
applicable to Chase's duties as a subcustodian or which
relate to the internal accounting controls of any
subcustodian employed by Chase with respect to foreign
assets of the Fund.
PAGE 17
3.6 Reports by Custodian. The Custodian will supply to the
Fund from time to time, as mutually agreed upon, statements
in respect of the foreign assets of the Fund held pursuant
to the terms of the Subcustodian Agreement between the
Custodian and Chase, including but not limited, to an
identification of entities having possession of the Fund's
foreign assets and advices or notifications of any transfers
of foreign assets to or from each custodial account
maintained by any sub-custodian on behalf of the Fund
indicating, as to foreign assets acquired for the Fund, the
identity of the entity having physical possession of such
foreign assets.
3.7 Transactions in Foreign Assets of the Fund. All
transactions with respect to the Fund's foreign assets shall
be in accordance with, and subject to, the provisions of the
Subcustodian Agreement between Chase and the Custodian.
3.8 Responsibility of Custodian, Sub-Custodian, and Fund.
Notwithstanding anything to the contrary in this Custodian
Contract, the Custodian shall not be liable to the Fund for
any loss, damage, cost, expense, liability or claim arising
out of or in connection with the maintenance of custody of
the Fund's foreign assets by Chase or by any other banking
institution or securities depository employed pursuant to
the terms of any Subcustodian Agreement between Chase and
the Custodian, except that the Custodian shall be liable for
any such loss, damage, cost, expense, liability or claim to
the extent provided in the Subcustodian Agreement between
Chase and the Custodian or attributable to the failure of
the Custodian to exercise the standard of care set forth in
Article 12 hereof in the performance of its duties under
this Contract or such Subcustodian Agreement. At the
election of the Fund, the Fund shall be entitled to be
subrogated to the rights of the Custodian under the
Subcustodian Agreement with respect to any claims arising
thereunder against Chase or any other banking institution or
securities depository employed by Chase if and to the extent
that the Fund has not been made whole therefor. As between
the Fund and the Custodian, the Fund shall be solely
responsible to assure that the maintenance of foreign
securities and cash pursuant to the terms of the
Subcustodian Agreement complies with all applicable rules,
regulations, interpretations and orders of the Securities
and Exchange Commission, and the Custodian assumes no
responsibility and makes no representations as to such
compliance.
3.9 Monitoring Responsibilities. With respect to the
Fund's foreign assets, the Custodian shall furnish annually
to the Fund, during the month of June, information
concerning the sub-custodians employed by the Custodian.
PAGE 18
Such information shall be similar in kind and scope to that
furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian
learns of a material adverse change in the financial
condition of a sub-custodian.
3.10 Branches of U.S. Banks. Except as otherwise set forth
in this Contract, the provisions of this Article 3 shall not
apply where the custody of the Fund's assets is maintained
in a foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the Investment
Company Act of 1940 which meets the qualification set forth
in Section 26(a) of said Act. The appointment of any such
branch as a sub-custodian shall be governed by Section 1 of
this Contract.
4. Payments for Repurchases or Redemptions and Sales of Shares
of the Fund
From such funds as may be available for the purpose but
subject to the limitations of the Governing Documents of the Fund
and any applicable votes of the Board of Directors/Trustees of
the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In
connection with the redemption or repurchase of Shares of the
Fund, the Custodian is authorized upon receipt of instructions
from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholder. In connection with
the redemption or repurchase of Shares of the Fund, the Custodian
shall honor checks drawn on the Custodian by a holder of Shares,
which checks have been furnished by the Fund to the holder of
Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to
time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the
Fund's Shares or from the Transfer Agent of the Fund and deposit
as received into the Fund's account such payments as are received
for Shares of the Fund issued or sold from time to time by the
Fund. The Custodian will provide timely notification to the Fund
and the Transfer Agent of any receipt by it of payments for
Shares of the Fund.
5. Proper Instructions
Proper Instructions as used herein means a writing signed or
initialled by one or more person or persons as the Board of
Directors/Trustees shall have from time to time authorized. Each
such writing shall set forth the specific transaction or type of
transaction involved, including a specific statement of the
purpose for which such action is requested, or shall be a blanket
instruction authorizing specific transactions of a repeated or
PAGE 19
routine nature. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all
oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Secretary or an Assistant Secretary as to the
authorization by the Board of Directors/Trustees of the Fund
accompanied by a detailed description of procedures approved by
the Board of Directors/Trustees, Proper Instructions may include
communications effected directly between electro-mechanical or
electronic devices provided that the Board of Directors/Trustees
and the Custodian are satisfied that such procedures afford
adequate safeguards for the Fund's assets.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express
authority from the Fund:
1) make payments to itself or others for minor
expenses of handling securities or other similar
items relating to its duties under this Contract,
provided that all such payments shall be accounted
for to the Fund;
2) surrender securities in temporary form for
securities in definitive form;
3) endorse for collection, in the name of the Fund,
checks, drafts and other negotiable instruments on
the same day as received; and
4) in general, attend to all non-discretionary
details in connection with the sale, exchange,
substitution, purchase, transfer and other
dealings with the securities and property of the
Fund except as otherwise directed by the Board of
Directors/Trustees of the Fund.
7. Evidence of Authority, Reliance on Documents
The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other
instrument or paper reasonably and in good faith believed by it
to be genuine and to have been properly executed by or on behalf
of the Fund in accordance with Article 5 hereof. The Custodian
may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the
authority of any person to act in accordance with such vote or
(b) of any determination or of any action by the Board of
Directors/Trustees pursuant to the Governing Documents of the
Fund as described in such vote, and such vote may be considered
as in full force and effect until receipt by the Custodian of
written notice to the contrary. So long as and to the extent
that it is in the exercise of the standard of care set forth in
Article 12 hereof, the Custodian shall not be responsible for the
title, validity or genuineness of any property or evidence of
title thereto received by it or delivered by it pursuant to this
PAGE 20
Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party
or parties.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary
information to the person or persons appointed by the Board of
Directors/Trustees of the Fund to keep the books of account of
the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do
so by the Fund, shall itself keep such books of account and/or
compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Fund
as described in the Fund's currently effective prospectus and
shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an
officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various
components. The calculations of the net asset value per share
and the daily income of the Fund shall be made at the time or
times and in the manner described from time to time in the Fund's
currently effective prospectus.
9. Records, Inventory
The Custodian shall create and maintain all records relating
to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the
Investment Company Act of 1940, with particular attention to
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the
Fund. All such records shall be the property of the Fund and
shall at all times during the regular business hours of the
Custodian be open for inspection and audit by duly authorized
officers, employees or agents of the Fund and employees and
agents of the Securities and Exchange Commission, and, in the
event of termination of this Agreement, will be delivered in
accordance with Section 14 hereof. The Custodian shall, at the
Fund's request, supply the Fund with a tabulation of securities
owned by the Fund and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall
be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations. The Custodian shall
conduct a periodic inventory of all securities and other property
subject to this Agreement and provide to the Fund a periodic
reconciliation of the vaulted position of the Fund to the
appraised position of the Fund. The Custodian will promptly
report to the Fund the results of the reconciliation, indicating
any shortages or discrepancies uncovered thereby, and take
appropriate action to remedy any such shortages or discrepancies.
PAGE 21
10. Opinion of Fund's Independent Accountant
The Custodian shall cooperate with the Fund's independent
public accountants in connection with the annual and other audits
of the books and records of the Fund and take all reasonable
action, as the Fund may from time to time request, to provide
from year to year the necessary information to such accountants
for the expression of their opinion without any qualification as
to the scope of their examination, including but not limited to,
any opinion in connection with the preparation of the Fund's Form
N-lA, and Form N-SAR or other annual reports to the Securities
and Exchange Commission and with respect to any other
requirements of such Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation
for its services and expenses as Custodian, as agreed upon from
time to time between the Fund and the Custodian.
12. Responsibility of Custodian
Notwithstanding anything to the contrary in this Agreement,
the Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Contract, but shall be kept
indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence.
In order for the indemnification provision contained in this
Section to apply, it is understood that if in any case the Fund
may be asked to indemnify or save the Custodian harmless, the
Fund shall be fully and promptly advised of all pertinent facts
concerning the situation in question, and it is further
understood that the Custodian will use all reasonable care to
identify and notify the Fund promptly concerning any situation
which presents or appears likely to present the probability of
such a claim for indemnification against the Fund. The Fund,
shall have the option to defend the Custodian against any claim
which may be the subject of this indemnification, and in the
event that the Fund so elects, it will so notify the Custodian,
and thereupon the Fund shall take over complete defense of the
claim and the Custodian shall in such situation initiate no
further legal or other expenses for which it shall seek
indemnification under this Section. The Custodian shall in no
case confess any claim or make any compromise in any case in
which the Fund will be asked to indemnify the Custodian except
with the Fund's prior written consent. Nothing herein shall be
construed to limit any right or cause of action on the part of
the Custodian under this Contract which is independent of any
right or cause of action on the part of the Fund. The Custodian
shall be entitled to rely on and may act upon advice of counsel
(who may be counsel for the Fund or such other counsel as may be
agreed to by the parties) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to
such advice. Notwithstanding the foregoing, the responsibility
PAGE 22
of the Custodian with respect to redemptions effected by check
shall be in accordance with a separate Agreement entered into
between the Custodian and the Fund.
If the Fund requires the Custodian to take any action with
respect to securities, which action involves the payment of money
or which action may, in the opinion of the Custodian, result in
the Custodian or its nominee assigned to the Fund being liable
for the payment of money or incurring liability of some other
form, the Fund, as a prerequisite to requiring the Custodian to
take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or
securities for any purpose or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the
account of the Fund shall be security therefor and should the
Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund's
assets to the extent necessary to obtain reimbursement, provided
that the Custodian gives the Fund reasonable notice to repay such
cash or securities advanced, however, such notice shall not
preclude the Custodian's right to assert any lien under this
provision.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution,
shall continue in full force and effect until terminated as
hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either
party by an instrument in writing delivered or mailed, postage
prepaid to the other party, such termination to take effect not
sooner than sixty (60) days after the date of such delivery or
mailing in the case of a termination by the Fund, and not sooner
than 180 days after the date of such delivery or mailing in the
case of a termination by the Custodian; provided, however that
the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors/Trustees of
the Fund has approved the initial use of a particular Securities
System and the receipt of an annual certificate of the Secretary
or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of such Securities System, as
required in each case by Rule 17f-4 under the Investment Company
Act of 1940, as amended and that the Custodian shall not act
under Section 2.11 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the
Board of Directors/Trustees has approved the initial use of the
Direct Paper System and the receipt of an annual certificate of
PAGE 23
the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of the Direct
Paper System; provided further, however, that the Fund shall not
amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the
Governing Documents of the Fund, and further provided, that the
Fund may at any time by action of its Board of Directors/Trustees
(i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event
at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements, provided that the Custodian
shall not incur any costs, expenses or disbursements specifically
in connection with such termination unless it has received prior
approval from the Fund, which approval shall not be unreasonably
withheld.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon
termination, deliver to such successor custodian at the office of
the Custodian, duly endorsed and in the form for transfer, all
securities, funds and other properties then held by it hereunder
and shall transfer to an account of the successor custodian all
of the Fund's securities held in a Securities System. The
Custodian shall also use its best efforts to assure that the
successor custodian will continue any subcustodian agreement
entered into by the Custodian and any subcustodian on behalf of
the Fund.
If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy
of a vote of the Board of Directors/Trustees of the Fund, deliver
at the office of the Custodian and transfer such securities,
funds and other properties in accordance with such vote.
In the event that no written order designating a successor
custodian or certified copy of a vote of the Board of
Directors/Trustees shall have been delivered to the Custodian on
or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment
Company Act of 1940, doing business in Boston, Massachusetts, of
its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not
PAGE 24
less than $25,000,000, all securities, funds and other properties
held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this
Contract and to transfer to an account of such successor
custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Contract.
In the event that securities, funds and other properties
remain in the possession of the Custodian after the date of
termination hereof owing to failure of the Fund to procure the
certified copy of the vote referred to or of the Board of
Directors/Trustees to appoint a successor custodian, the
Custodian shall be entitled to fair compensation for its services
during such period as the Custodian retains possession of such
securities, funds and other properties and the provisions of this
Contract relating to the duties and obligations of the Custodian
shall remain in full force and effect. If while this Contract is
in force the Fund shall be liquidated pursuant to law, the
Custodian shall distribute, either in cash or (if the Fund so
orders) in the portfolio securities and other assets of the Fund,
pro rata among the holders of shares of the Fund as certified by
the Transfer Agent, the property of the Fund which remains after
paying or satisfying all expenses and liabilities of the Fund.
Section 12 hereof shall survive any termination of this Contract.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the
Custodian and the Fund may from time to time agree on such
provisions interpretive of or in addition to the provisions of
this Contract as may in their joint opinion be consistent with
the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both
parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any
applicable federal or state regulations or any provision of the
Governing Documents of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Contract.
16. Notice
Any notice shall be sufficiently given when sent by
registered or certified mail, or by such other means as the
parties shall agree, to the other party at the address of such
party set forth above or at such other address as such party may
from time to time specify in writing to the other party.
