PAGE 1
Prospectus for the T. Rowe Price International Stock Fund, dated
March 1, 1996, should be inserted here.
To Open an Account
Investor Services
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ISF
Invest With Confidence
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
PROSISF 3/1/96
Prospectus
T. Rowe Price International Stock Fund
T. Rowe Price International Funds, Inc.
March 1, 1996
_____________________________________________________________________________
An international stock fund for investors seeking capital growth by
diversifying beyond U.S. borders.
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 higher appreciation potential over time and greater
diversification for their equity investments who can accept the price declines
associated with investing in stocks as well as 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. ("Price-Fleming"), was founded in 1979
as a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings, Ltd. As of December 31, 1995, Price-Fleming managed over $22 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, 1996
Prospectus
Contents
_____________________________________________________________________________
1
_____________________________________________________________________________
About the Fund
_____________________________________________________________________________
Transaction and Fund Expenses 2
_____________________________________________________________________________
Financial Highlights 3
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Fund, Market, and Risk
Characteristics 4
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2
_____________________________________________________________________________
About Your Account
_____________________________________________________________________________
Pricing Shares and Receiving
Sale Proceeds 9
_____________________________________________________________________________
Distributions and Taxes 10
_____________________________________________________________________________
Transaction Procedures and
Special Requirements 11
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3
_____________________________________________________________________________
More About the Fund
_____________________________________________________________________________
Organization and Management 14
_____________________________________________________________________________
Understanding Performance
Information 17
_____________________________________________________________________________
Investment Policies and
Practices 17
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4
_____________________________________________________________________________
Investing With T. Rowe Price
_____________________________________________________________________________
Account Requirements and
Transaction Information 22
_____________________________________________________________________________
Opening a New Account 22
_____________________________________________________________________________
Purchasing Additional Shares 23
_____________________________________________________________________________
Exchanging and Redeeming 24
_____________________________________________________________________________
Shareholder Services 25
_____________________________________________________________________________
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, 1996, 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.
1 About the Fund
Transaction and Fund Expenses
In Table 1 below, "Shareholder Transaction Expenses," shows that you pay no
sales charges. All the money you invest in the fund goes to work for you,
subject to the fees explained below. "Annual Fund Expenses" shows how much it
will cost to operate the fund for a year, based on 1995 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.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
_____________________________________________________________________________
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995, FEES PAID BY THE FUND INCLUDED THE
FOLLOWING: $5,147,000 TO T. ROWE PRICE SERVICES, INC., FOR TRANSFER AND
DIVIDEND DISBURSING FUNCTIONS AND SHAREHOLDER SERVICES; $2,340,000 TO T. ROWE
PRICE RETIREMENT PLAN SERVICES, INC., FOR RECORDKEEPING SERVICES FOR CERTAIN
RETIREMENT PLANS; AND $130,000 TO T. ROWE PRICE FOR ACCOUNTING SERVICES.
Shareholder Transaction Annual Fund Percentage of Fiscal
Expenses Expenses 1995 Average Net Assets
_____________________________________________________________________________
Sales charge "load"
on purchases None Management fee 0.69%
_____________________________________________________________________________
Sales charge "load" on Marketing fees
reinvested dividends None (12b-1) None
_____________________________________________________________________________
Redemption fees None Total other (shareholder
servicing, custodial,
auditing, etc.) 0.22%
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Exchange fees None
_____________________________________________________________________________
Total fund expenses 0.91%
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Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see "Small Account Fee" under "Transaction Procedures and Special
Requirements").
_____________________________________________________________________________
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 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.
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 "Organization and
Management."
_____________________________________________________________________________
THE TABLE AT RIGHT IS JUST AN EXAMPLE; ACTUAL EXPENSES CAN BE HIGHER OR LOWER
THAN THOSE SHOWN.
o Hypothetical example: Assume you invest $1,000, the fund returns 5%
annually, expense ratios remain as listed previously, and you close your
account at the end of the time periods shown. Your expenses would be:
1 year 3 years 5 years 10 years
_____________________________________________________________________________
$9 $29 $50 $112
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Table 2
Financial Highlights
The following table provides information about the fund's financial history.
It is based on a single share outstanding throughout each fiscal year. The
table is part of the fund's financial statements which are included in the
fund's Annual Report and are incorporated by reference into the Statement of
Additional Information. This document is available to shareholders upon
request. The financial statements in the annual report have been audited by
Price Waterhouse LLP, independent accountants, whose unqualified report covers
the most recent five-year period.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
Investment Activities Distributions End of Period
Net Ratio
Realized of Net
and Total Ratio Invest-
Net Unreal- Return of Ex- ment
Asset ized Total Net (Incl- penses Income
Value, Net Gain From Net Net Asset udes Net to to Port-
Begin- Invest-(Loss) Invest- Invest- Real- Value, Rein- Assets Aver- Aver- folio
Year ning ment on ment ment ized Total End vested ($ age age Turn-
End- of In- Invest- Activi- In- Gain Distri- of Divi- Thou- Net Net over
eda Period come ments ties come (Loss) butions Period dends) sands) Assets Assets Rate
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $9.04 $0.11 $5.23 $5.34 $(0.11) $(1.38) $(1.49) $12.89 61.3% $790,020 1.10% 0.89% 56.4%
1987 12.89 0.12 0.74 0.86 (0.23) (4.98) (5.21) 8.54 8.0% 642,463 1.14% 0.93% 76.5%
1988 8.54 0.16 1.36 1.52 (0.16) (0.93) (1.09) 8.97 17.9% 630,114 1.16% 1.78% 42.4%
1989 8.97 0.16 1.94 2.10 (0.16) (0.67) (0.83) 10.24 23.7% 970,214 1.10% 1.63% 47.8%
1990 10.24 0.22 (1.13) (0.91) (0.16) (0.36) (0.52) 8.81 (8.9%) 1,030,848 1.09% 2.16% 47.1%
1991 8.81 0.15 1.22 1.37 (0.15) (0.49) (0.64) 9.54 15.9% 1,476,309 1.10% 1.51% 45.0%
1992 9.54 0.14 (0.47) (0.33) (0.16) (0.16) (0.32) 8.89 (3.5%) 1,949,631 1.05% 1.49% 37.8%
1993b 8.89 0.10 2.75 2.85 - - - 11.74 32.1% 3,746,055 1.01%c 1.52%c 29.8%c
1994 11.74 0.09 1.30 1.39 (0.09) (0.20) (0.29) 12.84 12.0% 6,205,713 0.96% 1.11% 22.9%
1995 12.84 0.18 (0.19) (0.01) (0.12) (0.62) (0.74) 12.09 0.4% 6,385,905 0.91%d 1.56% 17.8%
____________________________________________________________________________________________________________
a All per-share figures reflect the 2-for-1 stock split effective August 31, 1987.
b For the ten months ended October 31, 1993. Fiscal year-end changed from December 31 to October 31.
c Annualized.
d Beginning in fiscal 1995, includes expenses paid indirectly.
___________________________________________________________________________________________________________
Table 3
Fund, Market, and Risk Characteristics: What to Expect
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objectives and approach.
Why invest in an international fund?
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.
o The potential for higher long-term returns. For example, 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
all but two rolling 10-year periods from 1981 through 1995. Of course,
during this time there were shorter periods when U.S. stocks
outperformed.
o Potentially reduced overall volatility for an all U.S. stock portfolio.
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 is the fund's objective and investment program?
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 - developed, newly
industrialized, and emerging.
What securities can the fund invest in other than common stocks?
The fund expects to invest substantially all of its assets in common stocks.
However, the fund 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 investment 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.
