<PAGE 1>
PROSPECTUS
FOREIGN EQUITY
FUND
MAY 1, 1994
FOREIGN
EQUITY FUND
PROSPECTUS
MAY 1, 1994
INSTITUTIONAL
INTERNATIONAL FUNDS, INC.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND PROGRAM. . . . . . . . . . 2
SUMMARY OF FUND FEES AND EXPENSES. .. . . . . . . . 3
FINANCIAL HIGHLIGHTS. . . . . . . . . . . . . . . . 3
RISK FACTORS. . . . . . . . . . . . . . . . . . . . 4
INVESTING IN INTERNATIONAL STOCKS . . . . . . . . . 5
INVESTMENT POLICIES . . . . . . . . . . . . . . . . 5
PERFORMANCE INFORMATION . . . . . . . . . . . . . . 7
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . 8
HOW TO PURCHASE, EXCHANGE, AND
REDEEM SHARES. . . . . . . . . . . . . . . . . 9
COMPLETING THE NEW ACCOUNT FORM . . . . . . . . . . 10
NAV, PRICING, AND EFFECTIVE DATE. . . . . . . . . . 10
RECEIVING YOUR PROCEEDS . . . . . . . . . . . . . . 11
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . 11
CONDITIONS OF YOUR PURCHASE . . . . . . . . . . . . 11
SERVICES. . . . . . . . . . . . . . . . . . . . . . 12
TAXES . . . . . . . . . . . . . . . . . . . . . . . 12
EXPENSES AND MANAGEMENT FEE . . . . . . . . . . . . 13
MANAGEMENT OF THE FUND. . . . . . . . . . . . . . . 14
Investment Summary
The Fund seeks long-term growth of capital by investing primarily in the
common stocks of established non-U.S. companies.
_____________________________________________________________________________
Rowe Price-Fleming International, Inc. (Price-Fleming), the Fund's manager,
was founded in 1979 as a joint venture between T. Rowe Price Associates, Inc.
(T. Rowe Price) and Robert Fleming Holdings Limited. Price-Fleming is one of
America's largest international mutual fund asset managers with approximately
$15.4 billion under management in its offices in Baltimore, London, Tokyo, and
Hong Kong.
_____________________________________________________________________________
This prospectus contains information you should know about the Fund before you
invest. Please keep it for future reference. A Statement of Additional
Information for the Fund (dated May 1, 1994) has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
prospectus. It is available at no charge by calling: 1-800-638-7890, extension
6515.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT
OBJECTIVE
AND PROGRAM
The Foreign Equity Fund's (the Fund) investment objective is to seek long-term
growth of capital through investments primarily in common stocks of
established non-U.S. companies. Total return consists of capital appreciation
or depreciation, dividend income, and currency gains or losses.
The Fund's share price will fluctuate with market, economic, and foreign
exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Fund should not be relied upon as a complete
investment program, nor used to play short-term swings in the stock or foreign
exchange markets. The Fund is subject to risks unique to international
investing. See extensive discussion under Risk Factors on page 4. Further,
there is no assurance that the favorable trends discussed below will continue,
and the Fund cannot guarantee it will achieve its investment objective.
Over the last 30 years, many foreign economies have grown faster than
the Unites States economy, and the return from equity investments in these
countries has often exceeded the return on similar investments in the Unites
States. Moreover, there has normally been a wide and largely unrelated
variation in performance between international equity markets over this
period. Although there can be no assurance that these conditions will
continue, the Fund's investment manager, Rowe Price-Fleming International,
Inc. (Price-Fleming), within the framework of diversification, seeks to
identify and invest in companies participating in the faster growing foreign
economies and markets. Price-Fleming believes that investment in foreign
securities offers significant potential for long-term capital appreciation and
an opportunity to achieve investment diversification.
The Fund intends to diversify investments broadly among countries and to
normally have at least three different countries represented in the portfolio.
The Fund may invest in countries of the Far East and Europe as well as South
Africa, Australia, Canada, and other areas (including developing countries).
Under unusual circumstances, however, the Fund may invest substantially all
its assets in one or two countries.
Portfolio Diversification. Today, more than one-half of the world's
stock market value is traded abroad. Investing overseas can help diversify a
portfolio otherwise invested solely in U.S. securities. Foreign stock markets
often do not parallel the performance of U.S. markets, which means that, over
time, diversifying investments across several countries can help reduce
portfolio volatility.
In seeking its objective, the Fund invests primarily in common stocks of
established foreign companies which have the potential for growth of capital.
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 objective and program. The Fund may also engage in
a variety of investment management practices, such as buying and selling
futures and options. Also, the Fund may enter into forward foreign currency
exchange contracts in order to protect against uncertainty in the level of
future foreign exchange rates. Under normal conditions, the Fund's investments
in securities other than common stocks is limited to no more than 35% of total
assets. Under exceptional economic or market conditions abroad, however, the
Fund may temporarily invest all or a major portion of its assets in U.S.
government obligations or debt obligations of U.S. companies.
_____________________________________________________________________________
SUMMARY OF
FUND FEES
AND EXPENSES
Shown below are all expenses and fees the Fund incurred during its fiscal
year. Where applicable, expenses were restated to reflect current fees. These
expenses are expressed as a percent of average Fund net assets. More
information about these expenses may be found below and under Expenses and
Management Fee and in the Statement of Additional Information under Limitation
on Fund Expenses.
Shareholder Transaction Expenses Annual Fund Expenses
Sales load "charge" on purchases None Management fee 0.70%
Sales load "charge" on reinvested None Total other (Shareholder
dividends servicing, custodial 0.16%
auditing, etc.)!
Redemption fees None
Exchange fees None Distribution fees (12b-1)None
____
Total Fund Expenses 0.86%
! The Fund charges a $5.00 fee for wire redemptions under $5,000, subject to
change without notice.
EXAMPLE OF
FUND EXPENSES.
The following example illustrates the expenses you would incur on a $1,000
investment, assuming a 5% annual rate of return and redemption at the end of
each period shown. For example, expenses for the first year in the Fund would
be $9. This is an illustration only. Actual expenses and performance may be
more or less than shown.
1 Year-$9 3 Years-$27 5 Years-$48 10 Years-$106
_____________________________________________________________________________
FINANCIAL
HIGHLIGHTS
The following table provides information about the Fund's financial history.
It is based on a single share outstanding throughout each fiscal period (which
ends on the last day of December for the periods 1989-1992 and the last day of
October for 1993). The table is part of the Fund's financial statements which
are included in the Fund's annual report and incorporated by reference into
the Statement of Additional Information, which is available to shareholders.
The financial statements in the annual report have been audited by Coopers &
Lybrand, independent accountants, whose unqualified report covers the periods
shown.
<TABLE>
<CAPTION> Investment Activities Distributions
Net Realized
and
Net Asset Unrealized Total
Value, Net Gain from Net Net Total
Year Ended, Beginning Investment (Loss) on Investment Investment Realized Distri-
December 31 of Year Income Investments Activities Income Gain butions
<S> <C> <C> <C> <C> <C> <C> <C>
1989! $10.00 $.05!! $.61 $.66 $(.04) - $(.04)
1990 10.62 .23!!! (1.10) (.87) (.21) - (.21)
1991 9.54 .18! 1.28 1.46 (.18) $(.09) (.27)
1992 10.73 .17 (.57) (.40) (.18) (.10) (.28)
1993!!! 10.05 .13 3.14 3.27 - - -
<CAPTION>
End of Period
Ratio
Total of Net
Return Ratio of Investment
Net Asset (Includes Net Expenses Income to Portfolio
Value, End Reinvested Assets to Average Average Turnover
of Year Dividends) ($ Thousands) Net Assets Net Assets Rate
<S> <C> <C> <C> <C> <C>
$10.62 6.6% $50,252 1.10%** 1.43%** 13.8%**
9.54 (8.2)% 83,645 1.01%!!! 2.23% 44.6%
10.73 15.4% 143,822 1.00%* 1.64% 46.7%
10.05 (3.7)% 238,979 0.99% 1.49% 35.1%
13.32 32.5% 489,389 0.86%** 1.65%** 27.4%**
<FN>
! For the period September 7, 1989 (commencement of operations) to December 31, 1989.