17. Bond
The Custodian shall, at all times, maintain a bond in such
form and amount as is acceptable to the Fund which shall be
issued by a reputable fidelity insurance company authorized to do
business in the place where such bond is issued against larceny
PAGE 25
and embezzlement, covering each officer and employee of the
Custodian who may, singly or jointly with others, have access to
securities or funds of the Fund, either directly or through
authority to receive and carry out any certificate instruction,
order request, note or other instrument required or permitted by
this Agreement. The Custodian agrees that it shall not cancel,
terminate or modify such bond insofar as it adversely affects the
Fund except after written notice given to the Fund not less than
10 days prior to the effective date of such cancellation,
termination or modification. The Custodian shall furnish to the
Fund a copy of each such bond and each amendment thereto.
18. Confidentiality
The Custodian agrees to treat all records and other
information relative to the Fund and its prior, present or future
shareholders as confidential, and the Custodian, on behalf of
itself and its employees, agrees to keep confidential all such
information except, after prior notification to and approval in
writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where the Custodian may be
exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Fund.
19. Exemption from Liens
The securities and other assets held by the Custodian for
the Fund shall be subject to no lien or charge of any kind in
favor of the Custodian or any person claiming through the
Custodian, but nothing herein shall be deemed to deprive the
Custodian of its right to invoke any and all remedies available
at law or equity to collect amounts due it under this Agreement.
Neither the Custodian nor any sub-custodian appointed pursuant to
Section 1 hereof shall have any power or authority to assign,
hypothecate, pledge or otherwise dispose of any securities held
by it for the Fund, except upon the direction of the Fund, duly
given as herein provided, and only for the account of the Fund.
20. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth
of Massachusetts.
21. Prior Contracts
Without derogating any of the rights established by such
contracts, this Contract supersedes and terminates, as of the
date hereof, all prior contracts between the Fund and the
Custodian relating to the custody of the Fund's assets.
22. The Parties
All references herein to "the Fund" are to each of the funds
listed on Appendix A individually, as if this Contract were
between such individual fund and the Custodian. In the case of a
series fund or trust, all references to "the Fund" are to the
individual series or portfolio of such fund or trust, or to such
fund or trust on behalf of the individual series or portfolio, as
PAGE 26
appropriate. Any reference in this Contract to "the parties"
shall mean the Custodian and such other individual Fund as to
which the matter pertains.
23. Governing Documents.
The term "Governing Documents" means the Articles of
Incorporation, Agreement of Trust, By-Laws and Registration
Statement filed under the Securities Act of 1933, as amended from
time to time.
24. Subcustodian Agreement.
Reference to the "Subcustodian Agreement" between the
Custodian and Chase shall mean any such agreement which shall be
in effect from time to time between Chase and the Custodian with
respect to foreign assets of the Fund.
25. Directors and Trustees.
It is understood and is expressly stipulated that neither
the holders of shares in the Fund nor any Directors or Trustees
of the Fund shall be personally liable hereunder.
26. Massachusetts Business Trust
With respect to any Fund which is a party to this Contract
and which is organized as a Massachusetts business trust, the
term Fund means and refers to the trustees from time to time
serving under the applicable trust agreement (Declaration of
Trust) of such Trust as the same may be amended from time to
time. It is expressly agreed that the obligations of any such
Trust hereunder shall not be binding upon any of the trustees,
shareholders, nominees, officers, agents or employees of the
Trust, personally, but bind only the trust property of the Trust,
as provided in the Declaration of Trust of the Trust. The
execution and delivery of this Contract has been authorized by
the trustees and signed by an authorized officer of the Trust,
acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed
to have been made by any of them but shall bind only the trust
property of the Trust as provided in its Declaration of Trust.
27. Successors of Parties.
This Contract shall be binding on and shall inure to the
benefit of the Fund and the Custodian and their respective
successors.
IN WITNESS WHEREOF, each of the parties has caused this
instrument to be executed in its name and behalf by its duly
authorized representative and its seal to be hereunder affixed as
of the dates indicated below.
DATED: September 28, 1987
__________________
PAGE 27
STATE STREET BANK AND TRUST
COMPANY
ATTEST:
/s/Kathleen M. Kubit By/s/Charles Cassidy
_____________________ _________________________________
Assistant Secretary Vice President
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Stock Fund
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
PAGE 28
(SIGNATURES CONTINUED)
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
New York Tax-Free Money Fund
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
New York Tax-Free Bond Fund
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
DATED: September 28, 1987
___________________
ATTEST:
/s/Nancy J. Wortman By/s/Carmen F. Deyesu
____________________________ __________________________________
PAGE 29
Appendix A
The following Funds are parties to this Agreement and have
so indicated their intention to be bound by such Agreement by
executing the Agreement on the dates indicated thereon.
T. Rowe Price California Tax-Free Income Trust on behalf of
the
California Tax-Free Bond Fund and
California Tax-Free Money Fund
T. Rowe Price Capital Appreciation Fund
T. Rowe Price Equity Income Fund
T. Rowe Price GNMA Fund
T. Rowe Price Growth & Income Fund, Inc.
T. Rowe Price Growth Stock Fund, Inc.
T. Rowe Price High Yield Fund, Inc.
T. Rowe Price Institutional Trust on behalf of the
Tax-Exempt Reserve Portfolio
T. Rowe Price International Trust on behalf of the
T. Rowe Price International Bond Fund and
T. Rowe Price International Stock Fund
T. Rowe Price New America Growth Fund
T. Rowe Price New Era Fund, Inc.
T. Rowe Price New Horizons Fund, Inc.
T. Rowe Price New Income Fund, Inc.
T. Rowe Price Prime Reserve Fund, Inc.
T. Rowe Price Science & Technology Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price State Tax-Free Income Trust on behalf of the
Maryland Tax-Free Bond Fund,
New York Tax-Free Bond Fund and
New York Tax-Free Money Fund
T. Rowe Price Tax-Exempt Money Fund, Inc.
T. Rowe Price Tax-Free High Yield Fund, Inc.
T. Rowe Price Tax-Free Income Fund, Inc.
T. Rowe Price Tax-Free Short-Intermediate Fund, Inc.
T. Rowe Price U.S. Treasury Money Fund, Inc.
PAGE 30
AMENDMENT NO. 1 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
THIS AGREEMENT, made as of this 24th day of June, 1988, by
and between: T. Rowe Price Growth Stock Fund, Inc., T. Rowe Price
New Horizons Fund, Inc., T. Rowe Price New Era Fund, Inc., T.
Rowe Price New Income Fund, Inc., T. Rowe Price Prime Reserve
Fund, Inc., T. Rowe Price International Trust, T. Rowe Price U.S.
Treasury Money Fund, Inc., T. Rowe Price Growth & Income Fund,
Inc., T. Rowe Price Tax-Exempt Money Fund, Inc., T. Rowe Price
Tax-Free Income Fund, Inc., T. Rowe Price Tax-Free Short-
Intermediate Fund, Inc., T. Rowe Price Short-Term Bond Fund,
Inc., T. Rowe Price High Yield Fund, Inc., T. Rowe Price Tax-Free
High Yield Fund, Inc., T. Rowe Price New America Growth Fund, T.
Rowe Price Equity Income Fund, T. Rowe Price GNMA Fund, T. Rowe
Price Capital Appreciation Fund, T. Rowe Price Institutional
Trust, T. Rowe Price State Tax-Free Income Trust, T. Rowe Price
California Tax-Free Income Trust, T. Rowe Price Science &
Technology Fund, Inc., (hereinafter together called the "Funds"
and individually "Fund") and State Street Bank and Trust Company,
a Massachusetts trust,
W I T N E S S E T H:
It is mutually agreed that the Custodian Contract made by
the parties on the 28th day of September, 1987, is hereby amended
by adding thereto the T. Rowe Price Small-Cap Value Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE NEW HORIZONS FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE NEW ERA FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
PAGE 31
(SIGNATURES CONTINUED)
T. ROWE PRICE NEW INCOME FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE PRIME RESERVE FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE INTERNATIONAL TRUST
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
/s/Henry H.Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE GROWTH & INCOME FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
PAGE 32
(SIGNATURES CONTINUED)
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE HIGH YIELD FUND, INC.
/s/ Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE NEW AMERICA GROWTH FUND
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE EQUITY INCOME FUND
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE GNMA FUND
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE CAPITAL APPRECIATION FUND
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE INSTITUTIONAL TRUST
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
PAGE 33
(SIGNATURES CONTINUED)
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
STATE STREET BANK AND TRUST COMPANY
/s/William Blackwell
______________________________________________
By:
PAGE 34
AMENDMENT NO. 2 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, between State Street Bank and Trust Company and
each of the Parties listed on Appendix A thereto is hereby
further amended, as of October 19, 1988, by adding thereto the T.
Rowe Price International Discovery Fund, Inc., a separate series
of T. Rowe Price International Trust.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
PAGE 35
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
STATE STREET BANK AND TRUST COMPANY
/s/Guy R. Sturgeon
______________________________________________
By:
PAGE 36
AMENDMENT NO. 3 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988 and October 19, 1988, between State Street Bank and
Trust Company and each of the Parties listed on Appendix A
thereto is hereby further amended, as of February 22, 1989, by
adding thereto the T. Rowe Price International Equity Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
PAGE 37
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
STATE STREET BANK AND TRUST COMPANY
/s/K. Donelson
______________________________________________
By:
PAGE 38
AMENDMENT NO. 4 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988 and February 22, 1989, between
State Street Bank and Trust Company and each of the Parties
listed on Appendix A thereto is hereby further amended, as of
July 19, 1989, by adding thereto the Institutional International
Funds, Inc., on behalf of the Foreign Equity Fund.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
PAGE 39
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
/s/Henry H. Hopkins
______________________________________________
By: Henry H. Hopkins
Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
______________________________________________
By:
PAGE 40
AMENDMENT NO. 5 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, and July 19,
1989 between State Street Bank and Trust Company and each of the
Parties listed on Appendix A thereto is hereby further amended,
as of September 15, 1989, by adding thereto the T. Rowe Price
U.S. Treasury Funds, Inc., on behalf of the U.S. Treasury
Intermediate Fund and the U.S. Treasury Long-Term Fund.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
PAGE 41
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
/s/Henry H. Hopkins
____________________________________
By: Henry H. Hopkins
Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
____________________________________
By:
PAGE 42
AMENDMENT NO. 6 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19, 1989
and September 15, 1989, between State Street Bank and Trust
Company and each of the Parties listed on Appendix A thereto is
hereby further amended, as of December 15, 1989, by restating
Section 2.15 as follows:
2.15 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to the Fund all written
information (including, without limitation, pendency of calls and
maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put
options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from
issuers of the domestic securities being held for the Fund by the
Custodian, an agent appointed under Section 2.9, or sub-custodian
appointed under Section 1. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian, an agent appointed
under Section 2.9, or sub-custodian appointed under Section 1
from issuers of the domestic securities whose tender or exchange
is sought and from the party (or his agents) making the tender or
exchange offer. If the Fund desires to take action with respect
to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian of such desired
action at least 48 hours (excluding holidays and weekends) prior
to the time such action must be taken under the terms of the
tender, exchange offer, or other similar transaction, and it will
be the responsibility of the Custodian to timely transmit to the
appropriate person(s) the Fund's notice. Where the Fund does not
notify the custodian of its desired action within the aforesaid
48 hour period, the Custodian shall use its best efforts to
timely transmit the Fund's notice to the appropriate person. It
is expressly noted that the parties may negotiate and agree to
alternative procedures with respect to such 48 hour notice period
on a selective and individual basis.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
PAGE 43
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
PAGE 44
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U. S. TREASURY FUNDS, INC.
U. S. Treasury Intermediate Fund
U. S. Treasury Long-Term Fund
/s/Carmen F. Deyesu
_________________________________________
By: Carmen F. Deyesu,
Treasurer
STATE STREET BANK AND TRUST COMPANY
/s/ E. D. Hawkes, Jr.
_________________________________________
By: E. D. Hawkes, Jr.
Vice President
PAGE 45
Amendment No. 7 filed on Form SE January 25, 1990 with
International Trust (CIK 313212) Post Effective Amendment No. 17.