How does the portfolio manager select stocks?
Rowe Price-Fleming uses a "bottom-up" approach to stock selection based on
fundamental research. A company's prospects for achieving and sustaining
above-average, long-term earnings growth is generally the manager's primary
focus. However, valuation factors, such as price-earnings, price-cash flow,
and price to book are also important considerations. In conjunction with
identifying potential stocks for investment, external factors are also
reviewed.
For example, a country's or region's political, economic, and financial status
help shape the outlook for individual stocks and also affect decisions
regarding the prudent level of overall exposure to particular areas.
_____________________________________________________________________________
EXCHANGE RATE MOVEMENTS CAN BE LARGE AND CAN LAST FOR EXTENDED PERIODS.
What are the major risks associated with international investing and this
fund?
Stock prices of foreign and U.S. companies are subject to many of the same
influences, such as general economic conditions, company and industry earnings
prospects, and investor psychology. However, investing in foreign securities
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.
o Currency fluctuations. Transactions in foreign securities are conducted
in local currencies, so dollars must often be exchanged for another
currency when 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 the fund can invest do
not compare favorably with the U.S. 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. This
is especially true for emerging markets such as those found in Latin
America, China, and certain Asian countries, Eastern Europe, and Africa.
However, even investments in countries with highly developed economies
are subject to risk. For example, the Japanese stock market historically
has experienced wide swings in value.
Some economies are less well developed (for example, those in Latin America,
Eastern Europe, Africa, and certain Asian countries), overly reliant on
particular industries, 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, Eastern Europe,
and Africa). This makes investment in such markets significantly riskier than
in other countries. 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 Eastern
Europe, China, and Africa, should be regarded as speculative.
Certain countries have histories of instability and upheaval (for example,
Latin America and Africa) with respect to their internal politics that could
cause their governments to act in a detrimental or hostile manner toward
private enterprise or foreign investment. Actions, such as 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. Significant external risks, including war,
currently affect some countries. Governments in many emerging market countries
participate to a significant degree in their economies and securities markets.
_____________________________________________________________________________
FOR MORE DETAILS ON POTENTIAL RISKS OF FOREIGN INVESTMENTS, PLEASE SEE
"INVESTMENT POLICIES AND PRACTICES."
o Legal, regulatory, and operational. Certain 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. In addition, securities markets in these countries
have substantially lower trading volumes than U.S. markets, resulting in
less liquidity and more volatility than experienced in the U.S.
o Pricing. Portfolio securities may be listed on foreign exchanges that
are open days (such as Saturdays) when the funds do not compute their
prices. As a result, the fund's net asset value may be significantly
affected by trading on days when shareholders cannot make transactions.
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.
Share prices of even the best managed, most profitable corporations, whether
U.S. or foreign, are subject to market risk, which means they can fluctuate
widely.
_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE; WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.
In less well developed stock markets, such as those in Latin America, Eastern
Europe, Africa, and certain Asian 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 local stock prices and, therefore, fund share prices.
How does the portfolio manager 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, 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 shorter-run returns provided
by foreign stocks, its influence on longer-term results generally has
been outweighed by price trends on local stock exchanges. Therefore,
under normal conditions, the funds do not engage in extensive hedging
programs. 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.
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 economics 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 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 could 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, Eastern
Europe, Asia, and Africa are emerging from periods of economic
stagnation and offer the potential for growth exceeding that of the U.S.
and other developed countries. The countries initiating market-based
economic reforms could benefit from significant amounts of capital
inflows.
_____________________________________________________________________________
THE FUND SHOULD NOT REPRESENT YOUR 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.
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 other information I need to review before making a decision?
Be sure to review the "Investment Policies and Practices" section, 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, and private placements) and
Types of Management Practices (cash position, borrowing money and transferring
assets, foreign currency transactions, futures and options, tax consequences
of hedging, and portfolio turnover).
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in a T. Rowe Price
international fund.
_____________________________________________________________________________
THE VARIOUS WAYS YOU CAN BUY, SELL, AND EXCHANGE SHARES ARE EXPLAINED AT THE
END OF THIS PROSPECTUS AND ON THE NEW ACCOUNT FORM. THESE PROCEDURES MAY
DIFFER FOR INSTITUTIONAL AND EMPLOYER-SPONSORED RETIREMENT ACCOUNTS.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the fund,
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, a fund's assets are valued 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.
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.
_____________________________________________________________________________
WHEN FILLING OUT THE NEW ACCOUNT FORM, YOU MAY WISH TO GIVE YOURSELF THE
WIDEST RANGE OF OPTIONS FOR RECEIVING PROCEEDS FROM A SALE.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the New
York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
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 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 banks, and credit unions, which
electronically exchange the transactions primarily through the Federal Reserve
Banks. Proceeds sent by bank wire should be credited to your account the next
business day.
_____________________________________________________________________________
IF FOR SOME REASON WE CANNOT ACCEPT YOUR 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 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
_____________________________________________________________________________
ALL NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS ARE DISTRIBUTED TO
SHAREHOLDERS.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding; that
is, you receive income dividends and capital gain distributions on a rising
number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to reinvest
your distribution check in your account at the 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.
_____________________________________________________________________________
YOU WILL BE SENT TIMELY INFORMATION FOR YOUR TAX FILING NEEDS.
Tax Information
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 one fund to another is still a sale for tax
purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For accounts opened new or by exchange in 1983 or
later, we will provide you the gain or loss of the shares you sold during the
year, based on the "average cost" method. This information is not reported to
the IRS, and you do not have to use it. You may calculate the cost basis using
other methods acceptable to the IRS, such as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction (except for systematic purchases and redemptions)
and a year-end statement detailing all your transactions in each fund account
during the year.
Taxes on fund distributions. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until you withdraw
money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distribution made to you. This information will also
be reported to the IRS. All distributions made by the fund are taxable to you
for the year in which they were paid. The only exception is that distributions
declared during the last three months of the year and paid in January are
taxed as though they were paid by December 31. You will be sent any additional
information you need to determine your taxes on fund distributions, such as
the portion of your dividend, if any, that may be exempt from state income
taxes.
_____________________________________________________________________________
CAPITAL GAIN 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 long-term 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 the fund pays nonrefundable taxes to foreign governments
during the year, the taxes will reduce the fund's dividends but will still be
included in your taxable income. However, you may be able to claim an
offsetting credit or deduction on your tax return for your portion of foreign
taxes paid by the fund.
Tax effect of buying shares before a capital gain distribution. If you buy
shares shortly before or on the "record date" - the date that establishes you
as the person to receive the upcoming distribution - you will receive, in the
form of a taxable distribution, a portion of the money you just invested.
Therefore you may also 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.
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 canceled. You will be
responsible for any losses or expenses incurred by the fund or transfer agent,
and the fund can redeem shares you own in this or another identically
registered T. Rowe Price fund as reimbursement. The fund and its agents have
the right to reject or cancel any purchase, exchange, or redemption due to
nonpayment.
U.S. dollars. All purchases must be paid for in U.S. dollars; checks must be
drawn on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you just purchased and paid by check or
ACH transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. If, during the
clearing period, we receive a check drawn against your bond or money market
account, it will be returned marked "uncollected." (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's, certified,
or treasurer's checks; or automatic purchases through your paycheck.)
Telephone, Tele*Access(registered trademark), and PC*Access(registered
trademark) transactions. These exchange and redemption services are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. Each fund uses
reasonable procedures (including shareholder identity verification) to confirm
that instructions given by telephone are genuine and is not liable for acting
on these instructions. 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. A confirmation is sent
promptly after the telephone transaction. All conversations are recorded.