!! Excludes expenses in excess of a 1.10% voluntary expense limitation in effect through February 28, 1990.
!!!The Fund's fiscal year-end was changed to October 31.
* Excludes expenses in excess of a 1.00% voluntary expense limitation in effect from March 1, 1990 through
December 31, 1991.
** Annualized.
</TABLE>
_____________________________________________________________________________
RISK
FACTORS
Foreign stock prices are subject to many of the same influences as U.S.
stocks, such as general economic conditions, company and industry earnings
prospects, and investor psychology. International investing also involves
additional risks which can increase the potential for the losses in the Fund.
Currency Fluctuations. Transactions in foreign securities are conducted in
local currencies, so dollars must be exchanged for another currency each time
a stock is bought or sold or a dividend is paid. Likewise, share-price
quotations and total return information reflect conversion into dollars.
Fluctuations in foreign exchange rates can significantly increase or decrease
the dollar value of a foreign investment, boosting or offsetting its local
market return. For example, if a French stock rose 10% in price during a year,
but the U. S. dollar gained 5% against the French franc during that time, the
U.S. investor's return would be reduced to 5%. This is because the franc would
"buy" fewer dollars at the end of the year than at the beginning, or,
conversely, a dollar would buy more francs. Exchange rate movements can be
large and endure for extended periods of time.
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.
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 United States and other mature economies in terms
of wealth and stability. Therefore, investments in these countries will be
riskier, and may be subject to erratic and abrupt price movements.
Some economies are less well developed and less diverse (for example,
Latin America, Eastern Europe and certain Asian countries), and more
vulnerable to the ebb and flow of international trade, trade barriers and
other protectionist or retaliatory measures (for example, Japan, Southeast
Asia, and Latin America). Some countries, particularly in Latin America, are
grappling with severe inflation and high levels of national debt. Investments
in countries that have recently begun moving away from central planning and
state-owned industries toward free markets, such as the Eastern European or
Chinese economies, should be regarded as speculative.
Certain portfolio countries have histories of instability and upheaval
(Latin America) and internal politics that could cause their governments to
act in a detrimental or hostile manner toward private enterprise or foreign
investment. Any such actions, for example nationalizing an industry or
company, could have a severe and adverse affect on security prices and impair
the Fund's ability to repatriate capital or income.
While certain portfolio countries have made progress in economic growth,
liberalization, fiscal discipline, and political and social stability, there
is no assurance these trends will continue.
Legal, Regulatory and Operational. Certain portfolio countries lack uniform
accounting, auditing, and financial reporting standards, have less
governmental supervision of financial markets than in the U.S., do not honor
legal rights enjoyed in the U.S. and have settlement practices which include
delays and subject the Fund to risks of loss not customary in U.S. markets.
Pricing. Portfolio securities may be listed on foreign exchanges that are open
on days (such as Saturdays) when the Fund does not compute its prices. As a
result, the Fund's net asset value may be significantly affected by trading on
days when shareholders cannot make transactions.
_____________________________________________________________________________
INVESTING IN INTERNATIONAL STOCKS
Common stocks of foreign companies offer a way to invest for long-term growth
of capital. As an economy expands, corporate profits generally grow, and share
values rise.
The long-term rise of foreign stock prices as a group has been
punctuated by periodic declines. As in the U.S., share prices of even the best
managed, most profitable corporations are subject to market risk, which means
they can fluctuate widely. In less liquid and well developed stock markets,
such those in some Asian and Latin American countries, volatility may be
heightened by actions of a few major investors. For example, substantial
increases or decreases in cash flows of mutual funds investing in these
markets could significantly affect stock prices and, therefore, share prices.
For this reason, investors in either foreign or domestic stocks should have a
long-term investment horizon and be willing to wait out bear markets.
_____________________________________________________________________________
INVESTMENT
POLICIES
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
objective and certain investment restrictions noted in the following section
as "fundamental policies." The managers also follow certain "operating
policies" which can be changed without shareholder approval. However,
significant changes are discussed with shareholders in Fund reports.
Types of Portfolio Securities
In seeking to meet its investment objective, the Fund may invest in any type
of security whose investment characteristics are consistent with the Fund's
investment program. These and some of the other investment techniques the Fund
may use are described in the following pages.
Fundamental Policy. The Fund will not purchase a security if, as a result,
with respect to 75% of the Fund's total assets, more than 5% of its total
assets would be invested in securities of the issuer or more than 10% of the
voting securities of the issuer would be held by 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 non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price any time during the life
of the warrants (generally, two or more years).
Fixed Income Securities. The Fund may invest in debt securities. Such
securities would be purchased in companies which meet the investment criteria
for the Fund. The price of a bond fluctuates with changes in interest rates,
rising when interest rates fall and falling when interest rates rise. The Fund
will not purchase 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.
Hybrid Instruments. These instruments can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of a security could be related to the market price of some
commodity, currency or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under
certain conditions, the redemption value of such an investment could be zero.
Hybrids can have volatile prices and limited liquidity and their use by the
Fund may not be successful.
Operating Policy. The Fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements (Restricted Securities). These securities are sold directly
to a small number of investors, usually institutions. Unlike public offerings,
such securities are not registered with the SEC. Although certain of these
securities may be readily sold, for example under Rule 144A, the sale of
others may involve substantial delays and additional costs.
Operating Policy. The Fund will not invest more than 15% of its net assets in
illiquid securities, but not more than 5% in restricted securities (other than
Rule 144A securities).
Types of Management Practices
Cash Position. The Fund will hold a certain portion of its assets in money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less. For temporary, defensive purposes,
the Fund may invest without limitation in such securities. This reserve
position provides flexibility in meeting redemptions, expenses, and the timing
of new investments, and serves as a short-term defense during periods of
unusual market volatility.
Borrowing Money and Transferring Assets. The Fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the Fund's investment
objective and program. Such borrowings may be collateralized with Fund assets,
subject to restrictions.
Fundamental Policy. Borrowings may not exceed 331_3% of the Fund's total
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 with a term of greater than one year.
The Fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. First, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when Price-Fleming believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another currency,
it may enter into a forward contract to sell or buy the former foreign
currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Under certain circumstances, the Fund
may commit a substantial portion or the entire value of its portfolio to the
consummation of these contracts. Price-Fleming will consider the effect such a
commitment of its portfolio to forward contracts would have on the investment
program of the Fund and the flexibility of the Fund to purchase additional
securities. Although forward contracts will be used primarily to protect the
Fund from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the Fund's
total return could be adversely affected as a result.
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 countries where the foreign exchange markets are not
sufficiently developed to permit hedging activity to take place.
Futures and Options. Futures are often used to manage risk, because they
enable the investor to buy or sell an asset in the future at an agreed upon
price. Options give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. The Fund may buy and
sell futures contracts (and options on such contracts) to manage its exposure
to changes in securities prices and foreign currencies and as an efficient
means of adjusting overall exposure to certain markets. The Fund may purchase,
sell, or write call and put options on securities, financial indices, and
foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the Fund's total return;
and the potential loss from the use of futures can exceed the Fund's initial
investment in such contracts.
Operating Policies. Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the Fund's net
asset value. 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.
Portfolio Turnover. The Fund will generally not 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
annualized portfolio turnover rates for the period ended October 31, 1993, and
the years 1992 and 1991, were 27.4%, 35.1%, and 46.7%, respectively.
_____________________________________________________________________________
PERFORMANCE
INFORMATION
The Fund may advertise total return figures on both a cumulative and compound
average annual basis and compare them to various indices (e.g., the S&P 500),
other mutual funds or other performance measures. (The total return of the
Fund consists of the change in its net asset value per share and the net
income it earns.) Cumulative total return compares the amount invested at the
beginning of a period with the amount redeemed at the end of the period,
assuming the reinvestment of all dividends and capital gain distributions. The
compound average annual total return indicates a yearly compound average of
the Fund's performance, derived from the cumulative total return figure. The
annual compound rate of return for the Fund may vary from any average. Further
information about the Fund's performance is contained in its annual report
which is available free of charge.