PAGE 46
AMENDMENT NO. 8 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, and December 20,
1989, between State Street Bank and Trust Company and each of the
Parties listed on Appendix A thereto is hereby further amended,
as of January 25, 1990, by adding thereto the T. Rowe Price
European Stock Fund, a separate series of T. Rowe Price
International Trust.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
PAGE 47
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
/s/Henry H. Hopkins
_________________________________________
By: Henry H. Hopkins
Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
_________________________________________
By:
PAGE 48
AMENDMENT NO. 9 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
and January 25, 1990 between State Street Bank and Trust Company
and each of the Parties listed on Appendix A thereto is hereby
further amended, as of February 21, 1990, by adding thereto the
T. Rowe Price Index Trust, Inc., on behalf of the T. Rowe Price
Equity Index Fund.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
PAGE 49
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins
Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
______________________________________
By:
PAGE 50
AMENDMENT NO. 10 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, between State Street Bank
and Trust Company and each of the Parties listed on Appendix A
thereto is hereby further amended, as of June 12, 1990, by adding
thereto the T. Rowe Price Spectrum Fund, Inc., on behalf of the
Spectrum Growth Fund and the Spectrum Income Fund.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL TRUST
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. ROWE PRICE U.S. TREASURY MONEY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
PAGE 51
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
______________________________________
By:
PAGE 52
AMENDMENT NO. 11 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, and June 12, 1990 between
State Street Bank and Trust Company and each of the Parties
listed on Appendix A thereto is hereby further amended, as of
July 18, 1990, by adding thereto the T. Rowe Price New Asia Fund,
a separate series of the T. Rowe Price International Funds, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
PAGE 53
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/ Guy R. Sturgeon
______________________________________
By: Guy R. Sturgeon
PAGE 54
AMENDMENT NO. 12 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, and July 18,
1990 between State Street Bank and Trust Company and each of the
Parties listed on Appendix A thereto is hereby further amended,
as of October 15, 1990, by adding thereto the T. Rowe Price
Global Government Bond Fund, a separate series of the T. Rowe
Price International Funds, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
PAGE 55
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE INSTITUTIONAL TRUST
Tax-Exempt Reserve Portfolio
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/ Guy R. Sturgeon
______________________________________
By:
PAGE 56
AMENDMENT NO. 13 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, and October 15, 1990, between State Street Bank and Trust
Company and each of the Parties listed on Appendix A thereto is
hereby further amended, as of February 13, 1991, by adding
thereto the Virginia Tax-Free Bond Fund and New Jersey Tax-Free
Bond Fund, two separate series of the T. Rowe Price State Tax-
Free Income Trust
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
PAGE 57
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/ Guy Sturgeon
______________________________________
By: Vice President
PAGE 58
AMENDMENT NO. 14 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, and February 13, 1991, between State
Street Bank and Trust Company and each of the Parties listed on
Appendix A thereto is hereby further amended, as of March 6,
1991, by adding thereto the T. Rowe Price Balanced Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
PAGE 59
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
______________________________________
By:
PAGE 60
AMENDMENT NO. 15 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, and March 6, 1991,
between State Street Bank and Trust Company and each of the
Parties listed on Appendix A thereto is hereby further amended,
as of September 12, 1991, by adding thereto the T. Rowe Price
Adjustable Rate U.S. Government Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
PAGE 61
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S.
GOVERNMENT FUND, INC.
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins, Vice President
PAGE 62
STATE STREET BANK AND TRUST COMPANY
/s/
______________________________________
By:
PAGE 63
AMENDMENT NO. 16 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991 and
September 12, 1991, between State Street Bank and Trust Company
and each of the Parties listed on Appendix A thereto is hereby
further amended, as of November 6, 1991, by adding thereto the T.
Rowe Price Japan Fund, a separate series of the T. Rowe Price
International Funds, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE
FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
PAGE 64
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME
TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY
FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL
EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S.
GOVERNMENT FUND, INC.
PAGE 65
/s/Henry H. Hopkins
_____________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
______________________________________
By:
PAGE 66
AMENDMENT NO. 17 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991 and November 6, 1991, between State Street
Bank and Trust Company and each of the Parties listed on
Appendix A thereto is hereby further amended, as of April 23,
1992, by adding thereto the T. Rowe Price Mid-Cap Growth Fund,
Inc. and T. Rowe Price Short-Term Global Income Fund, a separate
series of the T. Rowe Price International Funds, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
PAGE 67
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE INTERNATIONAL EQUITY FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
PAGE 68
/s/Henry H. Hopkins
_________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
____________________________________
By:
PAGE 69
AMENDMENT NO. 18 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, and April 23, 1992, between
State Street Bank and Trust Company and each of the Parties
listed on Appendix A thereto is hereby further amended, as of
September 2, 1992, by adding thereto the T. Rowe Price OTC Fund,
a series of the T. Rowe Price OTC Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
PAGE 70
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
PAGE 71
/s/Henry H. Hopkins
__________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
__________________________________
By:
PAGE 72
AMENDMENT NO. 19 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, and
September 2, 1992, between State Street Bank and Trust Company
and each of the Parties listed on Appendix A thereto is hereby
further amended, as of November 3, 1992, by adding thereto the T.
Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
PAGE 73
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
PAGE 74
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
/s/Henry H. Hopkins
_________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
_________________________________________
By:
PAGE 75
AMENDMENT NO. 20 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, and November 3, 1992, between State Street Bank and
Trust Company and each of the Parties listed on Appendix A
thereto is hereby further amended, as of December 16, 1992, by
adding thereto the T. Rowe Price Dividend Growth Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
PAGE 76
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
PAGE 77
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
/s/Henry H. Hopkins
_________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
_________________________________________
By:
PAGE 78
AMENDMENT NO. 21 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, and December 16, 1992, between State
Street Bank and Trust Company and each of the Parties listed on
Appendix A thereto is hereby further amended, as of December 21,
1992, by adding thereto the Maryland Short-Term Tax-Free Bond
Fund, an additional series to the T. Rowe Price State Tax-Free
Income Trust.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
PAGE 79
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
PAGE 80
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
/s/Henry H. Hopkins
_________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
_________________________________________
By:
PAGE 81
AMENDMENT NO. 22 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, and December 21,
1992, between State Street Bank and Trust Company and each of the
Parties listed on Appendix A thereto is hereby further amended,
as of January 28, 1993, by adding thereto the Georgia Tax-Free
Bond Fund and the Florida Insured Intermediate Tax-Free Fund,
additional series to the T. Rowe Price State Tax-Free Income
Trust.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
PAGE 82
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
PAGE 83
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
/s/Henry H. Hopkins
_________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
_________________________________________
By:
PAGE 84
AMENDMENT NO. 23 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
and January 28, 1993, between State Street Bank and Trust Company
and each of the Parties listed on Appendix A thereto is hereby
further amended, as of April 22, 1993, by adding thereto the T.
Rowe Price Blue Chip Growth Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
PAGE 85
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
PAGE 86
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
/s/Henry H. Hopkins
_________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
__________________________________________
By:
PAGE 87
AMENDMENT NO. 24 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, between State Street Bank and
Trust Company and each of the Parties listed on Appendix A
thereto is hereby further amended, as of September 16, 1993, by
adding thereto the T. Rowe Price Summit Funds, Inc. and T. Rowe
Price Summit Municipal Funds, Inc.
Notwithstanding anything to the contrary herein, it is
understood that the T. Rowe Price Summit Funds, Inc. and T. Rowe
Price Summit Municipal Funds, Inc. (collectively referred to as
the "Funds") shall not be responsible for paying any of the fees
or expenses set forth herein but that, in accordance with the
Investment Management Agreement, dated September 16, 1993,
between the Funds and T. Rowe Price Associates, Inc. ("T. Rowe
Price"), the Funds will require T. Rowe Price to pay all such
fees and expenses.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
PAGE 88
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
PAGE 89
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
/s/Henry H. Hopkins
________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
________________________________________
By:
PAGE 90
AMENDMENT NO. 25 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, and September 16, 1993, between
State Street Bank and Trust Company and each of the Parties
listed on Appendix A thereto is hereby further amended, as of
November 3, 1993, by adding thereto the T. Rowe Price Latin
America Fund, a separate series of the T. Rowe Price
International Funds, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
PAGE 91
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
PAGE 92
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
/s/Henry H. Hopkins
________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
________________________________________
By:
PAGE 93
AMENDMENT NO. 26 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, September 16, 1993, and
November 3, 1993, between State Street Bank and Trust Company and
each of the Parties listed on Appendix A thereto is hereby
further amended, as of March 1, 1994, by adding thereto the T.
Rowe Price Equity Income Portfolio and T. Rowe Price New America
Growth Portfolio, two separate series of the T. Rowe Price Equity
Series, Inc. and T. Rowe Price International Stock Portfolio, a
separate series of the T. Rowe Price International Series, Inc.
Notwithstanding anything to the contrary herein, it is
understood that the T. Rowe Price Equity Series, Inc. and T. Rowe
Price International Series, Inc. (collectively referred to as the
"Funds") shall not be responsible for paying any of the fees or
expenses set forth herein but that, in accordance with the
Investment Management Agreements, dated March 1, 1994, between
the Funds and T. Rowe Price Associates, Inc. and Rowe Price-
Fleming International, Inc. (collectively referred to as "T. Rowe
Price"), the Funds will require T. Rowe Price to pay all such
fees and expenses.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
PAGE 94
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
PAGE 95
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
PAGE 96
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
/s/Henry H. Hopkins
________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
________________________________________
By:
PAGE 97
AMENDMENT NO. 27 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, September 16, 1993, November 3,
1993, and March 1, 1994, between State Street Bank and Trust
Company and each of the Parties listed on Appendix A thereto is
hereby further amended, as of April 21, 1994, by adding thereto
the T. Rowe Price Limited-Term Bond Portfolio, a separate series
of the T. Rowe Price Fixed Income Series, Inc.
Notwithstanding anything to the contrary herein, it is
understood that the T. Rowe Price Fixed Income Series, Inc.
(referred to as the "Fund") shall not be responsible for paying
any of the fees or expenses set forth herein but that, in
accordance with the Investment Management Agreement, dated April
21, 1994, between the Fund and T. Rowe Price Associates, Inc.
(referred to as "T. Rowe Price"), the Fund will require T. Rowe
Price to pay all such fees and expenses.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
PAGE 98
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
PAGE 99
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
PAGE 100
/s/Henry H. Hopkins
________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
________________________________________
By:
PAGE 101
AMENDMENT NO. 28 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, September 16, 1993, November 3,
1993, March 1, 1994, and April 21, 1994, between State Street
Bank and Trust Company and each of the Parties listed on
Appendix A thereto is hereby further amended, as of July 27,
1994, by adding thereto the T. Rowe Price Personal Strategy
Balanced Fund, T. Rowe Price Personal Strategy Growth Fund, and
T. Rowe Price Personal Strategy Income Fund, three separate
series of the T. Rowe Price Personal Strategy Funds, Inc.
Notwithstanding anything to the contrary herein, it is
understood that the T. Rowe Price Personal Strategy Funds, Inc.
(collectively referred to as the "Funds") shall not be
responsible for paying any of the fees or expenses set forth
herein but that, in accordance with the Investment Management
Agreements, dated July 27, 1994, between the Funds and T. Rowe
Price Associates, Inc. (referred to as "T. Rowe Price"), the
Funds will require T. Rowe Price to pay all such fees and
expenses.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
PAGE 102
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
PAGE 103
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
PAGE 104
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
/s/Henry H. Hopkins
________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
________________________________________
By:
PAGE 105
AMENDMENT NO. 29 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, September 16, 1993, November 3,
1993, March 1, 1994, and April 21, 1994, between State Street
Bank and Trust Company and each of the Parties listed on
Appendix A thereto is hereby further amended, as of July 27,
1994, by adding thereto the T. Rowe Price Personal Strategy
Balanced Strategy Balanced Portfolio, a separate series of the T.
Rowe Price Equity Series, Inc.
Notwithstanding anything to the contrary herein, it is
understood that the T. Rowe Price Personal Strategy Balanced
Portfolio, a separate series of the T. Rowe Price Equity Series,
Inc. (referred to as the "Fund) shall not be responsible for
paying any of the fees or expenses set forth herein but that, in
accordance with the Investment Management Agreement, dated July
27, 1994, between the Fund and T. Rowe Price Associates, Inc.
(referred to as "T. Rowe Price"), the Fund will require T. Rowe
Price to pay all such fees and expenses.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
PAGE 106
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
PAGE 107
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced
Portfolio
PAGE 108
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
/s/Henry H. Hopkins
________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/
________________________________________
By:
PAGE 109
AMENDMENT NO. 30 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, September 16, 1993, November 3,
1993, March 1, 1994, April 21, 1994, and July 27, 1994 between
State Street Bank and Trust Company and each of the Parties
listed on Appendix A thereto is hereby further amended, as of
September 21, 1994, by adding thereto the T. Rowe Price Value
Fund, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
PAGE 110
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
PAGE 111
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced
Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
PAGE 112
T. ROWE PRICE VALUE FUND, INC.
/s/Henry H. Hopkins
________________________________________
By:Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/Carol C. Ayotte
________________________________________
By:Carol C. Ayotte, Vice President
PAGE 113
AMENDMENT NO. 31 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, September 16, 1993, November 3,
1993, March 1, 1994, April 21, 1994, July 27, 1994, and September
21, 1994 between State Street Bank and Trust Company and each of
the Parties listed on Appendix A thereto is hereby further
amended, as of November 1, 1994, by adding thereto the T. Rowe
Price Virginia Short-Term Tax-Free Bond Fund, a separate series
of the T. Rowe Price State Tax-Free Income Trust.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
PAGE 114
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
PAGE 115
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced
Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
PAGE 116
T. ROWE PRICE VALUE FUND, INC.
/s/Henry H. Hopkins
________________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/Carol C. Ayotte
________________________________________
By:Carol C. Ayotte, Vice President
PAGE 117
AMENDMENT NO. 32 TO CUSTODIAN CONTRACT BETWEEN
STATE STREET BANK AND TRUST COMPANY AND
THE T. ROWE PRICE FUNDS
W I T N E S S E T H:
The Custodian Contract of September 28, 1987, as amended
June 24, 1988, October 19, 1988, February 22, 1989, July 19,
1989, September 15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990, July 18,
1990, October 15, 1990, February 13, 1991, March 6, 1991,
September 12, 1991, November 6, 1991, April 23, 1992, September
2, 1992, November 3, 1992, December 16, 1992, December 21, 1992,
January 28, 1993, April 22, 1993, September 16, 1993, November 3,
1993, March 1, 1994, April 21, 1994, July 27, 1994, September 21,
1994, and November 1, 1994 between State Street Bank and Trust
Company and each of the Parties listed on Appendix A thereto is
hereby further amended, as of November 2, 1994, by adding thereto
the T. Rowe Price Capital Opportunity Fund, Inc. and the T. Rowe
Price Emerging Markets Bond Fund, a separate series of the T.