Redemptions over $250,000. Large sales can adversely affect a portfolio
manager's ability to implement a fund's investment strategy by causing the
premature sale of securities that would otherwise be held. If in any 90-day
period, you redeem (sell) more than $250,000, or your sale amounts to more
than 1% of 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").
Keeping Your Account Open
Due to the relatively high cost to the fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price Mutual Fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan accounts.
(A separate custodial fee may apply to IRAs and other retirement plan
accounts.)
_____________________________________________________________________________
A SIGNATURE GUARANTEE IS DESIGNED TO PROTECT YOU AND THE T. ROWE PRICE FUNDS
FROM FRAUD BY VERIFYING YOUR SIGNATURE.
Signature Guarantees
You may need to have your signature guaranteed in certain situations, such as:
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 (name/ownership) from yours.
o Establishing certain services after the account is opened.
o 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 Fund
Organization and Management
How is the fund organized?
T. Rowe Price International Funds, Inc. currently consists of twelve series,
each representing a separate class of shares and having different objectives
and investment policies. The twelve 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; Emerging Markets Bond Fund, 1994;
Emerging Markets Stock Fund and Global Stock Fund, 1995. (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.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o Receive a proportional interest in the fund's capital gain
distributions; and
o Cast one vote per share on certain fund matters, including the election
of fund directors/trustees, changes in fundamental policies, or approval
of changes in a fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and do not intend to do so
except when certain matters, such as a change in a fund's fundamental
policies, are to be decided. In addition, shareholders representing at least
10% of all eligible votes may call a special meeting if they wish for the
purpose of voting on the removal of any fund director(s)/trustee(s). 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, performance, expenses, and other
business affairs. The Board elects the fund's officers. The policy of the fund
is that a majority of the 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, SEOUL, TAIPEI, BOMBAY,
JAKARTA, SINGAPORE, BANGKOK, AND JOHANNESBURG.
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 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 26 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 nine years of experience with
the Fleming Group in research and portfolio management. Peter Askew joined
Price-Fleming in 1988 and has 20 years of experience managing multi-currency
fixed income portfolios. Richard Bruce joined Price-Fleming in 1991 and has
seven years of experience in investment management with the Fleming Group in
Tokyo. Mark Edwards joined Price-Fleming in 1986 and has 14 years of
experience in financial analysis. John Ford joined Price-Fleming in 1982 and
has 15 years of experience with the Fleming Group in research and portfolio
management. Robert Howe joined Price-Fleming in 1986 and has 14 years of
experience in economic research, company research, and portfolio management.
James Seddon joined Price-Fleming in 1987 and has nine years of portfolio
management experience. Benedict Thomas joined Price-Fleming in 1988 and has
six years of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 15 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 each fund are made by Price-Fleming.
The fund's Board of Directors has authorized Price-Fleming to utilize
affiliates of Flemings and Jardine Fleming in the capacity of broker in
connection with the execution of 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 fund's transfer and dividend disbursing agent and
provides shareholder and administrative services. Services for certain types
of retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly owned subsidiary. The address for each is 100 East Pratt
St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
The Management Fee. This fee has two parts - an "individual fund fee"
(discussed under "Transaction and Fund Expenses") which reflects a fund's
particular investment management costs, and a "group fee." The group fee,
which is designed to reflect the benefits of the shared resources of the T.
Rowe Price investment management complex, is calculated daily based on the
combined net assets of all T. Rowe Price funds (except Equity Index and the
Spectrum Funds and any institutional or private label mutual funds). The group
fee schedule (shown below) is graduated, declining as the asset total rises,
so shareholders benefit from the overall growth in mutual fund assets.
0.480% First $1 billion 0.370% Next $1 billion 0.330% Next $10 billion
0.450% Next $1 billion 0.360% Next $2 billion 0.320% Next $10 billion
0.420% Next $1 billion 0.350% Next $2 billion 0.310% Thereafter
0.390% Next $1 billion 0.340% Next $5 billion
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the Price funds described
previously. Based on combined Price funds' assets of approximately $48.6
billion at December 31, 1995, 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) 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 fund
performance. You will come across them in shareholder reports you receive from
us, in our newsletter, The Price Report, in Insights articles, in T. Rowe
Price advertisements, and in the media.
Total Return
_____________________________________________________________________________
TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN THE FUND'S ANNUAL AND SEMIANNUAL SHAREHOLDER
REPORTS, AND IN THE QUARTERLY PERFORMANCE UPDATE.
This tells you how much an investment in the 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 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
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
This section takes a detailed look at some of the types of securities the fund
may hold in its portfolio and the various kinds of investment practices that
may be used in day-to-day portfolio management. The fund's investment program
is subject to further restrictions and risks described in the "Statement of
Additional Information."
Shareholder approval is required to substantively change the fund's 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. 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 a
fund's investment program, investors should not view them as an accurate gauge
of the potential risk of such investments. For example, in a given period, a
5% investment in hybrid instruments could have significantly more than a 5%
impact on a 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 sent to you.
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. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
Fundamental policy: The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or more than 10% of the
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 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 nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price anytime during the life
of the warrants (generally, two or more years).
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.
_____________________________________________________________________________
HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY A FUND
MAY NOT BE SUCCESSFUL.
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) can combine the characteristics of securities, futures, and
options. For example, the principal amount, 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.
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.
To avoid such tax and interest, each Price-Fleming 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, 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. As part of this limit, the fund will not invest more than
10% 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 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 331/3% 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 331/3% 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 greater than
one year.
The fund 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, 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 potentially high-risk 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
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for a number of
reasons including: to manage its exposure to changes in securities prices and
foreign currencies; as an efficient means of adjusting overall exposure to
certain markets; in an effort to enhance income; and to protect the value of
portfolio securities. 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 a 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.
Tax Consequences of Hedging. Under applicable tax law, the fund may be
required to limit its gains from hedging in foreign currency forwards,
futures, and options. Although 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 fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 331/3% of a
fund's total assets.
Portfolio Turnover. 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 for the fiscal years ended
October 31, 1993, 1994, and 1995 were 29.8% (annualized), 22.9%, and 17.8%,
respectively.
4 Investing With T. Rowe Price
Account Requirements and Transaction Information
_____________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES PROMPTLY.
Tax Identification Number
We must have your correct Social Security or corporate tax identification
number on a signed New Account Form or W-9 Form. Otherwise, federal law
requires the funds to withhold a percentage (currently 31%) of your dividends,
capital gain distributions, and redemptions and may subject you to an IRS
fine. If this information is not received within 60 days after your account is
established, your account may be redeemed, priced at the NAV on the date
of redemption.
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.
_____________________________________________________________________________
T. ROWE PRICE
TRUST COMPANY
1-800-492-7670
1-410-625-6585
Employer-Sponsored Retirement Plans and Institutional Accounts
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or
service representative.
Opening a New Account: $2,500 minimum initial investment; $1,000 for
retirement 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
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
address at left. We do not accept third party checks, except for IRA Rollover
checks, to open new accounts.
_____________________________________________________________________________
MAILGRAM, EXPRESS,
REGISTERED, OR CERTIFIED MAIL
T. ROWE PRICE
ACCOUNT SERVICES
10090 RED RUN BLVD.
OWINGS MILLS, MD 21117
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
account name(s) and account number
o Complete a New Account Form and mail it to one of the appropriate
addresses listed on the previous page.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or PC*Access (see "Automated
Services" under "Shareholder Services"). The new account will have the same
registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. (See explanation of "Excessive Trading" under "Transaction
Procedures.")
In Person
Drop off your New Account Form at any of the locations listed on the cover and
obtain a receipt.