_____________________________________________________________________________
CAPITAL STOCK
Institutional International Funds, Inc. (Institutional International) is a
Maryland corporation organized in 1989 and registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 as a diversified,
open-end investment company, commonly known as a "mutual fund." A mutual fund,
such as the Fund, enables shareholders to: (1) obtain professional management
of investments, including Price-Fleming's proprietary research; (2) diversify
their portfolio to a greater degree than would be generally possible if they
were investing as individuals and thereby reduce, but not eliminate risks; and
(3) simplify the recordkeeping and reduce transaction costs associated with
investments. Institutional International is a series fund and has the
authority to issue other series in addition to the Foreign Equity Fund,
currently in existence.
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 Fund's advisory group is composed of the
following members: Martin G. Wade, Christopher D. Alderson, Peter B. Askew,
Richard J. Bruce, Mark J.T. Edwards, John R. Ford, Robert C. Howe, James B.M.
Seddon, Benedict R.F. Thomas, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 25 years of experience
with the Fleming Group in research, client service and investment management.
(Fleming Group includes Robert Fleming and/or Jardine Fleming Group Limited.)
Christopher Alderson joined Price-Fleming in 1988 and has eight years of
experience with the Fleming Group in research and portfolio management. Peter
Askew joined Price-Fleming in 1988 and has 19 years of experience managing
multi-currency fixed income portfolios. Richard Bruce joined Price-Fleming in
1991 and has six years of experience in investment management with the Fleming
Group in Tokyo. Mark Edwards joined Price-Fleming in 1986 and has 13 years of
experience in financial analysis. John Ford joined Price-Fleming in 1982 and
has 14 years of experience with Fleming Group in research and portfolio
management. Robert Howe joined Price-Fleming in 1986 and has 13 years of
experience in economic research, company research and portfolio management.
James Seddon joined Price-Fleming in 1987 and has seven years of experience in
investment management. Benedict Thomas joined Price-Fleming in 1988 and has
five years of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 14 years of experience in equity research, fixed
income research and portfolio management.
Shareholder Rights. Institutional International issues one class of capital
stock, all shares of which have equal rights with regard to voting,
redemptions, dividends, distributions, and liquidations. Fractional shares
have voting rights and participate in any distributions and dividends.
Shareholders have no preemptive or conversion rights; nor do they have
cumulative voting rights. When the Fund's shares are issued, they are fully
paid and nonassessable. Institutional International does not routinely hold
annual meetings of shareholders. However, if shareholders representing at
least 10% of all votes of Institutional International entitled to be cast so
desire, they may call a special meeting of shareholders of Institutional
International for the purpose of voting on the question of the removal of any
director(s). The total authorized capital stock of the Fund consists of
1,000,000,000 shares, each having a par value of $.01.
_____________________________________________________________________________
HOW TO
PURCHASE,
EXCHANGE,
AND REDEEM
SHARES
Open a New Account: Minimum initial investment: $100,000
Financial Institutions Division: 1-800-638-7780 (in Baltimore, 581-7290)
Payable to Foreign Equity Fund. The minimum investment for an institutional
investor may be satisfied by combining up to four accounts with the Fund. (See
Redemptions in Kind in the Fund's Statement of Additional Information for
further information on the issuance of Fund shares for securities or assets
other than cash.)
FINANCIAL INSTITUTIONS
DIVISION:
1-800-638-7780
(IN BALTIMORE, 581-7290)
All initial and subsequent investments must be made by bank wire.
By Mail Regular, Mailgram, Express, Registered, or Certified Mail
T. Rowe Price
Special Account Services
100 East Pratt Street
Baltimore, MD 21202
_____________________________________________________________________________
By Wire Wire Address Morgan Guaranty Trust Company of New York
(to give to your bank):ABA #021000238
T. Rowe Price Foreign Equity Fund/AC-00153938
Account name(s) and account number
_____________________________________________________________________________
Purchase Additional Shares: Minimum: $25,000
By Phone Call Financial Institutions Division at 1-800-638-7780 (in
Baltimore, 581-7290).
By Wire See Wire Instructions in previous section.
_____________________________________________________________________________
Exchange and Redeem Shares:
By Phone Call Financial Institutions Division at 1-800-638-7780 (in
Baltimore, 581-7290). If you find our phones busy during unusually
volatile markets, please consider placing your order by express
mail or mailgram. For exchange policy, see Excessive Trading and
Exchange Limitations, page 11. Redemption proceeds can be mailed,
sent by Bank-Fund Transfer, or wired to your bank.
By Mail Indicate account name(s) and numbers, fund names, and exchange or
redemption amount. We require the signature of all owners exactly
as registered, and possibly a signature guarantee (see Signature
Guarantees on next page).
_____________________________________________________________________________
COMPLETING
THE NEW ACCOUNT FORM
The Fund is designed to meet the needs of institutional investors,
particularly trust companies, acting for themselves, or in a fiduciary,
advisory, agency, custodial or similar capacity. Fund shares may not be
purchased directly by individual investors, although institutions may purchase
shares on behalf of individuals.
Tax Identification Number. We must have your correct corporate tax
identification number and a signed New Account Form or W-9 Form. Otherwise,
federal law requires the Fund to withhold 31% (or such other amount required
by applicable IRS regulations) of your dividends, capital gain distributions,
and redemptions, and may subject you to an IRS fine. You also will be
prohibited from opening another account by exchange. If this information is
not received within 60 days after your account is established, your account
may be redeemed, priced at the NAV on the date of the redemption.
Signature Guarantees. A signature guarantee is designed to protect you and the
Fund by verifying your signature. You will need one to:
(1) Redeem over $50,000 by written request (unless you have authorized
telephone services).
(2) Redeem or exchange shares when proceeds are: (i) being mailed to an
address other than the address of record, (ii) made payable to
other than the registered owner(s), or (iii) being sent to a bank
account other than the bank account listed on your fund account.
(3) Transfer shares to another owner.
(4) Send us written instructions asking us to wire redemption proceeds
(unless previously authorized).
These requirements may be waived or modified in certain instances.
Acceptable guarantors are all eligible guarantor institutions as defined
by the Securities Exchange Act of 1934 such as: commercial banks which are
FDIC members, trust companies, firms which are members of a domestic stock
exchange, and foreign branches of any of the above. We cannot accept
guarantees from institutions or individuals who do not provide reimbursement
in the case of fraud, such as notaries public.
_____________________________________________________________________________
NAV,
PRICING, AND
EFFECTIVE
DATE
Net Asset Value Per Share (NAV). The NAV per share, or share price, for the
Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the New
York Stock Exchange is open. The Fund's share price is calculated by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. Among other things, the Fund's
liabilities include accrued expenses and dividends payable, and its total
assets include portfolio securities valued at market as well as income accrued
but not yet received.
Purchased shares are priced at that day's NAV if your request is
received before 4:00 pm ET in good order. (See How to Purchase, Exchange, and
Redeem Shares and Completing the New Account Form.) If received later than
4:00 pm ET, shares will be priced at the next business day's NAV.
Redemptions are priced at that day's NAV if your request is received
before 4:00 pm ET in good order at the transfer agent's offices at T. Rowe
Price Account Services, P.O. Box 89000, Baltimore, MD 21289-0220. If received
after 4:00 pm ET, shares will be priced at the next business day's NAV.
We cannot accept requests which specify a particular date for purchase
or redemption or which specify any special conditions. If your redemption
request cannot be accepted, you will be notified and given further
instructions.
Redemptions in Excess of $250,000. Redemption proceeds are normally paid
in cash. However, if you redeem more than $250,000, or 1% of the Fund's net
assets, in any 90-day period, the Fund may in its discretion: (1) pay the
difference between the redemption amount and the lesser of these two figures
with securities of the Fund or (2) delay the transmission of your proceeds for
up to five business days after your request is received.
Banks. Purchases or redemptions through banks, trust companies, and
other institutions may be subject to service fees imposed by those entities.
The Fund reserves the right to change the time at which purchases and
redemptions are priced if the New York Stock Exchange closes at a time other
than 4:00 pm ET or an emergency exists.