Rowe Price International Funds, Inc.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Bond Fund
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
PAGE 118
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND,
INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GNMA FUND
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
PAGE 119
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT
FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. Rowe Price OTC Fund
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market
Fund
T. Rowe Price Summit Municipal Intermediate
Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced
Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
T. ROWE PRICE VALUE FUND, INC.
PAGE 120
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
/s/Henry H. Hopkins
________________________________________
By: Henry H. Hopkins, Vice President
STATE STREET BANK AND TRUST COMPANY
/s/Carol C. Ayotte
________________________________________
By:Carol C. Ayotte, Vice President
The Global Custody Agreement dated January 3, 1994, as
amended, between The Chase Manhattan Bank, N.A. and T. Rowe Price
Funds should be inserted here.
PAGE 1
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective January 3, 1994, and is between
THE CHASE MANHATTAN BANK, N.A. (the "Bank") and EACH OF THE
ENTITIES LISTED ON SCHEDULE A HERETO, Individually and Separately
(each individually, the "Customer").
1. Customer Accounts.
The Bank agrees to establish and maintain the following
accounts ("Accounts"):
(a) A custody account in the name of the Customer
("Custody Account") for any and all stocks, shares, bonds,
debentures, notes, mortgages or other obligations for the payment
of money, bullion, coin and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase or
subscribe for the same or evidencing or representing any other
rights or interests therein and other similar property whether
certificated or uncertificated as may be received by the Bank or
its Subcustodian (as defined in Section 3) for the account of the
Customer ("Securities"); and
(b) A deposit account in the name of the Customer ("Deposit
Account") for any and all cash in any currency received by the
Bank or its Subcustodian for the account of the Customer, which
cash shall not be subject to withdrawal by draft or check.
The Customer warrants its authority to: 1) deposit the cash
and Securities ("Assets") received in the Accounts and 2) give
Instructions (as defined in Section 11) concerning the Accounts.
The Bank may deliver securities of the same class in place of
those deposited in the Custody Account.
Upon written agreement between the Bank and the Customer,
additional Accounts may be established and separately accounted
for as additional Accounts under the terms of this Agreement.
2. Maintenance of Securities and Cash at Bank and Subcustodian
Locations.
Unless Instructions specifically require another location
acceptable to the Bank:
(a) Securities will be held in the country or other
jurisdiction in which the principal trading market for such
Securities is located, where such Securities are to be presented
for payment or where such Securities are acquired; and
PAGE 2
(b) Cash will be credited to an account in a country or
other jurisdiction in which such cash may be legally deposited or
is the legal currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest
or non-interest bearing accounts as may be available for the
particular currency. To the extent Instructions are issued and
the Bank can comply with such Instructions, the Bank is
authorized to maintain cash balances on deposit for the Customer
with itself or one of its affiliates at such reasonable rates of
interest as may from time to time be paid on such accounts, or in
non-interest bearing accounts as the Customer may direct, if
acceptable to the Bank.
If the Customer wishes to have any of its Assets held in the
custody of an institution other than the established
Subcustodians as defined in Section 3 (or their securities
depositories), such arrangement must be authorized by a written
agreement, signed by the Bank and the Customer.
3. Subcustodians and Securities Depositories.
The Bank may act under this Agreement through the
subcustodians listed in Schedule B of this Agreement with which
the Bank has entered into subcustodial agreements
("Subcustodians"). The Customer authorizes the Bank to hold
Assets in the Accounts in accounts which the Bank has established
with one or more of its branches or Subcustodians. The Bank and
Subcustodians are authorized to hold any of the Securities in
their account with any securities depository in which they
participate.
The Bank reserves the right to add new, replace or remove
Subcustodians. The Customer will be given reasonable notice by
the Bank of any amendment to Schedule B. Upon request by the
Customer, the Bank will identify the name, address and principal
place of business of any Subcustodian of the Customer's Assets
and the name and address of the governmental agency or other
regulatory authority that supervises or regulates such
Subcustodian.
4. Use of Subcustodian.
(a) The Bank will identify such Assets on its books as
belonging to the Customer.
(b) A Subcustodian will hold such Assets together with
assets belonging to other customers of the Bank in accounts
identified on such Subcustodian's books as special custody
accounts for the exclusive benefit of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will
be subject only to the instructions of the Bank or its agent.
PAGE 3
Any Securities held in a securities depository for the account of
a Subcustodian will be subject only to the instructions of such
Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian
for holding its customer's assets shall provide that such assets
will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of such Subcustodian or its
creditors except for a claim for payment for safe custody or
administration, and that the beneficial ownership of such assets
will be freely transferable without the payment of money or value
other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or
arrangement made by the Customer with any particular
Subcustodian.
5. Deposit Account Transactions.
(a) The Bank or its Subcustodians will make payments from
the Deposit Account upon receipt of Instructions which include
all information required by the Bank.
(b) In the event that any payment to be made under this
Section 5 exceeds the funds available in the Deposit Account, the
Bank, in its discretion, may advance the Customer such excess
amount which shall be deemed a loan payable on demand, bearing
interest at the rate customarily charged by the Bank on similar
loans.
(c) If the Bank credits the Deposit Account on a payable
date, or at any time prior to actual collection and
reconciliation to the Deposit Account, with interest, dividends,
redemptions or any other amount due, the Customer will promptly
return any such amount upon oral or written notification: (i)
that such amount has not been received in the ordinary course of
business or (ii) that such amount was incorrectly credited. If
the Customer does not promptly return any amount upon such
notification, the Bank shall be entitled, upon oral or written
notification to the Customer, to reverse such credit by debiting
the Deposit Account for the amount previously credited. The Bank
or its Subcustodian shall have no duty or obligation to institute
legal proceedings, file a claim or a proof of claim in any
insolvency proceeding or take any other action with respect to
the collection of such amount, but may act for the Customer upon
Instructions after consultation with the Customer.
6. Custody Account Transactions.
(a) Securities will be transferred, exchanged or delivered
by the Bank or its Subcustodian upon receipt by the Bank of
Instructions which include all information required by the Bank.
Settlement and payment for Securities received for, and delivery
of Securities out of, the Custody Account may be made in
PAGE 4
accordance with the customary or established securities trading
or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs,
including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the
expectation of receiving later payment and free delivery.
Delivery of Securities out of the Custody Account may also be
made in any manner specifically required by Instructions
acceptable to the Bank.
(b) The Bank, in its discretion, may credit or debit the
Accounts on a contractual settlement date with cash or Securities
with respect to any sale, exchange or purchase of Securities.
Otherwise, such transactions will be credited or debited to the
Accounts on the date cash or Securities are actually received by
the Bank and reconciled to the Account.
(i) The Bank may reverse credits or debits made to the
Accounts in its discretion if the related transaction
fails to settle within a reasonable period, determined
by the Bank in its discretion, after the contractual
settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this
Section 6 are returned by the recipient thereof, the
Bank may reverse the credits and debits of the
particular transaction at any time.
7. Actions of the Bank.
The Bank shall follow Instructions received regarding assets
held in the Accounts. However, until it receives Instructions to
the contrary, the Bank will:
(a) Present for payment any Securities which are called,
redeemed or retired or otherwise become payable and all coupons
and other income items which call for payment upon presentation,
to the extent that the Bank or Subcustodian is actually aware of
such opportunities.
(b) Execute in the name of the Customer such ownership and
other certificates as may be required to obtain payments in
respect of Securities.
(c) Exchange interim receipts or temporary Securities for
definitive Securities.
(d) Appoint brokers and agents for any transaction
involving the Securities, including, without limitation,
affiliates of the Bank or any Subcustodian.
(e) Issue statements to the Customer, at times mutually
agreed upon, identifying the Assets in the Accounts.
PAGE 5
The Bank will send the Customer an advice or notification of
any transfers of Assets to or from the Accounts. Such
statements, advices or notifications shall indicate the identity
of the entity having custody of the Assets. Unless the Customer
sends the Bank a written exception or objection to any Bank
statement within ninety (90) days of receipt, the Customer shall
be deemed to have approved such statement. The Bank shall, to
the extent permitted by law, be released, relieved and discharged
with respect to all matters set forth in such statement or
reasonably implied therefrom as though it had been settled by the
decree of a court of competent jurisdiction in an action where
the Customer and all persons having or claiming an interest in
the Customer or the Customer's Accounts were parties if: (a) the
Customer has failed to provide a written exception or objection
to any Bank statement within ninety (90) days of receipt and
where the Customer's failure to so provide a written exception or
objection within such ninety (90) day period has limited the
Bank's (i) access to the records, materials and other information
required to investigate the Customer's exception or objection,
and (ii) ability to recover from third parties any amounts for
which the Bank may become liable in connection with such
exception or objection, or (b) where the Customer has otherwise
explicitly approved any such statement.
All collections of funds or other property paid or
distributed in respect of Securities in the Custody Account shall
be made at the risk of the Customer. The Bank shall have no
liability for any loss occasioned by delay in the actual receipt
of notice by the Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the
Custody Account in respect of which the Bank has agreed to take
any action under this Agreement.
8. Corporate Actions; Proxies.
Whenever the Bank receives information concerning the
Securities which requires discretionary action by the beneficial
owner of the Securities (other than a proxy), such as
subscription rights, bonus issues, stock repurchase plans and
rights offerings, or legal notices or other material intended to
be transmitted to securities holders ("Corporate Actions"), the
Bank will give the Customer notice of such Corporate Actions to
the extent that the Bank's central corporate actions department
has actual knowledge of a Corporate Action in time to notify its
customers.
When a rights entitlement or a fractional interest resulting
from a rights issue, stock dividend, stock split or similar
Corporate Action is received which bears an expiration date, the
Bank will endeavor to obtain Instructions from the Customer or
its Authorized Person, but if Instructions are not received in
time for the Bank to take timely action, or actual notice of such
Corporate Action was received too late to seek Instructions, the
PAGE 6
Bank is authorized to sell such rights entitlement or fractional
interest and to credit the Deposit Account with the proceeds or
take any other action it deems, in good faith, to be appropriate
in which case it shall be held harmless for any such action.
The Bank will deliver proxies to the Customer or its
designated agent pursuant to special arrangements which may have
been agreed to in writing. Such proxies shall be executed in the
appropriate nominee name relating to Securities in the Custody
Account registered in the name of such nominee but without
indicating the manner in which such proxies are to be voted; and
where bearer Securities are involved, proxies will be delivered
in accordance with Instructions.
9. Nominees.
Securities which are ordinarily held in registered form may
be registered in a nominee name of the Bank, Subcustodian or
securities depository, as the case may be. The Bank may without
notice to the Customer cause any such Securities to cease to be
registered in the name of any such nominee and to be registered
in the name of the Customer. In the event that any Securities
registered in a nominee name are called for partial redemption by
the issuer, the Bank may allot the called portion to the
respective beneficial holders of such class of security pro rata
or in any other manner that is fair, equitable and practicable.
The Customer agrees to hold the Bank, Subcustodians, and their
respective nominees harmless from any liability arising directly
or indirectly from their status as a mere record holder of
Securities in the Custody Account.
10. Authorized Persons.
As used in this Agreement, the term "Authorized Person"
means employees or agents including investment managers as have
been designated by written notice from the Customer or its
designated agent to act on behalf of the Customer under this
Agreement. Such persons shall continue to be Authorized Persons
until such time as the Bank receives Instructions from the
Customer or its designated agent that any such employee or agent
is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized
Person received by the Bank, via telephone, telex, TWX, facsimile
transmission, bank wire or other teleprocess or electronic
instruction or trade information system acceptable to the Bank
which the Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing
or authentication pursuant to terms and conditions which the Bank
may specify. Unless otherwise expressly provided, all
PAGE 7
Instructions shall continue in full force and effect until
canceled or superseded.
Any Instructions delivered to the Bank by telephone shall
promptly thereafter be confirmed in writing by an Authorized
Person (which confirmation may bear the facsimile signature of
such Person), but the Customer will hold the Bank harmless for
the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the
telephone instructions received or the Bank's failure to produce
such confirmation at any subsequent time. The Bank may
electronically record any Instructions given by telephone, and
any other telephone discussions with respect to the Custody
Account. The Customer shall be responsible for safeguarding any
testkeys, identification codes or other security devices which
the Bank shall make available to the Customer or its Authorized
Persons.
12. Standard of Care; Liabilities.
(a) The Bank shall be responsible for the performance of
only such duties as are set forth in this Agreement or expressly
contained in Instructions which are consistent with the
provisions of this Agreement. Notwithstanding anything to the
contrary in this Agreement:
(i) The Bank will use reasonable care with respect to
its obligations under this Agreement and the
safekeeping of Assets. The Bank shall be liable to the
Customer for any loss which shall occur as the result
of the failure of a Subcustodian to exercise reasonable
care with respect to the safekeeping of such Assets to
the same extent that the Bank would be liable to the
Customer if the Bank were holding such Assets in New
York. In the event of any loss to the Customer by
reason of the failure of the Bank or its Subcustodian
to utilize reasonable care, the Bank shall be liable to
the Customer only to the extent of the Customer's
direct damages, and shall in no event be liable for any
special or consequential damages.