Purchasing Additional Shares: $100 minimum purchase; $50 minimum for
retirement plans and Automatic Asset Builder
By ACH Transfer
Use Tele*Access, PC*Access, or call Investor Services if you have established
electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in "Opening a New Account."
By Mail
_____________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE FUNDS
ACCOUNT SERVICES
P.O. BOX 89000
BALTIMORE, MD
21289-1500
(FOR MAILGRAMS, EXPRESS, REGISTERED,
OR CERTIFIED MAIL, SEE PREVIOUS SECTION.)
o Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
o Mail the check to us at the address shown at left with either a fund
reinvestment slip or a note indicating the fund you want to buy and your
fund account number.
o Remember to provide your account number and the fund name on your check.
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our phones busy during unusually
volatile markets, please consider placing your order by Tele*Access, PC*Access
(if you have previously authorized telephone services), mailgram, 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 (provided your bank information is already on
file). For charges, see "Electronic Transfers - By Wire" under "Shareholder
Services."
_____________________________________________________________________________
FOR MAILGRAM, EXPRESS, REGISTERED, OR CERTIFIED MAIL,SEE ADDRESSES UNDER
"OPENING A NEW ACCOUNT."
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please
mail to the appropriate address below or as indicated at left. T. Rowe Price
requires the signatures of all owners exactly as registered, and possibly a
signature guarantee (see "Transaction Procedures and Special Requirements -
Signature Guarantees").
Regular Mail
For nonretirement and IRA accounts:
T. Rowe Price Account Services
P.O. Box 89000
Baltimore, MD 21289-0220
For employer-sponsored retirement accounts:
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
Rights Reserved By the Fund
The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; to cancel or
rescind any purchase or exchange (for example, if an account has been
restricted due to excessive trading or fraud) upon notice to the shareholder
within five business days of the trade or if the written confirmation has not
been received by the shareholder, whichever is sooner; to freeze any account
and suspend account services when notice has been received of a dispute
between the registered or beneficial account owners or there is reason to
believe a fraudulent transaction may occur; to otherwise modify the conditions
of purchase and any services at any time; or to act on instructions believed
to be genuine.
Shareholder Services
_____________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically and others you must authorize on the New Account Form.
By signing up for services on the New Account Form rather than later on, you
avoid having to complete a separate form and obtain a signature guarantee.
This section reviews some of the principal services currently offered. Our
Services Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide
with our Welcome Kit.
_____________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
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
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.
Automated Services
_____________________________________________________________________________
TELE*ACCESS
1-800-638-2587
1-410-625-7676
Tele*Access. 24-hour service via a toll-free number provides information on
fund yields and prices, dividends, account balances, and your latest
transaction as well as the ability to request prospectuses, account and tax
forms, duplicate statements, checks, and to initiate purchase, redemption, and
exchange orders in your accounts (see "Electronic Transfers" below).
PC*Access. 24-hour service via a 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 investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH. With no charges to pay, you can initiate a purchase or redemption for
as little as $100 or as much as $100,000 between your bank account and fund
account using the ACH network. Enter instructions via Tele*Access, 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.
Checkwriting (Not available for equity funds, or the High Yield Fund or
Emerging Markets Bond Fund)
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 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.
Note: If you are moving money from your bank account, and if the date you
select for your transactions falls on a Sunday or a Monday which is a holiday,
your order will be priced on the second business day following this date.
o Automatic Exchange. You can set up systematic investments from one fund
account into another, such as from a money fund into a stock fund.
Discount Brokerage
You can trade stocks, bonds, options, precious metals, and other securities at
a 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.
_____________________________________________________________________________
DISCOUNT BROKERAGE IS A DIVISION OF T. ROWE PRICE INVESTMENT SERVICES, INC.
________________________________________________________________________
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING
AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
The Statement of Additional Information for the T. Rowe Price
International Funds, Inc., dated March 1, 1996, should be
inserted here.
PAGE 1
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
Emerging Markets Stock Fund
Global Stock 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, 1996, which may be obtained from
T. Rowe Price Investment Services, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you
are not a shareholder, please call 1-800-638-5660. A prospectus
with more complete information, including management fees and
expenses will be sent to you. Please read it carefully before
you invest or send money.
The date of this Statement of Additional Information is
March 1, 1996.
PAGE 2
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 3
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, Foreign Equity, and Global Stock Funds
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. The
Global Stock Fund may also invest in companies based in the U.S.
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.
PAGE 4
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,
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
PAGE 5
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
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
PAGE 6
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.
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.
PAGE 7
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,
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.
PAGE 8
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,
certain of 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
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 region 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
PAGE 9
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.
Emerging Markets Stock Fund
The fund's objective is long-term growth of capital
through investment primarily in common stocks of large and small
companies domiciled, or with primary operations, in emerging
markets. An emerging market includes any country defined as
emerging or developing by the International Bank for
Reconstruction and Development (World Bank), International
Finance Corporation, or the United Nations. The fund's
investments are expected to be diversified geographically across
emerging markets in Latin America, the Far East, Europe, and
Africa.
Countries in which the fund may invest are listed below
and others will be added as opportunities develop:
Africa and the
Far East: Latin America: Europe: Middle East:
China Argentina Portugal South Africa
Indonesia Brazil Hungary Nigeria
Korea Chile Turkey Zimbabwe
Malaysia Colombia Poland Botswana
Thailand Mexico Russia Jordan
India Venezuela Czech Republic Tunisia
Philippines Peru Slovakia Morocco
Taiwan Belize Greece Egypt
Hong Kong Baltic States Israel
Singapore Austria
Sri Lanka
Pakistan
Mauritius
PAGE 10
This fund is intended for investors with long-term
investment horizons who are looking for an aggressive approach to
international investing. Most emerging countries are experiencing
substantial economic and political restrictions, and their
developing financial markets offer the potential for significant
capital appreciation. Many of these countries are moving from
one-party rule to a multi-party democracy; from agrarian to
industrialized economies; and from nationalized to free market,
privatized industries. These transitions are proceeding smoothly
in some markets but not in others. Obviously, there is no
guarantee favorable trends will continue. Companies in emerging
markets that successfully navigate these changes offer investors
the prospect for earnings growth far more rapid than that
typically generated by companies in more mature, developed
markets. However, investors in this fund should be comfortable
with the risks of international investing and be prepared for
substantial share price volatility.
Risk Factors of Foreign Investing
There are special risks when investing in the Funds.
Some 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 when investing 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
PAGE 11
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
1994-1995, the Mexican peso plunged in value setting off a severe
crisis in the Mexican economy. 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 Funds' 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 and at times 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
PAGE 12
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. 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. 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
PAGE 13
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.
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 14
International Stock, International Discovery, European Stock,
Emerging Markets Stock, Global 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 15% restriction on investing in
illiquid securities.
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:
PAGE 15
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.
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
PAGE 16
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
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 (a type of potentially high risk
derivative) 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
PAGE 17
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
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.
PAGE 18
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
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.
PAGE 19
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
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.
All Funds
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.
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
PAGE 20
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. The Fund will only enter into repurchase
agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Fund's investment
guidelines would allow it to purchase directly, (ii) the market
value of the underlying security, including interest accrued,
will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-
entry transfer to the account of the custodian or a bank acting
as agent. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying 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
Options are a type of potentially high-risk derivative.
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
PAGE 21
deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the
case of a call option, a writer is required to deposit in escrow
the underlying security or currency or other assets in accordance
with the rules of a clearing corporation.
The Fund will write only covered call options. This
means that the Fund will own the security or currency subject to
the option or an option to purchase the same underlying security
or currency, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid 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.