_____________________________________________________________________________
RECEIVING
YOUR
PROCEEDS
Redemption proceeds are mailed to the address, or sent by wire or ACH transfer
to the bank account, designated on your New Account Form. They are generally
sent the next business day after your redemption request is received in good
order. Proceeds sent by bank wire should be credited to your bank account the
next business day and proceeds sent by ACH transfer should be credited the
second day after the sale. In addition, under certain conditions and when
deemed to be in the best interests of the Fund, redemption proceeds may not be
sent for up to five business days after your request is received to allow for
the orderly liquidation of securities. Requests by mail for wire redemptions
(unless previously authorized) must have a signature guarantee.
_____________________________________________________________________________
DIVIDENDS AND
DISTRIBUTIONS
The Fund distributes all net investment income and capital gains to
shareholders. Dividends from net investment income and distributions from
capital gains, if any, are normally declared in December and paid in January.
Dividends and distributions declared by the Fund will be reinvested unless you
choose an alternative payment option on the New Account Form. Dividends not
reinvested are paid by check. If the U.S. Postal Service cannot deliver your
check, or if your check remains uncashed for six months, the Fund reserves the
right to reinvest your distribution check in your account at the then current
NAV and convert your election to automatic reinvestment in shares of the Fund.
_____________________________________________________________________________
CONDITIONS
OF YOUR
PURCHASE
Account Balance. If your account drops below $100,000 for three months or
more, the Fund has the right to close your account(s), after giving 60 days'
notice, unless you make additional investments to bring your account value to
$100,000 or more.
Excessive Trading and Exchange Limitations. To protect Fund shareholders
against disruptions in portfolio management which might occur as a result of
too frequent buy and sell activity and to minimize Fund expenses associated
with such transaction activity, the Fund prohibits excessive trading in any
account (or group of accounts managed by the same person). Within any 120
consecutive-day period, investors may not exchange between Price Funds more
than twice or buy and sell the Price Funds more than once, if the transactions
involve substantial assets or a substantial portion of the assets in the
account or accounts. This policy is applied on a multi-fund basis. Any
transactions above and beyond these guidelines will be considered to be
excessive trading, and the investor may be prohibited from making additional
purchases or exercising the exchange privilege.
This policy does not apply to exchanges solely between, or purchases and sales
solely of, the Price Money Funds, nor does it apply to simple redemptions from
any Fund.
The Fund and its agents reserve the right to: (1) reject any purchase or
exchange, cancel any purchase due to nonpayment, or reject any exchange or
redemption where the Fund has not received payment; (2) waive or lower the
investment minimums; (3) accept initial purchases by telephone or mailgram;
(4) waive the limit on subsequent purchases by telephone; (5) reject any
purchase or exchange prior to receipt of the confirmation statement; (6)
redeem your account (see Tax Identification Number); (7) modify the conditions
of purchase at any time; and (8) reject any check not made directly payable to
the Fund or T. Rowe Price (call Financial Institutions Division for more
information).
_____________________________________________________________________________
SERVICES
Exchange Service. You can move money from one account to an existing
identically registered account or open a new identically registered account.
Remember that, for tax purposes, an exchange is treated as a redemption and a
new purchase. Some of the T. Rowe Price Funds may impose a redemption fee of
.50-2%, payable to such Funds, on shares held for less than one year, or in
some funds, six months.
PC*Access. All purchases, redemptions and exchanges of Fund shares may be
handled by you on your PC. You can also view account histories, the previous
business day's transactions, various summary information, Fund performance
data, and economic information. For more information about this service,
please call 1-800-638-7780.
Sub-Accounting Services. An institution may arrange for sub-accounting
services. Such services provide a master account record which links together
individual accounts and provides the following information: account number,
trade date, transaction, previous share balance, dollar amount of the current
transaction, share price, number of shares purchased, new share balance, and
the current market value of your group. The sub-accounting agent reserves the
right to charge a fee for such services or other shareholder services.
Telephone Exchange and Redemption. Telephone exchange and redemption are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. The Fund uses
reasonable procedures (including shareholder identity verification) to confirm
that instructions given by telephone are genuine. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the Fund may
be liable for any losses that may result from acting on the instructions
given. All conversations are recorded, and a confirmation is sent within five
business days after the telephone transactions.
Wire Service. Wiring is usually the quickest method to purchase shares and
receive redemption proceeds (a $5 charge applies to redemption amounts under
$5,000, and your bank may charge you for receiving wires). Under unusual
circumstances, the Fund reserves the right to temporarily suspend wires to
allow for the orderly liquidation of securities.
All transaction-related calls to the Financial Institutions Division are
recorded in order to protect you, the Fund, and its agents.
_____________________________________________________________________________
TAXES
Dividends and Distributions. In January, the Fund will mail you Form 1099-DIV
indicating the federal tax status of your dividends and capital gain
distributions. Generally, dividends and distributions are taxable in the year
they are paid. However, any dividends and distributions paid in January but
declared during the prior three months are taxable in the year they are
declared. Dividends and distributions are taxable to you regardless of whether
they are taken in cash or reinvested. Dividends and short-term capital gain
distributions are taxable as ordinary income; long-term capital gain
distributions are taxable as long-term capital gains. The capital gain holding
period is determined by the length of time the Fund has held the securities,
not the length of time you have owned Fund shares.
Foreign Transactions. Distributions resulting from the sale of foreign
currencies and debt securities, to the extent of foreign exchange gains, are
taxed as ordinary income or loss. If the Fund pays nonrefundable taxes to
foreign governments during the year, the taxes will reduce the Fund's
dividends but will still be included in your taxable income. However, you may
be able to claim an offsetting credit or deduction on your tax return for your
portion of foreign taxes paid by the Fund.
Shares Sold. A redemption or exchange of Fund shares is treated as a sale for
tax purposes which will result in a short or long-term capital gain or loss,
depending on how long you have owned the shares. In January, the Fund will
mail you Form 1099-B indicating the date of and proceeds from all sales and
exchanges.
Undistributed Income and Gains. At the time of purchase, the share price of
the Fund may reflect undistributed income, capital gains or unrealized
appreciation of securities. Any income or capital gains from these amounts
which are later distributed to you are fully taxable.
Corporations. The Fund's dividends will not be eligible for the 70% deduction
for dividends received by corporations if, as expected, none of the Fund's
income consists of dividends paid by U.S. corporations.
Passive Foreign Investment Companies. The Fund may purchase the securities of
certain foreign investment funds or trusts called passive foreign investment
companies. Although the situation could change at any time, such funds are the
only or primary means by which the Fund may invest in certain countries. In
addition to bearing the proportionate share of the Fund's expenses (management
fees and operating expenses) shareholders will also indirectly bear similar
expenses of such funds. Capital gains on the sale of such holdings will be
deemed to be ordinary income regardless of how long the Fund holds its
investment. In addition, the Fund may be subject to corporate income tax and
an interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to
shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such gains
will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
Tax Consequences of Hedging. Under applicable tax law, the Fund may be
required to limit its gains from hedging in foreign currency forwards, futures
and options. Although it is anticipated the Fund will comply with such limits,
the extent to which these limits apply is subject to tax regulations which
have not yet been issued. Hedging may also result in the application of the
mark-to-market straddle provisions of the Internal Revenue Code. These
provisions could result in an increase (or decrease) in the amount of taxable
dividends paid by the Fund as well as affect whether dividends paid by the
Fund are classified as capital gains or ordinary income.
_____________________________________________________________________________
EXPENSES AND
MANAGEMENT
FEE
The Fund bears all expenses of its operations other than those incurred by the
Fund Manager under its Investment Management Agreement with the Fund Manager.
Fund expenses include: the management fee; shareholder servicing fees and
expenses; custodian and accounting fees and expenses; legal and auditing fees;
expenses of preparing and printing prospectuses and shareholder reports;
registration fees and expenses, proxy and annual meeting expenses, if any; and
directors' fees and expenses. Organizational expenses will be charged to the
Fund over a period not to exceed 60 months.
Effective January 1, 1992, Price-Fleming agreed to extend the Fund's
1.00% expense limitation for a period of two years through December 31, 1993.
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 1.00%;
however, no reimbursement will be made after December 31, 1995, or if it would
result in the expense ratio exceeding 1.00%.