(ii) The Bank will not be responsible for any act,
omission, default or for the solvency of any broker or
agent which it or a Subcustodian appoints unless such
appointment was made negligently or in bad faith or for
any loss due to the negligent act of such broker or
agent except to the extent that such broker or agent
(other than a Subcustodian) performs in a negligent
manner which is the cause of the loss to the Customer
and the Bank failed to exercise reasonable care in
monitoring such broker's or agent's performance where
Customer has requested and Bank has agreed to accept
such monitoring responsibility.
PAGE 8
(iii) The Bank shall be indemnified by, and
without liability to the Customer for any action taken
or omitted by the Bank whether pursuant to Instructions
or otherwise within the scope of this Agreement if such
act or omission was in good faith, without negligence.
In performing its obligations under this Agreement, the
Bank may rely on the genuineness of any document which
it believes in good faith to have been validly
executed.
(iv) The Customer agrees to pay for and hold the Bank
harmless from any liability or loss resulting from the
imposition or assessment of any taxes or other
governmental charges, and any related expenses with
respect to income from or Assets in the Accounts,
except to the extent that the Bank has failed to
exercise reasonable care in performing any obligations
which the Bank may have agreed to assume (in addition
to those stated in this Agreement) with respect to
taxes and such failure by the Bank is the direct cause
of such imposition or assessment of such taxes, charges
or expenses.
(v) The Bank shall be entitled to rely, and may act,
upon the advice of counsel (who may be counsel for the
Customer) on all legal matters and shall be without
liability for any action reasonably taken or omitted
pursuant to such advice; provided, that the Bank gives
(to the extent practicable) prior notice to Customer of
Bank's intention to so seek advice of counsel and an
opportunity for consultation with Customer on the
proposed contact with counsel.
(vi) The Bank represents and warrants that it currently
maintain a banker's blanket bond which provides
standard fidelity and non-negligent loss coverage with
respect to the Securities and Cash which may be held by
Subcustodians pursuant to this Agreement. The Bank
agrees that if at any time it for any reason
discontinues such coverage, it shall immediately give
sixty (60) days' prior written notice to the Customer.
The Bank need not maintain any insurance for the
benefit of the Customer.
(vii) Without limiting the foregoing, the Bank
shall not be liable for any loss which results from:
(1) the general risk of investing, or (2) investing or
holding Assets in a particular country including, but
not limited to, losses resulting from nationalization,
expropriation or other governmental actions; regulation
of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market
PAGE 9
conditions which prevent the orderly execution of securities
transactions or affect the value of Assets.
(viii) Neither party shall be liable to the other
for any loss due to forces beyond their control
including, but not limited to strikes or work
stoppages, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation, or
acts of God.
(b) Consistent with and without limiting the first
paragraph of this Section 12, it is specifically acknowledged
that the Bank shall have no duty or responsibility to:
(i) question Instructions or make any suggestions to
the Customer or an Authorized Person regarding such
Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise the Customer or an Authorized Person
regarding any default in the payment of principal or
income of any security other than as provided in
Section 5(c) of this Agreement;
(iv) evaluate or report to the Customer or an
Authorized Person regarding the financial condition of
any broker, agent (other than a Subcustodian) or other
party to which Securities are delivered or payments are
made pursuant to this Agreement;
(v) review or reconcile trade confirmations received
from brokers. The Customer or its Authorized Persons
(as defined in Section 10) issuing Instructions shall
bear any responsibility to review such confirmations
against Instructions issued to and statements issued by
the Bank.
(c) The Customer authorizes the Bank to act under this
Agreement notwithstanding that the Bank or any of its divisions
or affiliates may have a material interest in a transaction, or
circumstances are such that the Bank may have a potential
conflict of duty or interest including the fact that the Bank or
any of its affiliates may provide brokerage services to other
customers, act as financial advisor to the issuer of Securities,
act as a lender to the issuer of Securities, act in the same
transaction as agent for more than one customer, have a material
interest in the issue of Securities, or earn profits from any of
the activities listed herein.
13. Fees and Expenses.
PAGE 10
The Customer agrees to pay the Bank for its services under
this Agreement such amount as may be agreed upon in writing,
together with the Bank's reasonable out-of-pocket or incidental
expenses, including, but not limited to, reasonable legal fees.
The Bank shall have a lien on and is authorized to charge any
Accounts of the Customer for any amount owing to the Bank under
any provision of this Agreement upon notice to the Customer.
14. Miscellaneous.
(a) Foreign Exchange Transactions. Pursuant to
Instructions, which may be standing Instructions, to facilitate
the administration of the Customer's trading and investment
activity, the Bank is authorized to enter into spot or forward
foreign exchange contracts with the Customer or an Authorized
Person for the Customer and may also provide foreign exchange
through its subsidiaries or Subcustodians. The Bank may
establish rules or limitations concerning any foreign exchange
facility made available. In all cases where the Bank, its
subsidiaries, affiliates or Subcustodians enter into a foreign
exchange contract related to Accounts, the terms and conditions
of the then current foreign exchange contract of the Bank, its
subsidiary, affiliate or Subcustodian and, to the extent not
inconsistent, this Agreement shall apply to such transaction.
(b) Certification of Residency, etc. The Customer
certifies that it is a resident of the United States and agrees
to notify the Bank of any changes in residency. The Bank may
rely upon this certification or the certification of such other
facts as may be required to administer the Bank's obligations
under this Agreement. The Customer will indemnify the Bank
against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) Access to Records. The Bank shall allow the Customer's
independent public accountants, officers and advisers reasonable
access to the records of the Bank relating to the Assets as is
required in connection with their examination of books and
records pertaining to the Customer's affairs. Subject to
restrictions under applicable law, the Bank shall also obtain an
undertaking to permit the Customer's independent public
accountants reasonable access to the records of any Subcustodian
which has physical possession of any Assets as may be required in
connection with the examination of the Customer's books and
records.
(d) Governing Law; Successors and Assigns. This Agreement
shall be governed by the laws of the State of New York and shall
not be assignable by either party, but shall bind the successors
in interest of the Customer and the Bank.
PAGE 11
(e) Entire Agreement; Applicable Riders. Customer
represents that the Assets deposited in the Accounts are (Check
one):
X * Employee Benefit Plan or other assets subject to the
Employee Retirement Income
Security Act of 1974, as amended ("ERISA");
X ** Mutual Fund assets subject to certain Securities
and Exchange Commission
("SEC") rules and regulations;
X *** Neither of the above.
With respect to each Customer, this Agreement consists
exclusively of this document together with Schedules A, B,
Exhibits I - _______ and the following Rider(s) to the
extent indicated on Schedule A hereto opposite the name of
the Customer under the column headed "Applicable Riders to
Agreement":
X ERISA
X MUTUAL FUND
SPECIAL TERMS AND CONDITIONS
There are no other provisions of this Agreement and this
Agreement supersedes any other agreements, whether written or
oral, between the parties. Any amendment to this Agreement must
be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions
of this Agreement are held invalid, illegal or enforceable in any
respect on the basis of any particular circumstances or in any
jurisdiction, the validity, legality and enforceability of such
provision or provisions under other circumstances or in other
jurisdictions and of the remaining provisions will not in any way
____________________
* With respect to each Customer listed on Schedule A
hereto under the heading "ERISA Trusts".
** With respect to each Customer listed on Schedule A
hereto under the heading "Investment
Companies/Portfolios Registered under the Investment
Company Act of 1940".
*** With respect to certain of the Customers listed on
Schedule A hereto under the heading "Separate Accounts"
as indicated on Schedule A.
be affected or impaired.
PAGE 12
(g) Waiver. Except as otherwise provided in this
Agreement, no failure or delay on the part of either party in
exercising any power or right under this Agreement operates as a
waiver, nor does any single or partial exercise of any power or
right preclude any other or further exercise, or the exercise of
any other power or right. No waiver by a party of any provision
of this Agreement, or waiver of any breach or default, is
effective unless in writing and signed by the party against whom
the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be
effective when actually received. Any notices or other
communications which may be required under this Agreement are to
be sent to the parties at the following addresses or such other
addresses as may subsequently be given to the other party in
writing:
Bank: The Chase Manhattan Bank, N.A.
Chase MetroTech Center
Brooklyn, NY 11245
Attention: Global Investor Services
Telephone: (718) 242-3455
Facsimile: (718) 242-1374
Copy to: The Chase Manhattan Bank, N.A.
Woolgate House
Coleman Street
London EC2P 2HD England
Attention: Global Investor Services
Telephone: 44-71-962-5000
Facsimile: 44-71-962-5377
Telex: 8954681CMBG
Customer: Name of Customer from Schedule A
c/o T. Rowe Price
100 East Pratt Street
Baltimore, MD 21202
Attention: Treasurer
Telephone: (410) 625-6658
Facsimile: (410) 547-0180
(i) Termination. This Agreement may be terminated by the
Customer or the Bank by giving ninety (90) days written notice to
the other, provided that such notice to the Bank shall specify
the names of the persons to whom the Bank shall deliver the
Assets in the Accounts. If notice of termination is given by the
Bank, the Customer shall, within ninety (90) days following
receipt of the notice, deliver to the Bank Instructions
specifying the names of the persons to whom the Bank shall
deliver the Assets. In either case the Bank will deliver the
Assets to the persons so specified, after deducting any amounts
which the Bank determines in good faith to be owed to it under
PAGE 13
Section 13. If within ninety (90) days following receipt of a
notice of termination by the Bank, the Bank does not receive
Instructions from the Customer specifying the names of the
persons to whom the Bank shall deliver the Assets, the Bank, at
its election, may deliver the Assets to a bank or trust company
doing business in the State of New York to be held and disposed
of pursuant to the provisions of this Agreement, or to Authorized
Persons, or may continue to hold the Assets until Instructions
are provided to the Bank.
(j) Entire Agreement. This Agreement, including the
Schedules and Riders hereto, embodies the entire agreement and
understanding of the parties in respect of the subject matter
contained in this Agreement. This Agreement supersedes all other
custody or other agreements between the parties with respect to
such subject matter, which prior agreements are hereby terminated
effective as of the date hereof and shall have no further force
or effect.
EACH OF THE CUSTOMERS, INDIVIDUALLY
AND SEPARATELY LISTED ON SECTION I OF
SCHEDULE A HERETO
/s/Carmen F. Deyesu
By:________________________________
Carmen F. Deyesu
Treasurer & Vice President
EACH OF THE CUSTOMERS, INDIVIDUALLY
AND SEPARATELY LISTED ON SECTION II OF
SCHEDULE A HERETO
/s/Alvin M. Younger
By:____________________________________
Alvin M. Younger
Treasurer
EACH OF THE CUSTOMERS, INDIVIDUALLY
AND SEPARATELY LISTED ON SECTION III OF
SCHEDULE A HERETO
/s/Alvin M. Younger
By:___________________________________
Alvin M. Younger
Treasurer
PAGE 14
THE CHASE MANHATTAN BANK, N.A.
/s/Alan Naughton
By:_________________________________
Alan Naughton
Vice President
STATE OF )
: ss.
COUNTY OF )
On this day of , 19 , before me
personally came , to me known, who
being by me duly sworn, did depose and say that he/she resides in
at ;
that he/she is of
, the entity
described in and which executed the foregoing instrument; that
he/she knows the seal of said entity, that the seal affixed to
said instrument is such seal, that it was so affixed by order of
said entity, and that he/she signed his/her name thereto by like
order.
__________________________________
Sworn to before me this
day of , 19 .
________________________________
Notary
PAGE 15
STATE OF )
: ss.
COUNTY OF )
On this day of
,19 , before me personally came , to
me known, who being by me duly sworn, did depose and say that
he/she resides in
at ; that
he/she is a Vice President of THE CHASE MANHATTAN BANK, (National
Association), the corporation described in and which executed the
foregoing instrument; that he/she knows the seal of said
corporation, that the seal affixed to said instrument is such
corporate seal, that it was so affixed by order of the Board of
Directors of said corporation, and that he/she signed his/her
name thereto by like order.
___________________________________
Sworn to before me this
day of , 19 .
___________________________________
Notary
PAGE 16
Schedule A
Page 1 of 2
LIST OF CUSTOMERS, EACH INDIVIDUALLY PARTIES TO
GLOBAL CUSTODY AGREEMENT WITH
THE CHASE MANHATTAN BANK, N.A.
DATED JANUARY 3, 1994
APPLICABLE RIDERS TO
CUSTOMER GLOBAL CUSTODY AGREEMENT
I. INVESTMENT COMPANIES/PORTFOLIOS The Mutual Fund Rider is
REGISTERED UNDER THE INVESTMENT applicable to all
COMPANY ACT OF 1940 Customers listed under
Section I of this
Schedule A.