PAGE 22
The premium received is the market value of an option.
The premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made,
Price-Fleming, in determining whether a particular call option
should be written on a particular security or currency, will
consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those
options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This
liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (close of
the New York Stock Exchange), or, in the absence of such sale,
the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
Closing transactions will be effected in order to
realize a profit on an outstanding call option, to prevent an
underlying security or currency from being called, or, to permit
the sale of the underlying security or currency. Furthermore,
effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with
either a different exercise price or expiration date or both. If
the Fund desires to sell a particular security or currency from
its portfolio on which it has written a call option, or purchased
a put option, it will seek to effect a closing transaction prior
to, or concurrently with, the sale of the security or currency.
There is, of course, no assurance that the Fund will be able to
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
PAGE 23
above the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may
be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the
Fund.
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 24
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
anticipated decline in the value of its securities or currencies.
An example of such use of put options is provided below.
PAGE 25
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
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.
PAGE 26
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
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
PAGE 27
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
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.
PAGE 28
Futures Contracts
Futures are a type of potentially high-risk derivative.
Transactions in Futures
The Fund may enter into futures contracts (a type of
potentially high risk derivative), 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
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
PAGE 29
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
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
PAGE 30
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.
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
PAGE 31
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.
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
PAGE 32
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
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.
PAGE 33
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
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
PAGE 34
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.
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.
PAGE 35
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
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
PAGE 36
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
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
PAGE 37
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
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.
PAGE 38
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
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.
PAGE 39
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
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,
PAGE 40
futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, the Fund
may be required to defer the closing out of option, futures or
foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that
unrealized gains on Section 1256 option, futures and foreign
forward exchange contracts, which have been open for less than
three months as of the end of the Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.
INVESTMENT RESTRICTIONS
Fundamental policies of each 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
PAGE 41
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;
(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,
including limited partnership interests therein,
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
PAGE 42
(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
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.
PAGE 43
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 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 10% of its total
assets in restricted securities;
(5) 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;
(6) 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
PAGE 44
with futures contracts or other permissible
investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by the
Fund as security for indebtedness except as may be
necessary in connection with permissible
borrowings 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;
(8) 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;
(9) 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;
(10) 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;
(11) Short Sales. Effect short sales of securities;
(12) 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
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or
(13) 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
PAGE 45
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
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 46
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
10/31/95 10/31/95 10/31/95 10/31/95
International Stock Fund
T. Rowe Price International
Stock Fund 0.38% 60.08% 322.71% 725.51%
(5/9/80)++
S&P 500 26.44 121.58 321.85 799.90+++
Dow Jones Industrial
Average 24.92 125.44 383.13 919.93+++
Lipper International Funds
Average -1.09 53.21 252.05 530.31
EAFE Index -0.07 42.16 276.53 680.21+++
CPI 2.68 14.98 41.21 85.85
Financial Times Actuaries
World Index++++ 8.15 66.22 N/A N/A
+++ 6/30/80-10/31/95
++++ Inception date of Index is 12/31/85
International Discovery Fund
T. Rowe Price International
Discovery Fund -13.06% 22.94% 65.51%
(12/30/88)
S&P 500 26.44 121.58 158.37+++
Dow Jones Industrial
Average 24.92 125.44 173.04+++
Lipper International Small
Co. Funds Average -2.75 N/A N/A
EAFE Index -0.07 42.16 26.42+++
CPI 2.68 14.98 27.55+++
+++ 12/31/88-10/31/95
PAGE 47
European Stock Fund
T. Rowe Price European
Stock Fund 14.41% 55.69% 53.20%
(2/28/90)
S&P 500 26.44 121.58 107.65
Dow Jones Industrial
Average 24.92 125.44 115.09
Lipper European Region
Funds Average 9.33 42.45 38.74
EAFE Index -0.07 42.16 27.34
CPI 2.68 14.98 20.08
+++ 2/13/90-10/31/95
Japan Fund
T. Rowe Price Japan Fund -12.87% 28.48%* 10.24%
(12/30/91)
Morgan Stanley Pacific
Basin Index -11.03 44.89 17.63+++
Morgan Stanley Capital
International World
Index 10.03 51.96 41.14+++
EAFE Index -0.07 52.09 32.05+++
S&P 500 26.44 50.96 55.20+++
Topix Index -10.95 10.34 -17.70+++
Nikkei Average -11.68 5.29 -23.19+++
Morgan Stanley Japan
Index -12.98 39.98 8.98+++
Lipper Japanese Funds
Average -11.26 30.52 1.64+++
* 3 Years Ended 10/31/95
+++ 12/31/91-10/31/95
Latin America Fund
T. Rowe Price Latin
America Fund -37.11% -35.10%
(12/29/93)
S&P 500 26.44 31.01+++
Lipper Latin American
Funds Average -38.94 -33.31+++
MSCI EMF Latin America
Index -33.00 -19.46+++
+++ 12/31/93-10/31/95
PAGE 48
New Asia Fund
T. Rowe Price New Asia
Fund -9.70% 91.99% 97.56%
(9/28/90)
S&P 500 26.44 121.58 120.64+++
Dow Jones Industrial
Average 24.92 125.44 125.29+++
Lipper Pacific Ex Japan
Funds Average -10.49 110.07 121.86+++
EAFE Index -0.07 42.16 64.35+++
CPI 2.68 14.98 15.83+++
+++ 9/30/90-10/31/95
Emerging Markets Stock Fund
T. Rowe Price Emerging
Markets Stock Fund 4.80%
(3/31/95)
S&P 500 17.83
Dow Jones 16.08
Lipper Emerging Mkts
Funds Average 5.84
MSCI Emerging Market
Free Index 4.26
CPI 1.52
Annualized returns do not apply, fund is less than a year old.