Management Fee. The Fund pays the Fund Manager an annual investment management
fee of 0.70% of the average daily net asset value of the Fund. The Fund
calculates and accrues the fee daily.
_____________________________________________________________________________
MANAGEMENT
OF THE FUND
Investment Manager. Price-Fleming is responsible for selection and management
of the Fund's portfolio investments. Price-Fleming has offices in Baltimore,
London, Tokyo, and Hong Kong. Price-Fleming's U.S. office is located at 100
East Pratt Street, Baltimore, Maryland 21202.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture
between T. Rowe Price and Robert Fleming Holdings Limited (Flemings). Flemings
is a diversified investment organization which participates in a global
network of regional investment offices in New York, London, Zurich, Geneva,
Tokyo, Hong Kong, Manila, Kuala Lumpur, South Korea, and Taiwan.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr. in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 1993, T.
Rowe Price and its affiliates managed over $50 billion of assets and Flemings
managed the U.S. equivalent of approximately $57 billion.
Board of Directors. The management of the Fund's business and affairs is the
responsibility of the Fund's Board of Directors.
T. Rowe Price, Flemings, and Jardine Fleming are owners of Price-Fleming. The
common stock of Price-Fleming is 50% owned by a wholly-owned subsidiary of T.
Rowe Price, 25% by a subsidiary of Flemings and 25% by Jardine Fleming Group
Limited (Jardine Fleming). (Half of Jardine Fleming is owned by Flemings and
half by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to
elect a majority of the board of directors of Price-Fleming, and Flemings has
the right to elect the remaining directors, one of whom will be nominated by
Jardine Fleming.
Research. 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
consulting 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.
Portfolio Transactions. Decisions with respect to the purchase and sale of the
Fund's portfolio securities are made by Price-Fleming. The Fund's Board of
Directors has authorized Price-Fleming to utilize affiliates of Flemings and
Jardine Fleming in the capacity of broker in connection with the execution of
the Fund's portfolio transactions if Price-Fleming believes that doing so
would result in an economic advantage (in the form of lower execution costs or
otherwise) being obtained by the Fund.
Investment Services. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the distributor for this Fund as well as all
other T. Rowe Price Funds.
Transfer Agent, Shareholder Servicing and Administrative Costs. TRP Services,
a wholly-owned subsidiary of T. Rowe Price, serves the Fund as transfer and
dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., a
wholly-owned subsidiary of T. Rowe Price, performs subaccounting and
recordkeeping services for shareholder accounts in certain retirement plans
investing in the Price Funds. T. Rowe Price calculates the daily share price
and maintains the portfolio and general accounting records of the Fund. The
address for TRP Services and T. Rowe Price Retirement Plan Services, Inc. is
100 East Pratt Street, Baltimore, Maryland 21202.
The Fund paid fees to (i) TRP Services for transfer and dividend
disbursing agent functions and shareholder services for all accounts and (ii)
T. Rowe Price for calculating the daily share price and maintaining the
portfolio and general accounting records of the Fund. These fees totaled
approximately $55,000 and $83,000, respectively, for the ten months ended
October 31, 1993.
_____________________________________________________________________________
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 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
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 May 1, 1994,
which may be obtained from T. Rowe Price Investment Services, Inc., 100 East
Pratt Street, Baltimore, Maryland 21202.
The date of this Statement of Additional Information is May 1,
1994.
PAGE 2
TABLE OF CONTENTS
Page Page
Call and Put Options . . . . . .15 Investment Performance . . . . . 33
Capital Stock. . . . . . . . . .64 Investment Programs. . . . . . . .2
Custodian. . . . . . . . . . . .55 Investment Restrictions. . . . . 29
Dealer Options . . . . . . . . .20 Legal Counsel. . . . . . . . . . 66
Distributor for Funds. . . . . .54 Lending of Portfolio Securities. 14
Dividends. . . . . . . . . . . .62 Management of Funds. . . . . . . 47
Federal and State Net Asset Value Per Share. . . . 61
Registration of Shares. . . . .65 Portfolio Management Practices . 14
Foreign Currency Transactions. .27 Portfolio Transactions . . . . . 55
Foreign Futures and Options. . .26 Pricing of Securities. . . . . . 60
Futures Contracts. . . . . . . .21 Principal Holders of Securities. 49
Hybrid Instruments . . . . . . .12 Repurchase Agreements. . . . . . 15
Illiquid or Restricted . . . . . . Risk Factors of
Securities. . . . . . . . . . .13 Foreign Investing . . . . . . . .8
Independent Accountants. . . . .66 Tax Status . . . . . . . . . . . 62
Investment Management Services .49 Taxation of Foreign
Investment Objectives and Shareholders. . . . . . . . . . 64
Policies. . . . . . . . . . . . 2 Warrants . . . . . . . . . . . . 14
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.
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
PAGE 3
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 8. Further, there is no assurance that the
favorable trends discussed below will continue, and the Funds cannot guarantee
they will achieve their objectives.
International Stock Fund
It is the present intention of Price-Fleming to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Europe (for example, United Kingdom, Germany,
Hungary, Poland, Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, Latin America, and such other areas and countries as Price-
Fleming may determine from time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, Price-Fleming ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Price-Fleming ordinarily
looks for one or more of the following characteristics: an above-average
earnings growth per share; high return on invested capital; healthy balance
sheet; sound financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which
the Fund invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future
years as earnings increase.
It is expected that the Fund's investments will ordinarily be
traded on exchanges located at least in the respective countries in which the
various issuers of such securities are principally based.
International Discovery Fund
It is the present intention of Price-Fleming to invest primarily in
smaller (i.e. small to medium size) companies based in developed and selected
emerging countries located in the Pacific Basin, Western Europe, Latin America
and such other areas and countries as Price-Fleming may determine from time to
time. Price-Fleming believes that such smaller companies may have the
potential for greater, more dynamic growth than larger firms, which may have
reached a period of maturity and more gradual growth. It is generally easier
for a company to grow from a smaller base. In addition, smaller companies are
often more flexible and responsive to customers, and to changes in competitive
conditions. Medium size companies also display such characteristics to a
certain extent. However, there are also special risks associated with
investing in smaller companies.
In selecting portfolio investments, Price-Fleming will consider: a
company's growth prospects, including the potential for superior appreciation
due to growth in earnings, relative valuation of its securities, and any risk
PAGE 4
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 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#
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 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.
PAGE 5
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.
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.
PAGE 6
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.
Australia Philippines#
Hong Kong Singapore#
India+# South Korea
Indonesia# Taiwan+#
Malaysia# Thailand#
New Zealand
______________________________________________________________________________
+ Indicates countries in which the Fund effectively may invest only
or primarily through investment funds subject to the provisions of
the Investment Company Act of 1940 relating to the purchase of
securities of investment companies. See "Investment Restrictions
Operating Policy No. 3."
# Countries designated with a number sign (#) are emerging or less
developed countries.
Other Asian and Pacific Basin markets may become available at any
time.
Latin America Fund
Price-Fleming believes that the economic revitalization of the
Latin American region will provide attractive investment opportunities.
After the "lost years" of the 1970's and early 80's when economic
stagnation and hyperinflation became commonplace, the governments of the
region have embarked on a process of transformation:
PAGE 7
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 country
have picked up leading to increased investment and a revival of growth.
Although countries such as Chile, Mexico and Argentina have made considerable
progress, this economic catch-up is still at an early stage, while in
countries such as Brazil and Peru the process is just beginning.
The Fund may invest in the countries listed below, together with
other countries in the region as their markets become accessible. The Latin
America region includes Mexico, Central America, South America and the islands
of the Caribbean.
Argentina# Mexico#
Brazil# Peru#
Chile+# Venezuela#
Colombia+#
______________________________________________________________________________
+ Indicates countries in which the Fund effectively may invest only
or primarily through investment funds subject to the provisions of
the Investment Company Act of 1940 relating to the purchase of
securities of investment companies. See "Investment Restrictions
Operating Policy No. 3."
# Countries designated with a number sign (#) are emerging or less
developed countries.