Equity Funds
T. Rowe Price Balanced Fund, Inc.
T. Rowe Price Blue Chip Growth Fund, Inc.
T. Rowe Price Capital Appreciation Fund
T. Rowe Price Dividend Growth Fund, Inc.
T. Rowe Price Equity Income Fund
T. Rowe Price Growth & Income Fund, Inc.
T. Rowe Price Growth Stock Fund, Inc.
Institutional International Funds, Inc. on behalf of:
Foreign Equity Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price European Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price New Asia Fund
T. Rowe Price Mid-Cap Growth Fund, Inc.
T. Rowe Price New Era Fund, Inc.
T. Rowe Price New Horizons Fund, Inc.
T. Rowe Price OTC Fund, Inc. on behalf of:
T. Rowe Price OTC Fund
T. Rowe Price Science & Technology Fund, Inc.
T. Rowe Price Small Cap Value Fund, Inc.
CUNA Mutual Funds, Inc. on behalf of:
CUNA Mutual Cornerstone Fund
PAGE 17
Schedule A
Page 2 of 2
APPLICABLE RIDERS TO
CUSTOMER GLOBAL CUSTODY AGREEMENT
Income Funds
T. Rowe Price Adjustable Rate U.S. Government Fund, Inc.
T. Rowe Price High Yield Fund, Inc.
T. Rowe Price New Income Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Summit Funds, Inc. on behalf of:
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price Global Government Bond Fund
T. Rowe Price International Bond Fund
T. Rowe Price Short-Term Global Income Fund
II. ACCOUNTS SUBJECT TO ERISA The ERISA Rider is
applicable to all
T. Rowe Price Trust Company, as Customers under Section
Trustee for the Johnson Matthey II of this Schedule A.
Salaried Employee Savings Plan
Common Trust Funds
T. Rowe Price Trust Company, as Trustee
for the International Common Trust Fund
on behalf of the Underlying Trusts:
Foreign Discovery Trust
Foreign Discovery Trust-Augment
Pacific Discovery Trust
European Discovery Trust
Japan Discovery Trust
Latin American Discovery Trust
New York City International Common Trust Fund
III. OTHER No Riders are applicable
to the Customer listed
RPFI International Partners, L.P. under Section III of
this Schedule A.
PAGE 18
ERISA Rider to Global Custody Agreement
Between The Chase Manhattan Bank, N.A. and
Each of the Entities Listed on Schedule A Hereto
effective January 3, 1994
Customer represents that the Assets being placed in the
Bank's custody are subject to ERISA. It is understood that in
connection therewith the Bank is a service provider and not a
fiduciary of the plan and trust to which the assets are related.
The Bank shall not be considered a party to the underlying plan
and trust and the Customer hereby assumes all responsibility to
assure that Instructions issued under this Agreement are in
compliance with such plan and trust and ERISA.
This Agreement will be interpreted as being in compliance
with the Department of Labor Regulations Section 2550.404b-1
concerning the maintenance of indicia of ownership of plan assets
outside of the jurisdiction of the district courts of the United
States.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
As used in this Agreement, the term Subcustodian and the
term securities depositories include a branch of the Bank,
a branch of a qualified U.S. bank, an eligible foreign
custodian, or an eligible foreign securities depository,
where such terms shall mean:
(a) "qualified U.S. bank" shall mean a U.S. bank as
described in paragraph (a)(2)(ii)(A)(1) of the
Department of Labor Regulations Section 2550.404b-1;
(b) "eligible foreign custodian" shall mean a banking
institution incorporated or organized under the laws
of a country other than the United States which is
supervised or regulated by that country's government
or an agency thereof or other regulatory authority in
the foreign jurisdiction having authority over banks;
and
(c) "eligible foreign securities depository" shall mean a
securities depository or clearing agency,
incorporated or organized under the laws of a country
other than the United States, which is supervised or
regulated by that country's government or an agency
thereof or other regulatory authority in the foreign
jurisdiction having authority over such depositories
or clearing agencies and which is described in
paragraph (c)(2) of the Department of Labor
Regulations Section 2550.404b-1.
Section 4. Use of Subcustodian.
PAGE 19
Subsection (d) of this section is modified by deleting the
last sentence.
Section 5. Deposit Account Payments.
Subsection (b) is amended to read as follows:
(b) In the event that any payment made under this Section
5 exceeds the funds available in the Deposit Account, such
discretionary advance shall be deemed a service provided
by the Bank under this Agreement for which it is entitled
to recover its costs as may be determined by the Bank in
good faith.
Section 10. Authorized Persons.
Add the following paragraph at the end of Section 10:
Customer represents that: a) Instructions will only be issued
by or for a fiduciary pursuant to Department of Labor
Regulation Section 404b-1 (a)(2)(i) and b) if Instructions
are to be issued by an investment manager, such entity will
meet the requirements of Section 3(38) of ERISA and will have
been designated by the Customer to manage assets held in the
Customer Accounts ("Investment Manager"). An Investment
Manager may designate certain of its employees to act as
Authorized Persons under this Agreement.
Section 14(a). Foreign Exchange Transactions.
Add the following paragraph at the end of Subsection 14(a):
Instructions to execute foreign exchange transactions with
the Bank, its subsidiaries, affiliates or Subcustodians will
include (1) the time period in which the transaction must be
completed; (2) the location i.e., Chase New York, Chase
London, etc. or the Subcustodian with whom the contract is to
be executed and (3) such additional information and
guidelines as may be deemed necessary; and, if the
Instruction is a standing Instruction, a provision allowing
such Instruction to be overridden by specific contrary
Instructions.
PAGE 20
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank, N.A. and
Each of the Entities Listed on Schedule A Hereto
effective January 3, 1994
Customer represents that the Assets being placed in the
Bank's custody are subject to the Investment Company Act of 1940
(the Act), as the same may be amended from time to time.
Except to the extent that the Bank has specifically agreed to
comply with a condition of a rule, regulation, interpretation
promulgated by or under the authority of the SEC or the Exemptive
Order applicable to accounts of this nature issued to the Bank
(Investment Company Act of 1940, Release No. 12053, November 20,
1981), as amended, or unless the Bank has otherwise specifically
agreed, the Customer shall be solely responsible to assure that
the maintenance of Assets under this Agreement complies with such
rules, regulations, interpretations or exemptive order
promulgated by or under the authority of the Securities Exchange
Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used in
this Agreement shall mean a branch of a qualified U.S. bank,
an eligible foreign custodian or an eligible foreign
securities depository, which are further defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank
as defined in Rule 17f-5 under the Investment Company Act of
1940;
(b) "eligible foreign custodian" shall mean (i) a banking
institution or trust company incorporated or organized under
the laws of a country other than the United States that is
regulated as such by that country's government or an agency
thereof and that has shareholders' equity in excess of $200
million in U.S. currency (or a foreign currency equivalent
thereof), (ii) a majority owned direct or indirect subsidiary
of a qualified U.S. bank or bank holding company that is
incorporated or organized under the laws of a country other
than the United States and that has shareholders' equity in
excess of $100 million in U.S. currency (or a foreign
currency equivalent thereof)(iii) a banking institution or
trust company incorporated or organized under the laws of a
country other than the United States or a majority owned
direct or indirect subsidiary of a qualified U.S. bank or
bank holding company that is incorporated or organized under
the laws of a country other than the United States which has
such other qualifications as shall be specified in
Instructions and approved by the Bank; or (iv) any other
PAGE 21
entity that shall have been so qualified by exemptive order,
rule or other appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a
securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United
States, which operates (i) the central system for handling
securities or equivalent book-entries in that country, or
(ii) a transnational system for the central handling of
securities or equivalent book-entries.
The Customer represents that its Board of Directors has
approved each of the Subcustodians listed in Schedule B to this
Agreement and the terms of the subcustody agreements between the
Bank and each Subcustodian, which are attached as Exhibits I
through of Schedule B, and further represents that its
Board has determined that the use of each Subcustodian and the
terms of each subcustody agreement are consistent with the best
interests of the Fund(s) and its (their) shareholders. The Bank
will supply the Customer with any amendment to Schedule B for
approval. As requested by the Bank, the Customer will supply the
Bank with certified copies of its Board of Directors
resolution(s) with respect to the foregoing prior to placing
Assets with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions
made pursuant to Section 5 and 6 of this Agreement may be
made only for the purposes listed below. Instructions must
specify the purpose for which any transaction is to be made
and Customer shall be solely responsible to assure that
Instructions are in accord with any limitations or
restrictions applicable to the Customer by law or as may be
set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at
prices as confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or
otherwise become payable;
(c) In exchange for or upon conversion into other securities
alone or other securities and cash pursuant to any plan or
merger, consolidation, reorganization, recapitalization or
readjustment;
(d) Upon conversion of Securities pursuant to their terms
into other securities;
(e) Upon exercise of subscription, purchase or other similar
rights represented by Securities;
(f) For the payment of interest, taxes, management or
supervisory fees, distributions or operating expenses;
PAGE 22
(g) In connection with any borrowings by the Customer
requiring a pledge of Securities, but only against receipt of
amounts borrowed;
(h) In connection with any loans, but only against receipt
of adequate collateral as specified in Instructions which
shall reflect any restrictions applicable to the Customer;
(i) For the purpose of redeeming shares of the capital stock
of the Customer and the delivery to, or the crediting to the
account of, the Bank, its Subcustodian or the Customer's
transfer agent, such shares to be purchased or redeemed;
(j) For the purpose of redeeming in kind shares of the
Customer against delivery to the Bank, its Subcustodian or
the Customer's transfer agent of such shares to be so
redeemed;
(k) For delivery in accordance with the provisions of any
agreement among the Customer, the Bank and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance
with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Customer;
(l) For release of Securities to designated brokers under
covered call options, provided, however, that such Securities
shall be released only upon payment to the Bank of monies for
the premium due and a receipt for the Securities which are to
be held in escrow. Upon exercise of the option, or at
expiration, the Bank will receive from brokers the Securities
previously deposited. The Bank will act strictly in
accordance with Instructions in the delivery of Securities to
be held in escrow and will have no responsibility or
liability for any such Securities which are not returned
promptly when due other than to make proper request for such
return;
(m) For spot or forward foreign exchange transactions to
facilitate security trading, receipt of income from
Securities or related transactions;
(n) For other proper purposes as may be specified in
Instructions issued by an officer of the Customer which shall
include a statement of the purpose for which the delivery or
payment is to be made, the amount of the payment or specific
Securities to be delivered, the name of the person or persons
to whom delivery or payment is to be made, and a
certification that the purpose is a proper purpose under the
instruments governing the Customer; and
(o) Upon the termination of this Agreement as set forth in
Section 14(i).
PAGE 23
Section 12. Standard of Care; Liabilities.
Add the following subsection (c) to Section 12:
(c) The Bank hereby warrants to the Customer that in its
opinion, after due inquiry, the established procedures to be
followed by each of its branches, each branch of a qualified
U.S. bank, each eligible foreign custodian and each eligible
foreign securities depository holding the Customer's
Securities pursuant to this Agreement afford protection for
such Securities at least equal to that afforded by the Bank's
established procedures with respect to similar securities
held by the Bank and its securities depositories in New York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from the Customer, the Bank shall
furnish the Customer such reports (or portions thereof) of
the Bank's system of internal accounting controls applicable
to the Bank's duties under this Agreement. The Bank shall
endeavor to obtain and furnish the Customer with such similar
reports as it may reasonably request with respect to each
Subcustodian and securities depository holding the Customer's
assets.
GLOBAL CUSTODY AGREEMENT
WITH
DATE
SPECIAL TERMS AND CONDITIONS RIDER
PAGE 24
January, 1994 Schedule B
SUB-CUSTODIANS EMPLOYED BY
THE CHASE MANHATTAN BANK, N.A. LONDON, GLOBAL CUSTODY
COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK
ARGENTINA The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
Main Branch N.A. Buenos Aires
25 De Mayo 130/140
Buenos Aires
ARGENTINA
AUSTRALIA The Chase Manhattan Bank, The Chase
Australia Limited Manhattan Bank
36th Floor Australia Limited
World Trade Centre Sydney
Jamison Street
Sydney
New South Wales 2000
AUSTRALIA
AUSTRIA Creditanstalt - Bankvereln Credit Lyonnais
Schottengasse 6 Vienna
A - 1011, Vienna
AUSTRIA
BANGLADESH Standard Chartered Bank Standard Chartered
18-20 Motijheel C.A. Bank Dhaka
Box 536,
Dhaka-1000
BANGLADESH
BELGIUM Generale Bank Credit Lyonnais
3 Montagne Du Parc Bank Brussels
1000 Bruxelles
BELGIUM
BOTSWANA Standard Chartered Bank Standard Chartered
Botswana Ltd. Bank Botswana Ltd.
4th Floor Commerce House Gaborone
The Mall
Gaborone
BOTSWANA
BRAZIL Banco Chase Manhattan, S.A. Banco Chase
Chase Manhattan Center Manhattan S.A.
Rua Verbo Divino, 1400 Sao Paulo
Sao Paulo, SP 04719-002
BRAZIL
PAGE 25
CANADA The Royal Bank of Canada Toronto Dominion
Royal Bank Plaza Bank
Toronto Toronto
Ontario M5J 2J5
CANADA
Canada Trust Toronto Dominion
Canada Trust Tower Bank
BCE Place Toronto
161 Bay at Front
Toronto
Ontario M5J 2T2
CANADA
CHILE The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
Agustinas 1235 N.A.
Casilla 9192 Santiago
Santiago
CHILE
COLOMBIA Cititrust Colombia S.A. Cititrust Colombia
Sociedad Fiduciaria S.A. Sociedad
Av. Jimenez No 8-89 Fiduciaria
Santafe de Bogota, DC Santafe de Bogota
COLOMBIA
CZECH Ceskoslovenska Obchodni Ceskoslovenska
REPUBLC Banka, A.S. Obchodni Banka,
Na Prikoope 14 A.S.