Foreign Equity Fund
Foreign Equity Fund 0.64% 60.80% 62.38%
(9/7/89)
S&P 500 26.44 121.58 99.44+++
Dow Jones Industrial
Average 24.92 125.44 110.42+++
Lipper International Funds
Average -1.09 53.21 53.48+++
EAFE Index -0.07 42.16 24.80+++
CPI 2.68 14.98 23.35+++
Financial Times Actuaries
Euro-Pacific Index -1.08 39.21 22.23+++
+++ 8/31/89-10/31/95
PAGE 49
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
10/31/95 10/31/95 10/31/95 10/31/95
International Stock Fund
T. Rowe Price International
Stock Fund 0.38% 9.87% 15.51% 14.61%
(5/9/80)
S&P 500 26.44 17.25 15.48 15.40+++
Dow Jones Industrial
Average 24.92 17.65 17.06 16.35+++
Lipper International Funds
Average -1.09 8.71 13.12 12.46+++
EAFE Index -0.07 7.29 14.18 14.33+++
CPI 2.68 2.83 3.51 4.12+++
Financial Times Actuaries
World Index++++ 8.15 10.70 N/A N/A
+++ 6/30/80-10/31/95
++++ Index began 12/31/85
International Discovery Fund
T. Rowe Price International
Discovery Fund -13.06% 4.22% 7.65%
(12/30/88)
S&P 500 26.44 17.25 14.90+++
Dow Jones Industrial
Average 24.92 17.65 15.83+++
Lipper International Small
Co. Funds Average -2.75 N/A N/A
EAFE Index -0.07 7.29 3.49+++
CPI 2.68 2.83 3.63+++
Morgan Stanley Capital
International World Index10.03 11.02 7.53+++
+++ 12/31/88-10/31/95
PAGE 50
European Stock Fund
T. Rowe Price European
Stock Fund 14.41% 9.26% 7.81%
(2/28/90)
S&P 500 26.44 17.25 13.75
Dow Jones Industrial
Average 24.92 17.65 14.46
Lipper European Region
Funds Average 9.33 6.70 5.74
EAFE Index -0.07 7.29 4.35
CPI 2.68 2.83 3.28
Morgan Stanley Capital
International Europe
Index 13.68 11.16 9.68
+++ 2/13/90-10/31/95
Japan Fund
T. Rowe Price Japan Fund -12.87% 8.71* 2.57%
(12/20/91)
Morgan Stanley Pacific
Basin Index -11.03 13.16 4.33+++
Morgan Stanley Capital
International World
Index 10.03 14.97 9.41+++
EAFE Index -0.07 15.00 7.52+++
S&P 500 26.44 14.71 12.15+++
Topix Index -10.95 3.33 -4.96+++
Morgan Stanley Japan -12.98 11.86 2.27+++
Index
Lipper Japanese Funds
Average -11.26 9.24 0.38+++
* 3 Years Ended 10/31/95
+++ 12/31/91-10/31/95
Latin America Fund
T. Rowe Price Latin
America Fund -37.11% -20.95%
(12/29/93)
S&P 500 26.44 15.87+++
Lipper Latin American
Funds Average -38.94 -19.91+++
MSCI EMF Latin
America Index -33.00 -11.13+++
PAGE 51
New Asia Fund
T. Rowe Price New Asia
Fund -9.70% 13.93% 14.31%
(9/28/90)
S&P 500 26.44 17.25 16.84+++
Dow Jones Industrial
Average 24.92 17.65 17.32+++
Lipper Pacific Ex Japan
Funds Average -10.49 15.78 16.17+++
EAFE Index -0.07 7.29 10.26+++
CPI 2.68 2.83 2.93+++
Financial Times
Actuaries Pacific
Excluding Japan -1.11 20.56 19.92+++
+++ 9/30/90-10/31/95
Foreign Equity Fund
Foreign Equity Fund 0.64% 9.97% 8.21%
(9/7/89)
S&P 500 26.44 17.25 11.85+++
Dow Jones Industrial
Average 24.92 17.65 12.82+++
Lipper International Funds
Average -1.09 8.71 6.92+++
EAFE Index -0.07 7.29 3.66+++
CPI 2.68 2.83 3.46+++
Financial Times Actuaries
Euro-Pacific Index -1.08 6.84 3.31+++
+++ 8/31/89-10/31/95
Other Sources of Information
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
PAGE 52
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
research firm which rates mutual funds by overall performance,
investment objective, and assets; 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, U.K. index and Pacific Ex Japan Index which is a widely-
recognized series of indices in international market performance;
(v) Hoarve Govette Small Cap Index and Datastream, as sources for
United Kingdom Small Cap Stocks; (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 the Japan
Small-Tokyo Stock Exchange Section 2; (ix) the Wilshire Small
Growth Index, as a source for U.S. small company average annual
returns; (x) IFCI Composite 100, IFCI Latin America 100, IFCI
Asia 100, and the IFCI Europe/Mideast 100 may each be used as a
source to represent total return on an investment of $100 in each
index at various points in time; and (xi) 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
PAGE 53
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
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.
("T. Rowe Price") 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
PAGE 54
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; 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; and Tax
Considerations for Investors discusses the tax advantages of
annuities and municipal bonds and now to access whether they are
suitable for your portfolio, reviews pros and cons of placing
assets in a gift to minors account and summarizes the benefits
and types of tax-deferred retirement plans currently available;
and the 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
risk. 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 12/31/95
50 years 20 years 10 years 5 years
Small-Company Stocks 13.8% 19.6% 11.9% 24.5%
Large-Company Stocks 11.9 14.6 14.8 16.6
Foreign Stocks N/A 15.1 13.9 9.7
Long-Term Corporate Bonds 5.7 10.5 11.2 12.1
Intermediate-Term U.S.
Gov't. Bonds 5.9 9.7 9.1 8.8
Treasury Bills 4.8 7.3 5.5 4.3
U.S. Inflation 4.4 5.2 3.5 2.8
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
PAGE 55
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 on the next page.
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/95 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real BestWorst
Portfolio Growth IncomeSafety ReturnReturn** YearYear
I. Low
Risk 40% 40% 20% 11.8% 6.5% 24.9% 0.1% $ 92,675
II. Moderate
Risk 60% 30% 10% 13.1% 7.9% 29.1% -1.8%$116,826
III. High
Risk 80% 20% 0% 14.3% 9.1% 33.4% -5.2%$145,611
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1995 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far
East [EAFE] Index), bonds (Lehman Brothers Aggregate Bond
Index from 1976-95 and 30-day Treasury bills from January
1976 through December 1995. 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 5.2% for the 20-year period ended
12/31/95.
PAGE 56
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,
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,
PAGE 57
each has been an employee of T. Rowe Price for more than five
years. In the list below, the Funds' directors who are
considered "interested persons" of T. Rowe Price or the Fund as
defined under Section 2(a)(19) of the Investment Company Act of
1940 are noted with an 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, Eurocapital Advisors,
LLC, an acquisition and management advisory Firm (from 7/95-to
present), Principal, Overseas Partners, Inc., a financial
investment firm (5/89-6/95); formerly (6/65-3/89) Director and
Vice President-Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc.,
Baltimore, Maryland; Address: 600 Harbor Blvd. - 1018, Weehawken,
New Jersey 07087
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
(c)PAUL M. WYTHES, Director--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
*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 and Director,
Price-Fleming; Director, Robert Fleming Holdings Limited;
Address: 25 Copthall Avenue, London, EC2R 7DR, England
CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-
Fleming
(a)PETER B. ASKEW, Executive Vice President--Executive Vice
President, Price-Fleming
(a)RICHARD J. BRUCE, Vice President--Vice President of Price-
Fleming; formerly (1985-1990) Investment Manager, Jardine Fleming
Investment Advisers, Tokyo
(a)ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe
Price and Price-Fleming; formerly (4/80-5/90) Vice President and
PAGE 58
Director, Private Finance, New York Life Insurance Company, New
York, New York
(a)MARK 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
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
(a)STEPHEN 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 and 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.
(a)CHRISTOPHER ROTHERY, Vice President--Employee, Price-Fleming;
formerly (1987-1989) employee of Robert Fleming Holdings Limited,
London
(b)R. 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
(a)CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Price-Fleming
(a)BENEDICT R. F. THOMAS, Vice President--Vice President, Price-
Fleming
(a)PETER VAN DYKE, Vice President--Managing Director, T. Rowe
Price; Vice President, Price-Fleming
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.
(a)(b)EDWARD A. WIESE, Vice President--Vice President, T. Rowe
Price, Price-Fleming 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 and T. Rowe Price Investment Services,
Inc.
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
PAGE 59
(a)ANN B. CRANMER, Vice President--Vice President, Price-Fleming
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and T. Rowe Price
(a)LEAH P. HOLMES, Assistant Vice President--Vice President,
Price-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.
(c) Effective January 24, 1996, Paul M. Wythes was elected to
the Board of T. Rowe Price International Funds, Inc.