Foreign Equity Fund
In determining the appropriate distribution of investments among
various countries and geographic regions, Price-Fleming ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Price-Fleming ordinarily
looks for one or more of the following characteristics: an above-average
earnings growth per share; high return on invested capital; healthy balance
sheet; sound 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.
PAGE 8
Risk Factors of Foreign Investing
There are special risks in investing in the Funds. Certain of
these risks are inherent in any international mutual fund while others relate
more to the countries in which the Funds will invest. Many of the risks are
more pronounced for investments in developing or emerging countries, such as
many of the countries of Southeast Asia, Latin America, Eastern Europe and the
Middle East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
initial stages of its industrialization cycle with a per capita gross national
product of less than $8,000.
General. Investors should understand that all investments have a
risk factor. There can be no guarantee against loss resulting from an
investment in the Funds, and there can be no assurance that the Funds'
investment policies will be successful, or that its investment objectives will
be attained. The Funds are designed for individual and institutional
investors seeking to diversify beyond the United States in actively researched
and managed portfolios, and are intended for long-term investors who can
accept the risks entailed in investment in foreign securities.
Political and Economic Factors. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. The internal politics of certain foreign countries are not
as stable as in the United States. For example, in 1991, the existing
government in Thailand was overthrown in a military coup. In 1992, there were
two military coup attempts in Venezuela and in 1992 the President of Brazil
was impeached. In addition, significant external political risks currently
affect some foreign countries. Both Taiwan and China still claim sovereignty
of one another and there is a demilitarized border between North and South
Korea.
Governments in certain foreign countries continue to participate to
a significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in the value of any
such currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the Funds' assets denominated in that currency. Such
changes will also affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of the Fund's
securities denominated in that currency will rise. When a given currency
depreciates against the dollar (the dollar strengthens) the value of the
Funds' securities denominated in that currency would be expected to
decline.
Investment and Repatriation of Restrictions. Foreign investment in
the securities markets of certain foreign countries is restricted or
controlled in varying degrees. These restrictions may limit at times and
preclude investment in certain of such countries and may increase the cost and
expenses of the Funds. Investments by foreign investors are subject to a
PAGE 9
variety of restrictions in many developing countries. These restrictions may
take the form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. It is contemplated that most foreign
securities, other than Latin American securities, will be purchased in
over-the-counter markets or on stock exchanges located in the countries in
which the respective principal offices of the issuers of the various
securities are located, if that is the best available market. Currently, it
is anticipated that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and the Funds' portfolio securities may be less liquid and
subject to more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on United States exchanges,
although the Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government supervision
and regulation of foreign stock exchanges, brokers and listed companies than
in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences may include delays beyond periods customary in the United States
and practices, such as delivery of securities prior to receipt of payment,
which increase the likelihood of a "failed settlement." Failed settlements
can result in losses to a Fund.
Investment Funds. The Funds may invest in investment funds which
have been authorized by the governments of certain countries specifically to
permit foreign investment in securities of companies listed and traded on the
stock exchanges in these respective countries. The Funds' investment in these
funds is subject to the provisions of the 1940 Act discussed on page 33. If
the Funds invest in such investment funds, the Funds' shareholders will bear
not only their proportionate share of the expenses of the Funds (including
operating expenses and the fees of the investment manager), but also will bear
indirectly similar expenses of the underlying investment funds. In addition,
the securities of these investment funds may trade at a premium over their net
asset value.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and
ratings that are published about companies in the United States. Foreign
companies are also generally not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to United States companies. It also may be more difficult to keep
currently informed of corporate actions which affect the prices of portfolio
securities.
Taxes. The dividends and interest payable on certain of the Funds'
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Funds'
PAGE 10
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 62.)
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.
International Stock, International Discovery, European Stock and Foreign
Equity Funds
Eastern Europe and Russia. Changes occurring in Eastern Europe and
Russia today could have long-term potential consequences. As restrictions
fall, this could result in rising standards of living, lower manufacturing
costs, growing consumer spending, and substantial economic growth. However,
investment in the countries of Eastern Europe and Russia is highly speculative
at this time. Political and economic reforms are too recent to establish a
definite trend away from centrally-planned economies and state owned
industries. In many of the countries of Eastern Europe and Russia, there is
no stock exchange or formal market for securities. Such countries may also
have government exchange controls, currencies with no recognizable market
value relative to the established currencies of western market economies,
little or no experience in trading in securities, no financial reporting
standards, a lack of a banking and securities infrastructure to handle such
trading, and a legal tradition which does not recognize rights in private
property. In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the country's national
interest. Further, the governments in such countries may require governmental
or quasi-governmental authorities to act as custodian of a Fund's assets
invested in such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive relief from
such Act may be required. All of these considerations are among the factors
PAGE 11
which could cause significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company located in, or a
government of, Eastern Europe and Russia, if it believes the potential return
justifies the risk. To the extent any securities issued by companies in
Eastern Europe and Russia are considered illiquid, each Fund will be required
to include such securities within its 10% restriction on investing in illiquid
securities.
Japan Fund
The 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.
Additional factors relating to Japan include the following:
In the past, Japan has experienced earthquakes and tidal waves of
varying degrees of severity, and the risks of such phenomena, and damage
resulting therefrom, continue to exist. Japan also has one of the world's
highest population densities. A significant percentage of the total
population of Japan is concentrated in the metropolitan areas of Tokyo, Osaka
and Nagoya.
Energy. Japan has historically depended on oil for most of its
energy requirements. Almost all of its oil is imported, the majority from the
Middle East. In the past, oil prices have had a major impact on the domestic
economy, but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic industries to
processing and assembly type industries, has contributed to the reduction of
oil consumption. However, there is no guarantee this favorable trend will
continue.
Foreign Trade. Overseas trade is important to Japan's economy.
Japan has few natural resources and must export to pay for its imports of
these basic requirements. Japan's principal export markets are the U.S.,
Canada, the United Kingdom, the Federal Republic of Germany, Australia, Korea,
Taiwan, Hong Kong and the People's Republic of China. The principal sources
of its imports are the U.S., South East Asia and the Middle East. Because of
the concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors and the large trade surpluses
ensuing therefrom, Japan has had difficult relations with its trading
partners, particularly the U.S., where the trade imbalance is the greatest.
It is possible trade sanctions or other protectionist measures could impact
Japan adversely in both the short- and long-term.
Latin America Fund
The 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. Additional factors relating to Latin
America include the following:
Inflation. Most Latin American countries have experienced, at one
time or another, severe and persistent levels of inflation, including, in some
cases, hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
PAGE 12
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. 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 have recently been developed and combine the
elements of futures contracts or options with those of debt, preferred equity
or a depository instrument (hereinafter "Hybrid Instruments"). Often these
Hybrid Instruments are indexed to the price of a commodity, particular
currency, or a domestic or foreign debt or equity securities index. Hybrid
Instruments may take a variety of forms, including, but not limited to, debt
instruments with interest or principal payments or redemption terms determined
by reference to the value of a currency or commodity or securities index at a
future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a combination
of the risks from investing in securities, options, futures and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures, options, and forward contracts herein for a discussion
of these risks. Further, the prices of the Hybrid Instrument and the related
commodity or currency may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instrument,
the creditworthiness of the contra party to the transaction would be a risk
factor which the Fund would have to consider. Hybrid Instruments also may not
be subject to regulation of the Commodities Futures Trading Commission
("CFTC"), which generally regulates the trading of commodity futures by U.S.
PAGE 13
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.
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.
PAGE 14
There are, of course, other types of securities that are, or may
become available, which are similar to the foregoing and the Fund may invest
in these securities.
Portfolio Management Practices
All Funds, except Foreign Equity Fund
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional
investors or other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The Fund has a right to call each loan and obtain the securities on
five business days' notice or, in connection with securities trading on
foreign markets, within such longer period of time which coincides with the
normal settlement period for purchases and sales of such securities in such
foreign markets. The Fund will not have the right to vote securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will only be made to
firms deemed by Price-Fleming to be of good standing and will not be made
unless, in the judgment of Price-Fleming, the consideration to be earned from
such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission and certain
state regulatory agencies, the Fund may make loans to, or borrow funds from,
other mutual funds sponsored or advised by T. Rowe Price or Price-Fleming
(collectively, "Price Funds"). The Fund has no current intention of engaging
in these practices at this time.