115 20 Praha 1 Praha
CZECH REPUBLIC
DENMARK Den Danske Bank Den Danske Bak
2 Holmens Kanala DK 1091 Copenhagen
Copenhagen
DENMARK
EUROBONDS Cedel S.A. ECU:Lloyds Bank
67 Boulevard Grande Duchesse PLC
Charlotte International
LUXEMBOURG Banking Dividion
A/c The Chase Manhattan London
Bank, N.A. For all other
London currencies: see
A/c No. 17817 relevant country
EURO CDS First Chicago Clearing ECU:Lloyds Bank
Centre PLC
27 Leadenhall Street Banking Division
London EC3A 1AA London
UNITED KINGDOM For all other
currencies: see
relevant country
PAGE 26
FINLAND Kansallis-Osake-Pankki Kanasallis-Osake-
Aleksanterinkatu 42 Pankki
00100 Helsinki 10
FINLAND
FRANCE Banque Paribas Societe Generale
Ref 256 Paris
BP 141
3, Rue D'Antin
75078 Paris
Cedex 02
FRANCE
GERMANY Chase Bank A.G. Chase Bank A.G.
Alexanderstrasse 59 Frankfurt
Postfach 90 01 09
60441 Frankfurt/Main
GERMANY
GREECE National Bank of Greece S.A. National Bank of
38 Stadiou Street Greece S.A. Athens
Athens A/c Chase
GREECE Manhattan Bank,
N.A., London
A/c No.
040/7/921578-68
HONG KONG The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
40/F One Exchange Square N.A.
8, Connaught Place Hong Kong
Central, Hong Kong
HONG KONG
HUNGARY Citibank Budapest Rt. Citibank Budapest
Vaci Utca 19-21 Rt.
1052 Budapest V Budapest
HUNGARY
INDIA The Hongkong and Shanghai The Hongkong and
Banking Corporation Limited Shanghai
52/60 Mahatma Gandhi Road Banking
Bombay 400 001 Corporation
INDIA Limited
Bombay
INDONESIA The Hongkong and Shanghai The Chase
Banking Corporation Limited Manhattan Bank,
World Trade Center N.A.
J1. Jend Sudirman Kav. 29-31 Jakarta
Jakarta 10023
INDONESIA
PAGE 27
IRELAND Bank of Ireland Allied Irish Bank
International Financial Dublin
Services Centre
1 Hargourmaster Place
Dublin 1
IRELAND
ISRAEL Bank Leumi Le-Israel B.M. Bank Leumi Le-
19 Herzi Street Israel B.M.
65136 Tel Aviv Tel Aviv
ISRAEL
ITALY The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
Piazza Meda 1 N.A.
20121 Milan Milan
ITALY
JAPAN The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
1-3 Marunouchi 1-Chome N.A.
Chiyoda-Ku Tokyo
Tokyo 100
JAPAN
JORDAN Arab Bank Limited Arab Bank Limited
P.O. Box 950544-5 Amman
Amman
Shmeisani
JORDAN
LUXEMBOURG Banque Generale du Banque Generale du
Luxembourg S.A. Luxembourg S.A.
27 Avenue Monterey Luxembourg
LUXEMBOURG
MALAYSIA The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
Pernas International N.A.
Jalan Sultan Ismail Kuala Lumpur
50250, Kuala Lumpur
MALAYSIA
MEXICO The Chase Manhattan Bank, No correspondent
(Equities) N.A. Bank
Hamburgo 213, Piso 7
06660 Mexico D.F.
MEXICO
(Government Banco Nacional de Mexico, Banque Commerciale
Bonds) Avenida Juarez No. 104 - 11 du Maroc
Piso Casablanca
06040 Mexico D.F.
MEXICO
PAGE 28
NETHERLANDS ABN AMRO N.V. Credit Lyonnais
Securities Centre Bank Nederland
P.O. Box 3200 N.V.
4800 De Breda Rotterdam
NETHERLANDS
NEW ZEALAND National Nominees Limited National Bank of
Level 2 BNZ Tower New Zealand
125 Queen Street Wellington
Auckland
NEW ZEALAND
NORWAY Den Norske Bank Den Norske Bank
Kirkegaten 21 Oslo
Oslo 1
NORWAY
PAKISTAN Citibank N.A. Citibank N.A.
State Life Building No.1 Karachi
I.I. Chundrigar Road
Karachi
PAKISTAN
PERU Citibank, N.A. Citibank N.A.
Camino Real 457 Lima
CC Torre Real - 5th Floor
San Isidro, Lima 27
PERU
PHILIPPINES The Hongkong and Shanghai The Hongkong and
Banking Corporation Limited Shaghai Banking
Hong Kong Bank Centre 3/F Corporation
San Miguel Avenue Limited
Ortigas Commercial Centre Manila
Pasig Metro Manila
PHILIPPINES
POLAND Bank Polska Kasa Opieki S.A. Bank Potska Kasa
6/12 Nowy Swiat Str Opieki S.A.
00-920 Warsaw Warsaw
POLAND
PORTUGAL Banco Espirito Santo & Banco Pinto &
Comercial de Lisboa Sotto Mayor
Servico de Gestaode Titulos Avenida Fontes
R. Mouzinho da Silvelra, 36 Pereira de Melo
r/c 1000 Lisbon
1200 Lisbon
PORTUGAL
PAGE 29
SHANGHAI The Hongkong and Shanghai The Chase
(CHINA) Banking Corporation Limited Manhattan Bank,
Shanghai Branch N.A.
Corporate Banking Centre Hong Kong
Unit 504, 5/F Shanghai
Centre
1376 Hanjing Xi Lu
Shanghai
THE PEOPLE'S REPUBLIC OF
CHINA
SCHENZHEN The Hongkong and Shanghai The Chase
(CHINA) Banking Corporation Limited Manhattan Bank,
1st Floor N.A.
Central Plaza Hotel Hong Kong
No. 1 Chun Feng Lu
Shenzhen
THE PEOPLE'S REPUBLIC OF
CHINA
SINGAPORE The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
Shell Tower N.A.
50 Raffles Place Singapore
Singapore 0104
SINGAPORE
SOUTH KOREA The Hongkong & Shanghai The Hongkong &
Banking Corporation Limited Shanghai Banking
6/F Kyobo Building Corporation
#1 Chongro, 1-ka Chongro-Ku, Limited
Seoul Seoul
SOUGH KOREA
SPAIN The Chase Manhattan Bank, Banco Zaragozano,
N.A. S.A.
Calle Peonias 2 Madrid
7th Floor
La Piovera
28042 Madrid
SPAIN
URUGUAY The First National Bank of The First National
Boston Bank of Boston
Zabala 1463 Montevideo
Montevideo
URUGUAY
U.S.A The Chase Manhattan Bank, The Chase
N.A. Manhattan Bank,
1 Chase Manhattan Plaza N.A.
New York New York
NY 10081
U.S.A.
PAGE 30
VENEZUELA Citibank N.A. Citibank N.A.
Carmelitas a Altagracia Caracas
Edificio Citibank
Caracas 1010
VENEZUELA
PAGE 31
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of April 18, 1994 (the
"Amendment Agreement") to the Global Custody Agreement, effective
January 3, 1994 (the "Custody Agreement") by and between each of
the Entities listed in Attachment A hereto, separately and
individually (each such entity referred to hereinafter as the
"Customer") and THE CHASE MANHATTAN BANK, N.A. (the "Bank").
Terms defined in the Custody Agreement are used herein as therein
defined.
WITNESSETH:
WHEREAS, the Customer wishes to appoint the Bank as its
global custodian and the bank wishes to accept such appointment
pursuant to the terms of the Custody Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. Amendment. Section I of Schedule A of the Custody
Agreement ("Schedule A") shall be amended to add each
Customer listed in Attachment A hereto. The revised
Schedule A incorporating these changes in the form
attached hereto as Attachment B shall supersede the
existing Schedule A in its entirety.
2. Agreement. The Customer agrees to be bound in all
respects by all the terms and conditions of the Custody
Agreement and shall be fully liable thereunder as a
"Customer" as defined in the Custody Agreement.
3. Confirmation of Agreement. Except as amended hereby, the
Custody Agreement is in full force and effect and as so
amended is hereby ratified, approved and confirmed by the
Customer and the Bank in all respects.
4. Governing Law. This Amendment Agreement shall be
construed in accordance with and governed by the law of
the State of New York without regard to its conflict of
law principles.
PAGE 32
IN WITNESS WHEREOF, the parties have executed this Amendment
Agreement as of the day and year first above written.
THE CHASE MANHATTAN BANK, N.A.
/s/Alan P. Naughton
By:________________________________
Alan P. Naughton
Vice President
EACH OF THE CUSTOMERS LISTED IN
ATTACHMENT A HERETO, SEPARATELY AND
INDIVIDUALLY
/s/Carmen F. Deyesu
By: ______________________________
Carmen F. Deyesu
Treasurer
PAGE 33
Attachment A
LIST OF CUSTOMERS
T. Rowe Price International Series, Inc. on behalf of the
T. Rowe Price International Stock Portfolio
T. Rowe Price Equity Series, Inc. on behalf of the
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price New America Growth Fund, Inc.
T. Rowe Price Income Series, Inc. on behalf of
T. Rowe Price Limited-Term Bond Portfolio
PAGE 34
Attachment B
Schedule A
Page 1 of 2
LIST OF CUSTOMERS, EACH INDIVIDUALLY PARTIES TO
GLOBAL CUSTODY AGREEMENT WITH
THE CHASE MANHATTAN BANK, N.A.
DATED JANUARY 3, 1993
APPLICABLE RIDERS TO
CUSTOMER GLOBAL CUSTODY AGREEMENT
I. INVESTMENT The Mutual Fund Rider is
COMPANIES/PORTFOLIOS applicable to all Customers
REGISTERED UNDER THE listed under Section I
INVESTMENT COMPANY ACT OF 1940 of this Schedule A.
PAGE 35
Equity Funds
T. Rowe Price Balanced Fund, Inc.
T. Rowe Price Blue Chip Growth Fund, Inc.
T. Rowe Price Capital Appreciation Fund
T. Rowe Price Dividend Growth Fund, Inc.
T. Rowe Price Equity Income Fund
T. Rowe Price Growth & Income Fund, Inc.
T. Rowe Price Growth Stock Fund, Inc.
Institutional International Funds, Inc. on behalf of:
Foreign Equity Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price European Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price New Asia Fund
T. Rowe Price International Series, Inc., on behalf of:
T. Rowe Price International Stock Portfolio
T. Rowe Price Mid-Cap Growth Fund, Inc.
T. Rowe Price New Era Fund, Inc.
T. Rowe Price New Horizons Fund, Inc.
T. Rowe Price OTC Fund, Inc. on behalf of:
T. Rowe Price OTC Fund
T. Rowe Price Science & Technology Fund, Inc.
T. Rowe Price Small-Cap Value Fund, Inc.
CUNA Mutual Funds, Inc. on behalf of:
CUNA Mutual Cornerstone Fund
T. Rowe Price Equity Series, Inc. on behalf of:
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price New America Growth Fund, Inc.
Income Funds
T. Rowe Price Adjustable Rate U.S. Government Fund, Inc.
T. Rowe Price High Yield Fund, Inc.
T. Rowe Price New Income Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Summit Funds, Inc. on behalf of:
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price Global Government Income Fund
T. Rowe Price International Bond Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Income Series, Inc. on behalf of:
T. Rowe Price Limited-Term Bond Portfolio
II. ACCOUNTS SUBJECT TO ERISA The ERISA Rider is
applicable to all Customers
T. Rowe Price Trust Company, under Section II of this
as Trustee for the Johnson Schedule A.
Matthey Salaried Employee
Savings Plan
PAGE 36
Common Trust Funds
T. Rowe Price Trust company,
as Trustee for the International
Common Trust Fund on behalf of
the Underlying Trusts:
Foreign Discovery Trust
Foreign Discovery Trust-Augment
Pacific Discovery Trust
European Discovery Trust
Japan Discovery Trust
Latin American Discovery Trust
New York City International Common Trust Fund
III. OTHER No Riders are applicable to
the Customer listed under
RPFI International Section III of this
Partners, L.P. Schedule A.
PAGE 37
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of August 15, 1994 (the
"Amendment Agreement") to the Global Custody Agreement, effective
January 3, 1994, as amended (the "Custody Agreement") by and
between each of the Entities listed in Attachment A hereto,
separately and individually (each such entity referred to
hereinafter as the "Customer") and THE CHASE MANHATTAN BANK, N.A.
(the "Bank"). Terms defined in the Custody Agreement are used
herein as therein defined.
WITNESSETH:
WHEREAS, the Customer wishes to appoint the Bank as its
global custodian and the Bank wishes to accept such appointment
pursuant to the terms of the Custody Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. Amendment. Section I of Schedule A of the Custody
Agreement ("Schedule A") shall be amended to add each Customer
listed in Attachment A hereto. The revised Schedule A
incorporating these changes in the form attached hereto as
Attachment B shall supersede the existing Schedule A in its
entirety.
2. Agreement. The Customer agrees to be bound in all
respects by all the terms and conditions of the Custody Agreement
and shall be fully liable thereunder as a "Customer" as defined
in the Custody Agreement.