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Retirement from Fund and
Name of Aggregate Benefits Fund Complex
Person, Compensation Accrued as Paid to
Position from Fund(a)Part of Fund(b) Directors(c)
_________________________________________________________________
International Stock
Leo C. Bailey, $11,330 N/A $70,083
Director
Anthony W. Deering, 11,330 N/A 68,250
Director
Donald W. Dick, 11,330 N/A 70,083
Director
Addison Lanier, 11,330 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
Martin G. Wade, -- N/A --
Director(d)
PAGE 60
_________________________________________________________________
International Discovery
Leo C. Bailey, $3,317 N/A $70,083
Director
Anthony W. Deering, 3,317 N/A 68,250
Director
Donald W. Dick, 3,317 N/A 70,083
Director
Addison Lanier, 3,317 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
Martin G. Wade, -- N/A --
Director(d)
_________________________________________________________________
European Stock
Leo C. Bailey, $2,935 N/A $70,083
Director
Anthony W. Deering, 2,935 N/A 68,250
Director
Donald W. Dick, 2,935 N/A 70,083
Director
Addison Lanier, 2,935 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
Martin G. Wade, -- N/A --
Director(d)
_________________________________________________________________
Japan
Leo C. Bailey, $1,901 N/A $70,083
Director
Anthony W. Deering, 1,901 N/A 68,250
Director
PAGE 61
Donald W. Dick, 1,901 N/A 70,083
Director
Addison Lanier, 1,901 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
Martin G. Wade, -- N/A --
Director(d)
_________________________________________________________________
New Asia
Leo C. Bailey, $9,578 N/A $70,083
Director
Anthony W. Deering, 9,578 N/A 68,250
Director
Donald W. Dick, 9,578 N/A 70,083
Director
Addison Lanier, 9,578 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
Martin G. Wade, -- N/A --
Director(d)
_________________________________________________________________
Latin America
Leo C. Bailey, $1,917 N/A $70,083
Director
Anthony W. Deering, 1,917 N/A 68,250
Director
Donald W. Dick, 1,917 N/A 70,083
Director
Addison Lanier, 1,917 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
PAGE 62
Martin G. Wade, -- N/A --
Director(d)
_________________________________________________________________
Emerging Markets Stock(e)
Leo C. Bailey, $741 N/A $70,083
Director
Anthony W. Deering, 741 N/A 68,250
Director
Donald W. Dick, 741 N/A 70,083
Director
Addison Lanier, 741 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
Martin G. Wade, -- N/A --
Director(d)
_________________________________________________________________
Foreign Equity
Leo C. Bailey, $5,437 N/A $70,083
Director
Anthony W. Deering, 5,437 N/A 68,250
Director
Donald W. Dick, 5,437 N/A 70,083
Director
Addison Lanier, 5,437 N/A 70,083
Director
M. David Testa, -- N/A --
Chairman of the Board(d)
Martin G. Wade, -- N/A --
Director(d)
(a) Amounts in this Column are for the period November 1, 1994
through October 31, 1995.
(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 1995.
PAGE 63
(d) Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no renumeration from the
Fund.
(e) Emerging Markets Stock Fund opened March 31, 1995.
Compensation based on April 1, 1995 through October 31, 1995.
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, 1996, 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,
accounting, and administrative functions of each Fund;
PAGE 64
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
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.
PAGE 65
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:
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
PAGE 66
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 Equity Index
Fund, 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% each
for the Global Stock and International Stock Funds, 0.50% each
for the European Stock, Japan and New Asia Funds, 0.75% each for
the International Discovery, Latin America, and Emerging Markets
Stock 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:
International Stock International Discovery Japan
1995 $41,829,000 1995 $4,381,000 1995 $1,523,000
1994 $35,176,000 1994 $5,142,000 1994 $1,289,000
1993 $14,955,000 1993 $1,983,000 1993 $ 458,000
European Stock New Asia Latin America
1995 $3,547,000 1995 $16,864,000 1995 $1,765,000
1994 $2,710,000 1994 $17,320,000 1994 $1,195,000
1993 $1,422,000 1993 $ 4,937,000 1993 *
Emerging Market Stock
1995 -0-
1994 *
1993 *
*Prior to commencement of Fund operations.
PAGE 67
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.
Emerging Markets Stock 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, 1996, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.75%.
Expenses paid or assumed under this agreement are subject to
reimbursement to Price-Fleming by the Fund whenever the Fund's
expense ratio is below 1.75%; however, no reimbursement will be
made after October 31, 1998, or if it would result in the expense
ratio exceeding 1.75%. 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, 1996, 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.
Global Stock 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, 1997, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.30%.
Expenses paid or assumed under this agreement are subject to
reimbursement to Price-Fleming by the Fund whenever the Fund's
expense ratio is below 1.30%; however, no reimbursement will be
made after October 31, 1999, or if it would result in the expense
ratio exceeding 1.30%. 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
PAGE 68
expiration of the current one on October 21, 1997, 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.
For information concerning past expense limitations and
the effect on the accrual, payment, and reimbursement of fees and
expenses, please see the Funds' annual report.
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
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 1995, 1994, and 1993, Price-Fleming
received from the Fund management fees totaling $8,673,000,
$5,137,000, and $2,064,000 (10 months ended October 31, 1993),
respectively.
PAGE 69
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
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 certain of 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
PAGE 70
Depository Trust Corporation. State Street Bank's main office is
at 225 Franklin Street, Boston, Massachusetts 02110. The Funds
have entered into a Custodian Agreement with The Chase Manhattan
Bank, N.A., London, pursuant to which portfolio securities 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
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
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
PAGE 71
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.
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
PAGE 72
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.
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
PAGE 73
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
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.
PAGE 74
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
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
PAGE 75
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.
The following amounts and percentages were paid to JFS
during the year 1995:
Total Aggregate Aggregate
Brokerage Brokerage Dollar
Fund Commissions Commissions Amount
______ ______________ ____________ ________
International Stock $ 6,029,012 9% 7%
International Discovery 1,548,256 23% 19%
New Asia 10,230,880 21% 21%
Japan 781,356 23% 26%
Latin America 293,894 3% 5%
Emerging Markets Stock 25,786 36% 31%
Foreign Equity 2,077,591 9% 8%
The following amounts and percentages were paid to RF&Co
during the year 1995:
Total Aggregate Aggregate
Brokerage Brokerage Dollar
Fund Commissions Commissions Amount
______ ______________ ____________ ________
International Stock $236,915 4% 6%
European Stock 28,980 10% 12%
International Discovery 30,702 2% 4%
Emerging Markets Stock 4,869 7% 8%
Japan 59,539 8% 3%
Latin America 10,135 3% 5%
Foreign Equity 46,833 2% 4%
The following amounts and percentages were paid to Ord
Minnett during the year 1995:
PAGE 76
Total Aggregate Aggregate
Brokerage Brokerage Dollar
Fund Commissions Commissions Amount
______ ______________ ____________ ________
International Stock $174,136 3% 2%
International Discovery 30,612 2% 2%
New Asia 336,088 3% 4%
Foreign Equity 49,051 2% 2%
In accordance with the written procedures adopted
pursuant to Rule 17e-1, the independent directors of each Fund
reviewed the 1995 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
The amounts shown below involved trades with brokers
acting as agents or underwriters, in which such brokers received
total commissions, including discounts received in connection
with underwritings for the fiscal years ended 1995, 1994, and
1993:
Fund 1995 1994 1993
______ ____ ____ ____
International Stock $ 6,029,012 $ 9,684,485 $5,419,000
International Discovery 1,548,256 2,042,917 1,277,000
European Stock 290,226 219,614 182,000
Japan 781,356 1,284,041 412,000
New Asia 10,230,880 13,086,017 6,642,000
Foreign Equity 2,077,591 1,913,957 853,000
Latin America 293,894 447,402 --
Emerging Markets Stock 72,181 -- --
The percentage of total portfolio transactions, placed
with firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Funds, or in some cases, to the Funds for the fiscal year
ended 1995, 1994, and 1993, are shown below:
PAGE 77
Fund 1995 1994 1993
______ ____ ____ ____
International Stock 85% 83% 76%
International Discovery 73% 82% 81%
European Stock 90% 98% 99%
Japan 69% 64% 73%
New Asia 75% 77% 72%
Foreign Equity 86% 85% 79%
Latin America 97% 99% --
Emerging Markets Stock 58% -- --
The portfolio turnover rates for the following Funds for
the fiscal year ended October 31, 1995, October 31, 1994, and the
ten-month fiscal year ended October 31, 1993, are as follows:
Fund 1995 1994 1993
______ _____ ____ ____
International Stock 17.8% 22.9% 29.8%*
International Discovery 43.5% 57.4% 71.8%*
European Stock 17.2% 24.5% 21.3%*
Japan 62.4% 61.5% 61.4%*
New Asia 63.7% 63.2% 40.4%*
Foreign Equity 18.8% 22.0% 27.4%*
Latin America 18.9% 12.2%** --
Emerging Markets Stock 28.8%# -- --
* For the ten-month fiscal year ended October 31, 1994.