Foreign Equity Fund
InterFund Borrowing
Subject to approval by the Securities and Exchange Commission, the Fund
may borrow funds from other mutual funds sponsored or advised by Price-Fleming
or T. Rowe Price Associates, Inc. (collectively, "Price Funds"). The Fund has
no current intention of engaging in this practice at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which an
investor (such as the Fund) purchases a security (known as the "underlying
security") from a well-established securities dealer or a bank that is a
member of the Federal Reserve System. Any such dealer or bank will be on T.
Rowe Price's approved list and have a credit rating with respect to its short-
term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe Price. At that
time, the bank or securities dealer agrees to repurchase the underlying
PAGE 15
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
Writing Covered Call Options
The Fund may write (sell) American or European style "covered" call
options and purchase options to close out options previously written by a
Fund. In writing covered call options, the Fund expects to generate
additional premium income which should serve to enhance the Fund's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in Price-Fleming's opinion, are not expected
to have any major price increases or moves in the near future but which, over
the long term, are deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price) at expiration
of the option (European style) or at any time until a certain date (the
expiration date) (American style). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by
repurchasing an option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the case of a
call option, a writer is required to deposit in escrow 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
PAGE 16
little risk (in contrast to the writing of naked or uncovered options, which
the Fund will not do), but capable of enhancing the Fund's total return. When
writing a covered call option, a Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security or currency during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security or currency. The Fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium
the Fund will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the
option 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.
PAGE 17
Call options written by the Fund will normally have expiration
dates of less than nine months from the date written. The exercise price of
the options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security or currency from its portfolio. In
such cases, additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security or currency, any loss resulting from the repurchase of
a call option is likely to be offset in whole or in part by appreciation of
the underlying security or currency owned by the Fund.
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 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
PAGE 18
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.
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
PAGE 19
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.
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 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.
PAGE 20
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.
Futures Contracts
Transactions in Futures
The Fund may enter into futures contracts, including stock index,
interest rate and currency futures ("futures or futures contracts").
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for Price-Fleming to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. The Fund may,
purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
PAGE 21
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
Commodity Futures Trading Commission ("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 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
PAGE 22
instrument (e.g., units of a stock index) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would
be paid or received by the Fund upon the purchase or sale of a futures
contract. Upon entering into a futures contract, and to maintain the Fund's
open positions in futures contracts, the Fund would be required to deposit
with its custodian in a segregated account in the name of the futures broker
an amount of cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as "initial margin."
The margin required for a particular futures contract is set by the exchange
on which the contract is traded, and may be significantly modified from time
to time by the exchange during the term of the contract. Futures contracts
are customarily purchased and sold on margins that may range upward from less
than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by increase in
the case of a sale or by decrease in the case of a purchase) so that the loss
on the futures contract reaches a point at which the margin on deposit does
not satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from
the futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date.
Closing out an open futures contract purchase or sale is effected by entering
into an offsetting futures contract sale or purchase, respectively, for the
same aggregate amount of the identical securities and the same delivery date.
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, one contract in the Financial Times Stock Exchange 100
Index future is a contract to buy 25 pounds sterling multiplied by the level
of the UK Financial Times 100 Share Index on a given future date. Settlement
of a stock index futures contract may or may not be in the underlying
security. If not in the underlying security, then settlement will be made in
cash, equivalent over time to the difference between the contract price and
the actual price of the underlying asset at the time the stock index futures
contract expires.
PAGE 23
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 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
PAGE 24
underlying instruments, the Fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described below, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior, market or
interest rate trends. There are several risks in connection with the use by
the Fund of futures contracts as a hedging device. One risk arises because of
the imperfect correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying instruments which are
the subject of the hedge. Price-Fleming will, however, attempt to reduce this
risk by entering into futures contracts whose movements, in its judgment, will
have a significant correlation with movements in the prices of the Fund's
underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging
purposes is also subject to Price-Fleming's ability to correctly predict
movements in the direction of the market. It is possible that, when the Fund
has sold futures to hedge its portfolio against a decline in the market, the
index, indices, or instruments underlying futures might advance and the value
of the underlying instruments held in the Fund's portfolio might decline. If
this were to occur, the Fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, Price-Fleming believes that over time
the value of the Fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that if
the Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In addition, in such
situations, if the Fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The Fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements
of futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of the imperfect correlation between price movements in the
PAGE 25
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.
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
PAGE 26
exchange of special procedures which may interfere with the timely execution
of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in futures
or options transactions other than those described above, it reserves the
right to do so. Such futures and options trading might involve risks which
differ from those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, customers who trade foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the Fund for foreign futures or foreign options transactions may not be
provided the same 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
PAGE 27
foreign currency during the period between the date the security is purchased
or sold and the date on which payment is made or received.
Second, when Price-Fleming believes that one currency may
experience a substantial movement against another currency, including the U.S.
dollar, it may enter into a forward contract to sell or buy the amount of the
former foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under normal circumstances, consideration of
the prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, Price-Fleming believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best
interests of the Fund will be served.
The Fund may enter into forward contacts for any other purpose
consistent with the Fund's investment objective and program. However, the
Fund will not enter into a forward contract, or maintain exposure to any such
contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Fund's holdings of liquid, high-grade debt
securities and currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, the Fund may net
offsetting positions.
At the maturity of a forward contract, the Fund may sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and either extend the maturity of the forward contract (by
"rolling" that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices.
If the Fund engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price 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
PAGE 28
Fund reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by Price-Fleming. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on currencies, which
will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
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
PAGE 29
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
or securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income.
In order to avoid realizing excessive gains on securities or currencies held
less than three months, the Fund may be required to defer the closing out of
option, futures or foreign forward exchange contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on Section 1256 option, futures and foreign forward exchange contracts,
which have been open for less than three months as of the end of the Fund's
fiscal year and which are recognized for tax purposes, will not be considered
gains on securities or currencies held less than three months for purposes of
the 30% test.
INVESTMENT RESTRICTIONS
Fundamental policies of each Fund other than Latin America Fund may
not be changed without the approval of the lesser of (1) 67% of a Fund's
shares present at a meeting of shareholders if the holders of more than 50% of
the outstanding shares are present in person or by proxy or (2) more than 50%
of a Fund's outstanding shares. Other restrictions, in the form of operating
policies, are subject to change by the Funds' Board of Directors without
shareholder approval. Any investment restriction which involves a maximum
percentage of securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after, and is caused
by, an acquisition of securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may (i) borrow
for non-leveraging, temporary or emergency purposes and (ii)
engage in reverse repurchase agreements and make other
investments or engage in other transactions, which may involve
a borrowing, in a manner consistent with the Fund's investment
objective and program, provided that the combination of (i)
and (ii) shall not exceed 33 1/3% of the value of the Fund's
total assets (including the amount borrowed) less liabilities
(other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be
reduced in accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other persons to the
extent permitted by applicable law.
(2) Commodities. Purchase or sell physical commodities; except
that it may enter into futures contracts and options thereon;
(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
PAGE 30
with other Price Funds provided that no such loan may be made
if, as a result, the aggregate of such loans would exceed 33
1/3% of the value of the Fund's total assets; (ii) purchase
money market securities and enter into repurchase agreements;
and (iii) acquire publicly- distributed or privately-placed
debt securities and purchase debt;
Foreign Equity Fund
Loans. Make loans, although the Fund may (i) participate in
an interfund lending program with other Price Funds provided
that no such loan may be made if, as a result, the aggregate
of such loans would exceed 33 1/3% of the value of the Fund's
total assets; (ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire publicly-
distributed or privately-placed debt securities and purchase
debt;
All Funds
(5) Real Estate. Purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments (but
this shall not prevent the Fund from investing in securities
or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(6) Senior Securities. Issue senior securities except in
compliance with the Investment Company Act of 1940; or
(7) Underwriting. Underwrite securities issued by other persons,
except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933
in connection with the purchase and sale of its portfolio
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
PAGE 31
Fund (defined as any other mutual fund managed be for which T.