3. Confirmation of Agreement. Except as amended hereby,
the Custody Agreement is in full force and effect and as so
amended is hereby ratified, approved and confirmed by the
Customer and the Bank in all respects.
4. Governing Law. This Amendment Agreement shall be
construed in accordance with and governed by the law of the State
of New York without regard to its conflict of law principles.
PAGE 38
IN WITNESS WHEREOF, the parties have executed this Amendment
Agreement as of the day and year first above written.
THE CHASE MANHATTAN BANK, N.A.
/s/Alan P. Naughton
By:_________________________________
Alan P. Naughton
Vice President
EACH OF THE CUSTOMERS LISTED IN
ATTACHMENT A HERETO, SEPARATELY AND
INDIVIDUALLY
/s/Carmen F. Deyesu
By:_________________________________
Carmen F. Deyesu
Treasurer
PAGE 39
Attachment A
LIST OF CUSTOMERS
T. Rowe Price Equity Series, Inc. on behalf of the
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Personal Strategy Funds, Inc. on behalf of
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
PAGE 40
Attachment B
Schedule A
Page 1 of 2
LIST OF CUSTOMERS, EACH INDIVIDUALLY PARTIES TO
GLOBAL CUSTODY AGREEMENT WITH
THE CHASE MANHATTAN BANK, N.A.
DATED JANUARY 3, 1993
APPLICABLE RIDERS TO
CUSTOMER GLOBAL CUSTODY AGREEMENT
I. INVESTMENT The Mutual Fund Rider is
COMPANIES/PORTFOLIOS applicable to all Customers
REGISTERED UNDER THE listed under Section I
INVESTMENT COMPANY ACT OF 1940 of this Schedule A.
Equity Funds
T. Rowe Price Balanced Fund, Inc.
T. Rowe Price Blue Chip Growth Fund, Inc.
T. Rowe Price Capital Appreciation Fund
T. Rowe Price Dividend Growth Fund, Inc.
T. Rowe Price Equity Income Fund
T. Rowe Price Growth & Income Fund, Inc.
T. Rowe Price Growth Stock Fund, Inc.
Institutional International Funds, Inc. on behalf of:
Foreign Equity Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price European Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price New Asia Fund
T. Rowe Price International Series, Inc., on behalf of:
T. Rowe Price International Stock Portfolio
T. Rowe Price Mid-Cap Growth Fund, Inc.
T. Rowe Price New Era Fund, Inc.
T. Rowe Price New Horizons Fund, Inc.
T. Rowe Price OTC Fund, Inc. on behalf of:
T. Rowe Price OTC Fund
T. Rowe Price Science & Technology Fund, Inc.
T. Rowe Price Small-Cap Value Fund, Inc.
CUNA Mutual Funds, Inc. on behalf of:
CUNA Mutual Cornerstone Fund
T. Rowe Price Equity Series, Inc. on behalf of:
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price New America Growth Fund, Inc.
PAGE 41
Income Funds
T. Rowe Price Adjustable Rate U.S. Government Fund, Inc.
T. Rowe Price High Yield Fund, Inc.
T. Rowe Price New Income Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Summit Funds, Inc. on behalf of:
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price Global Government Income Fund
T. Rowe Price International Bond Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Income Series, Inc. on behalf of:
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Personal Strategy Funds, Inc. on behalf of:
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
II. ACCOUNTS SUBJECT TO ERISA The ERISA Rider is
applicable to all Customers
T. Rowe Price Trust Company, under Section II of this
as Trustee for the Johnson Schedule A.
Matthey Salaried Employee
Savings Plan
Common Trust Funds
T. Rowe Price Trust company,
as Trustee for the International
Common Trust Fund on behalf of
the Underlying Trusts:
Foreign Discovery Trust
Foreign Discovery Trust-Augment
Pacific Discovery Trust
European Discovery Trust
Japan Discovery Trust
Latin American Discovery Trust
New York City International Common Trust Fund
III. OTHER No Riders are applicable to
the Customer listed under
RPFI International Section III of this
Partners, L.P. Schedule A.
PAGE 42
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of November 28, 1994 (the
"Amendment Agreement") to the Global Custody Agreement, effective
January 3, 1994, as amended (the "Custody Agreement") by and
between each of the Entities listed in Attachment A hereto,
separately and individually (each such entity referred to
hereinafter as the "Customer") and THE CHASE MANHATTAN BANK, N.A.
(the "Bank"). Terms defined in the Custody Agreement are used
herein as therein defined.
WITNESSETH:
WHEREAS, the Customer wishes to appoint the Bank as its
global custodian and the Bank wishes to accept such appointment
pursuant to the terms of the Custody Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. Amendment. Section I of Schedule A of the Custody
Agreement ("Schedule A") shall be amended to add each Customer
listed in Attachment A hereto. The revised Schedule A
incorporating these changes in the form attached hereto as
Attachment B shall supersede the existing Schedule A in its
entirety.
2. Agreement. The Customer agrees to be bound in all
respects by all the terms and conditions of the Custody Agreement
and shall be fully liable thereunder as a "Customer" as defined
in the Custody Agreement.
3. Confirmation of Agreement. Except as amended hereby,
the Custody Agreement is in full force and effect and as so
amended is hereby ratified, approved and confirmed by the
Customer and the Bank in all respects.
4. Governing Law. This Amendment Agreement shall be
construed in accordance with and governed by the law of the State
of New York without regard to its conflict of law principles.
PAGE 43
IN WITNESS WHEREOF, the parties have executed this Amendment
Agreement as of the day and year first above written.
THE CHASE MANHATTAN BANK, N.A.
/s/Alan P. Naughton
By:_________________________________
Alan P. Naughton
Vice President
EACH OF THE CUSTOMERS LISTED IN
ATTACHMENT A HERETO, SEPARATELY AND
INDIVIDUALLY
/s/Carmen F. Deyesu
By:_________________________________
Carmen F. Deyesu
Treasurer
PAGE 44
Attachment A
LIST OF CUSTOMERS
T. Rowe Price Value Fund, Inc.
T. Rowe Price Capital Opportunity Fund, Inc.
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price Emerging Markets Bond Fund
PAGE 45
Attachment B
Schedule A
Page 1 of 2
LIST OF CUSTOMERS, EACH INDIVIDUALLY PARTIES TO
GLOBAL CUSTODY AGREEMENT WITH
THE CHASE MANHATTAN BANK, N.A.
DATED JANUARY 3, 1993
APPLICABLE RIDERS TO
CUSTOMER GLOBAL CUSTODY AGREEMENT
I. INVESTMENT The Mutual Fund Rider is
COMPANIES/PORTFOLIOS applicable to all Customers
REGISTERED UNDER THE listed under Section I
INVESTMENT COMPANY ACT OF 1940 of this Schedule A.
Equity Funds
T. Rowe Price Balanced Fund, Inc.
T. Rowe Price Blue Chip Growth Fund, Inc.
T. Rowe Price Capital Appreciation Fund
T. Rowe Price Capital Opportunity Fund, Inc.
T. Rowe Price Dividend Growth Fund, Inc.
T. Rowe Price Equity Income Fund
T. Rowe Price Growth & Income Fund, Inc.
T. Rowe Price Growth Stock Fund, Inc.
Institutional International Funds, Inc. on behalf of:
Foreign Equity Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price European Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price New Asia Fund
T. Rowe Price International Series, Inc., on behalf of:
T. Rowe Price International Stock Portfolio
T. Rowe Price Mid-Cap Growth Fund, Inc.
T. Rowe Price New Era Fund, Inc.
T. Rowe Price New Horizons Fund, Inc.
T. Rowe Price OTC Fund, Inc. on behalf of:
T. Rowe Price OTC Fund
T. Rowe Price Science & Technology Fund, Inc.
T. Rowe Price Small-Cap Value Fund, Inc.
CUNA Mutual Funds, Inc. on behalf of:
CUNA Mutual Cornerstone Fund
T. Rowe Price Equity Series, Inc. on behalf of:
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price New America Growth Fund, Inc.
T. Rowe Price Value Fund, Inc.
PAGE 46
Income Funds
T. Rowe Price Adjustable Rate U.S. Government Fund, Inc.
T. Rowe Price High Yield Fund, Inc.
T. Rowe Price New Income Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Summit Funds, Inc. on behalf of:
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price International Funds, Inc. on behalf of:
T. Rowe Price Global Government Income Fund
T. Rowe Price International Bond Fund
T. Rowe Price Short-Term Global Income Fund
T. Rowe Price Emerging Markets Bond Fund
T. Rowe Price Income Series, Inc. on behalf of:
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Personal Strategy Funds, Inc. on behalf of:
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
II. ACCOUNTS SUBJECT TO ERISA The ERISA Rider is
applicable to all Customers
T. Rowe Price Trust Company, under Section II of this
as Trustee for the Johnson Schedule A.
Matthey Salaried Employee
Savings Plan
Common Trust Funds
T. Rowe Price Trust company,
as Trustee for the International
Common Trust Fund on behalf of
the Underlying Trusts:
Foreign Discovery Trust
Foreign Discovery Trust-Augment
Pacific Discovery Trust
European Discovery Trust
Japan Discovery Trust
Latin American Discovery Trust
New York City International Common Trust Fund
III. OTHER No Riders are applicable to
the Customer listed under
RPFI International Section III of this
Partners, L.P. Schedule A.
PAGE 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectus and Statement of Additional Information constituting
parts of this Post-Effective Amendment No. 51 to the Registration
Statement on Form N-1A (the "Registration Statement") of our
report dated November 17, 1994, relating to the financial
statements and selected per share data and ratios appearing in
the October 31, 1994 Annual Report to Shareholders of the
International Discovery Fund, (one of the portfolios constituting
T. Rowe Price International Funds, Inc.), which is also
incorporated by reference into the Registration Statement. We
also consent to the references to us under the heading "Financial
Highlights" in the Prospectus and under the heading "Independent
Accountants" in the Statement of Additional Information.
/s/PRICE WATERHOUSE, LLP
Price Waterhouse, LLP
February 7, 1995
PAGE 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectus and Statement of Additional Information constituting
parts of this Post-Effective Amendment No. 51 to the Registration
Statement on Form N-1A (the "Registration Statement") of our
report dated November 17, 1994, relating to the financial
statements and selected per share data and ratios appearing in
the October 31, 1994 Annual Report to Shareholders of the
International Stock Fund, (one of the portfolios constituting T.
Rowe Price International Funds, Inc.), which is also incorporated
by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in
the Prospectus and under the heading "Independent Accountants" in
the Statement of Additional Information.
/s/PRICE WATERHOUSE, LLP
Price Waterhouse, LLP
February 7, 1995
PAGE 3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectus and Statement of Additional Information constituting
parts of this Post-Effective Amendment No. 51 to the Registration
Statement on Form N-1A (the "Registration Statement") of our
report dated November 17, 1994, relating to the financial
statements and selected per share data and ratios appearing in
the October 31, 1994 Annual Report to Shareholders of the
European Stock Fund, (one of the portfolios constituting T. Rowe
Price International Funds, Inc.), which is also incorporated by
reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in
the Prospectus and under the heading "Independent Accountants" in
the Statement of Additional Information.
/s/PRICE WATERHOUSE, LLP
Price Waterhouse, LLP
February 7, 1995
PAGE 4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectus and Statement of Additional Information constituting
parts of this Post-Effective Amendment No. 51 to the Registration
Statement on Form N-1A (the "Registration Statement") of our
report dated November 17, 1994, relating to the financial
statements and selected per share data and ratios appearing in
the October 31, 1994 Annual Report to Shareholders of the Japan
Fund, (one of the portfolios constituting T. Rowe Price
International Funds, Inc.), which is also incorporated by
reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in
the Prospectus and under the heading "Independent Accountants" in
the Statement of Additional Information.
/s/PRICE WATERHOUSE, LLP
Price Waterhouse, LLP
February 7, 1995
PAGE 5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectus and Statement of Additional Information constituting
parts of this Post-Effective Amendment No. 51 to the Registration
Statement on Form N-1A (the "Registration Statement") of our
report dated November 17, 1994, relating to the financial
statements and selected per share data and ratios appearing in
the October 31, 1994 Annual Report to Shareholders of the Latin
America Fund, (one of the portfolios constituting T. Rowe Price
International Funds, Inc.), which is also incorporated by
reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in
the Prospectus and under the heading "Independent Accountants" in
the Statement of Additional Information.
/s/PRICE WATERHOUSE, LLP
Price Waterhouse, LLP
February 7, 1995
PAGE 6
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
T. Rowe Price International Funds, Inc. and
Shareholders of T. Rowe Price New Asia Fund
We consent to the incorporation by reference in Post-
Effective Amendment No. 51 to the Registration Statement of the
T. Rowe Price International Funds, Inc. on Form N-1A (File No.
002-65539) of our report dated November 25, 1994, relating to the
financial statements and financial highlights of the T. Rowe
Price New Asia Fund (the "Fund") appearing in the Fund's October
31, 1994 Annual Report to the Shareholders, which is incorporated
by reference in the Registration Statement. We also consent to
the reference to our Firm under the captions "Financial
Highlights" in the Prospectus and "Independent Accountants" in
the Statement of Additional Information.
/s/COOPERS & LYBRAND, L.L.P.
Coopers & Lybrand, L.L.P.
Baltimore, Maryland
February 6, 1995
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