** From the commencement of operations December 29, 1993 to
October 31, 1994
# From the commencement of operations March 31, 1995 to October
31, 1995
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
generally are valued at a price within the limits of the latest
bid and asked prices deemed by the Board of Directors or by
persons delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-
counter market and are valued at a price deemed best to reflect
PAGE 78
fair value as provided 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, the U.S. dollar value of all assets and liabilities
initially expressed in foreign currencies is determined by using
the mean of the bid and offer prices of such currencies against
U.S. dollars provided 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
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:
PAGE 79
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
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, as well as the following weeks days in 1997: January 1, 2, 3,
15; February 11; March 20; April 29; May 5; July 21; September
15, 23; October 10; November 24; and December 23. 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").
Dividends and distributions paid by the Funds (other
than Global Stock 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. Income dividends paid by the Global Stock
Fund are eligible for the dividends--received deduction for
PAGE 80
corporate shareholders, only to the extent the Global Stock
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, the income dividend paid by the fund will
be decreased, or to the extent such dividend has already been
paid a portion may be reclassified 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, 1995, 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.
Net Realized
Undistributed Capital Unrealized
Fund Net Income Gains (Losses) Appreciation
European Stock $ 7,440,000 $ 7,731,000 $ 87,580,000
International Stock 91,242,000 35,091,000 691,498,000
Foreign Equity 20,836,000 17,187,000 95,608,000
PAGE 81
Net Realized
Undistributed Capital Unrealized
Fund Net Income Gains (Losses) Depreciation
Latin America $ 1,226,000 ($15,291,000) $64,992,000
New Asia 17,116,000 (41,030,000) $11,000
Japan -- (2,717,000) 13,556,000
Emerging Markets
Stock $35,000 (45,000) 721,000
International
Discovery 2,048,000 (8,883,000) 13,775,000
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.
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
PAGE 82
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.
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
twelve 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
PAGE 83
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 Funds, were added as separate series of the
Corporation in 1991, 1992, 1993, and 1994, respectively. The
Emerging Markets Stock, and Global Stock Funds were both added as
separate series of the Corporation in 1995. 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.
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
PAGE 84
attaching to any series of shares, including the present series
of capital stock, might be altered or eliminated, or the series
might be combined with another series, by action approved by the
vote of the holders of a majority of all the shares of all series
entitled to be voted on the proposal, without any additional
right to vote as a series by the holders of the capital stock or
of another affected series.
Shareholders are entitled to one vote for each full
share held (and fractional votes for fractional shares held) and
will vote in the election of or removal of directors (to the
extent hereinafter provided) and on other matters submitted to
the vote of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Corporation, a special meeting of
shareholders of the Corporation shall be called by the Secretary
of the Corporation on the written request of shareholders
entitled to cast at least 10% of all the votes of the
Corporation, entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Corporation to the extent
required by Section 16(c) of the 1940 Act.
FEDERAL AND STATE REGISTRATION OF SHARES
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.
PAGE 85
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, LLP, whose
address is 919 Third Avenue, New York, New York 10022, is legal
counsel to the Funds.
INDEPENDENT ACCOUNTANTS
All 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, Latin America,
New Asia, and Foreign Equity Funds for the year ended October 31,
1995, and the report of independent accountants are included in
each Fund's Annual Report for the year ended October 31, 1995. 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, 1995, are incorporated into
this Statement of Additional Information by reference:
ANNUAL REPORT REFERENCES:
INTERNATIONAL
STOCK FUND
______________
Report of Independent Accountants 19
Statement of Net Assets, October 31, 1995 7-13
Statement of Operations, year ended October 31, 1995 14
Statement of Changes in Net Assets, years ended
October 31, 1995 and October 31, 1994 15
Notes to Financial Statements, October 31, 1995 16-18
Financial Highlights 18
PAGE 86
INTERNATIONAL
DISCOVERY FUND
_________________
Report of Independent Accountants 23
Statement of Net Assets, October 31, 1995 7-16
Statement of Operations, year ended October 31, 1995 17
Statement of Changes in Net Assets, years ended
October 31, 1995 and October 31, 1994 18
Notes to Financial Statements, October 31, 1995 19-21
Financial Highlights 22
EUROPEAN
STOCK FUND
_____________
Report of Independent Accountants 16
Statement of Net Assets, October 31, 1995 5-10
Statement of Operations, year ended October 31, 1995 11
Statement of Changes in Net Assets, years ended
October 31, 1995 and October 31, 1994 12
Notes to Financial Statements, October 31, 1995 13-14
Financial Highlights 15
JAPAN FUND
_____________
Report of Independent Accountants 13
Statement of Net Assets, October 31, 1995 5-6
Statement of Operations, year ended October 31, 1995 7
Statement of Changes in Net Assets, years ended
October 31, 1995 and October 31, 1994 8
Notes to Financial Statements, October 31, 1995 9-11
Financial Highlights 12
LATIN AMERICA
FUND
_______________
Report of Independent Accountants 13
Statement of Net Assets, October 31, 1995 5-7
Statement of Operations, October 31, 1995 8
Statement of Changes in Net Assets, year ended
October 31, 1995 and from December 29, 1993
(Commencement of Operations) to October 31, 1994 9
Notes to Financial Statements, October 31, 1995 10-11
Financial Highlights 12
PAGE 87
EMERGING MARKETS
STOCK FUND
_________________
Report of Independent Accountants 14
Statement of Net Assets, October 31, 1995 5-7
Statement of Operations, from March 31, 1995
(Commencement of Operations) to October 31, 1995 8
Statement of Changes in Net Assets, from March 31, 1995
(Commencement of Operations) to October 31, 1995 9
Notes to Financial Statements, October 31, 1995 10-12
Financial Highlights 13
NEW ASIA
FUND ANNUAL
REPORT PAGE
___________
Report of Independent Accountants 15
Portfolio of Investments, October 31, 1995 6-9
Statement of Assets and Liabilities, October 31, 1995 9
Statement of Operations, year ended October 31, 1995 10
Statement of Changes in Net Assets, years ended
October 31, 1995 and October 31, 1994 11
Notes to Financial Statements, October 31, 1995 12-13
Financial Highlights 14
FOREIGN EQUITY
FUND ANNUAL
REPORT PAGE
_______________
Report of Independent Accountants 24
Statement of Net Assets, October 31, 1995 9-18
Statement of Operations, year ended
October 31, 1995 19
Statement of Changes in Net Assets, years
ended October 31, 1995 and October 31, 1994 20
Notes to Financial Statements, October 31, 1995 21-22
Financial Highlights 23
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