Rowe Price acts as adviser) unless each Fund applies for and
receives an exemptive order from the SEC or the SEC issues
rules permitting such transactions. The Fund has no current
intention of engaging in any such activity and there is no
assurance the SEC would grant any order requested by the Fund
or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Fund does
not consider currency contracts or hybrid investments to be
commodities.
For purposes of investment restriction (3), U.S., state or
local governments, or related agencies or instrumentalities,
are not considered an industry. Industries are determined by
reference to the classifications of industries set forth in
the Fund's semi-annual and annual reports.
For purposes of investment restriction (4), the Fund will
consider the acquisition of a debt security to include the
execution of a note or other evidence of an extension of
credit with a term of more than nine months.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional securities
when money borrowed exceeds 5% of its total assets;
(2) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(3) Futures Contracts. Purchase a futures contract or an option
thereon if, with respect to positions in futures or options on
futures which do not represent bona fide hedging, the
aggregate initial margin and premiums on such positions would
exceed 5% of the Fund's net asset value.
(4) Illiquid Securities. Purchase illiquid securities and
securities of unseasoned issuers if, as a result, more than
15% of its net assets would be invested in such securities,
provided that the Fund will not invest more than 5% of its
total assets in restricted securities and not more than 5% in
securities of unseasoned issuers. Securities eligible for
resale under Rule 144A of the Securities Act of 1933 are not
included in the 5% limitation but are subject to the 15%
limitation;
(4) Investment Companies. Purchase securities of open-end or
closed-end investment companies except in compliance with the
Investment Company Act of 1940 and applicable state law.
Duplicate fees may result from such purchases;
(5) Margin. Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits in
connection with futures contracts or other permissible
investments;
PAGE 32
(6) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for
indebtedness except as may be necessary in connection with
permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3%
of the Fund's total assets at the time of borrowing or
investment;
(7) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to, oil, gas, or
other mineral exploration or development programs;
(8) Options, Etc. Invest in puts, calls, straddles, spreads, or
any combination thereof, except to the extent permitted by the
prospectus and Statement of Additional Information;
(9) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and
directors of the Fund, and of its investment manager, who each
own beneficially more than .5% of the outstanding securities
of such issuer, together own beneficially more than 5% of such
securities;
(10) Short Sales. Effect short sales of securities;
(11) Unseasoned Issuers. Purchase a security (other than
obligations issued or guaranteed by the U.S., any state or
local government, or any foreign government, their agencies or
instrumentalities) if, as a result, more than 5% of the value
of the Fund's total assets would be invested in the securities
issuers which at the time of purchase had been in operation
for less than three years (for this purpose, the period of
operation of any issuer shall include the period of operation
of any predecessor or unconditional guarantor of such issuer).
This restriction does not apply to securities of pooled
investment vehicles or mortgage or asset-backed securities; or
(12) Warrants. Invest in warrants if, as a result thereof, more
than 2% of the value of the total assets of the Fund would be
invested in warrants which are not listed on the New York
Stock Exchange, the American Stock Exchange, or a recognized
foreign exchange, or more than 5% of the value of the total
assets of the Fund would be invested in warrants whether or
not so listed. For purposes of these percentage limitations,
the warrants will be valued at the lower of cost or market 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.
PAGE 33
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.
International Stock Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/93+ 12/31/93 12/31/93 12/31/93++
_________ ________ ___________ __________
International Stock 40.11% 76.63% 396.21% 678.83%
Fund
S&P 500 10.07 97.34 301.77 661.50
Dow Jones Industrial
Average 16.99 105.25 333.86 732.91
Lipper International
Funds Average 39.40 62.48 303.71 480.69+++
EAFE Index 32.94 12.19 417.77 592.40+++
CPI 2.75 21.00 43.93 80.00
Financial Times
Actuaries World
Index++++ 22.60 35.85 N/A N/A
PAGE 34
Average Annual Compound Rates of Return
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/93+ 12/31/93 12/31/93 12/31/93++
_________ ________ ____________ __________
International Stock 40.11% 12.05% 17.37% 16.23%
Fund
S&P 500 10.07 14.56 14.92 16.04
Dow Jones Industrial
Average 16.99 15.47 15.81 16.80
Lipper International
Funds Average 39.40 9.85 14.84 13.66+++
EAFE Index 32.94 2.33 17.87 15.40+++
CPI 2.75 3.89 3.71 4.40
Financial Times
Actuaries World
Index++++ 22.60 6.32 N/A N/A
+ If you invested $1,000 at the beginning of 1993, the total return on
December 31, 1993 would be $1,401.10 ($1,000 x 1.4011).
++ Assumes purchase of one share of International Stock Fund at the
public offering price of $5.00 on May 9, 1980. Over this time, stock
prices in general have risen.
+++ 06/30/80-12/31/93
++++ The inception date of this index is 12/31/85.
International Discovery Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years Inception
Ended Ended 12/30/88 to
12/31/93+ 12/31/93 12/31/93++
__________ __________ ____________
International Discovery Fund 49.85% 87.99% 87.99%
S&P 500 10.07 97.34 97.34+++
Dow Jones Industrial
Average 16.99 105.25 105.25+++
Lipper International
Funds Average 39.40 62.48 62.48+++
EAFE Index 32.94 12.19 12.19+++
CPI 2.75 21.00 21.00+++
PAGE 35
Average Annual Compound Rates of Return
Since
1 Year 5 Years Inception
Ended Ended 12/30/88 to
12/31/93+ 12/31/93 12/31/93++
__________ __________ ____________
International Discovery Fund 49.85% 13.46% 13.45%
S&P 500 10.07 14.56 14.56+++
Dow Jones Industrial
Average 16.99 15.47 15.47+++
Lipper International
Funds Average 39.40 9.85 9.85+++
EAFE Index 32.94 2.33 2.33+++
CPI 2.75 3.89 3.89+++
Morgan Stanley Capital
International World Index 23.13 6.44 6.44+++
+ If you invested $1,000 at the beginning of 1993, the total return on
December 31, 1993 would be $1,498.50 ($1,000 x 1.4985).
++ Assumes purchase of one share of International Discovery Fund at the
public offering price of $10.00 on December 30, 1988. Over this time,
stock prices in general have risen.
+++ 12/31/88 - 12/31/93
Small company stocks achieved higher total annualized returns than
large-cap stocks and long-term bonds for the 25 and 50-year periods ending
December 31, 1993. The table below shows recent trends during the past ten
years.
SMALL COMPANIES VS. LARGE COMPANIES
AVERAGE ANNUAL RETURNS
1983 - 1993
Chart 1
Sources: Japan Large - Tokyo Stock Exchange Section; Japan Small - Tokyo Stock
Exchange Section 2; Datastream; United Kingdom Large - MSCI U.K. Index; United
Kingdom Small - Hoarve Govette Small Cap. Index; Datastream; United States
Large - S&P 500 Index; Standard & Poor's, United State Small - Wilshire Small
Growth Index, Wilshire Associates.
PAGE 36
European Stock Fund
Cumulative Performance Percentage Change
Since
1 Year 3 Years Inception
Ended Ended 2/28/90+ to
12/31/93 12/31/93 12/31/93++
__________ __________ ____________
European Stock Fund 27.24% 28.95% 24.86%
S&P 500 10.07 54.48 58.93
Dow Jones Industrial
Average 16.99 56.11 61.68
Lipper European Region
Funds Average 25.96 23.28 19.81
EAFE Index 32.94 31.84 13.01
CPI 2.75 8.97 13.91
Average Annual Compound Rates of Return
Since
1 Year 3 Years Inception
Ended Ended 2/28/90+ to
12/31/93 12/31/93 12/31/93++
__________ __________ ____________
European Stock Fund 27.24% 8.84% 5.95%
S&P 500 10.07 15.60 12.83
Dow Jones Industrial
Average 16.99 16.01 13.33
Lipper European Region
Funds Average 25.96 6.85 4.66
EAFE Index 32.94 9.65 3.24
CPI 2.75 2.90 3.45
Morgan Stanley Capital
International Europe Index 29.79 12.209.18
+ If you invested $1,000 at the beginning of 1993, the total return on
December 31, 1993 would be $1,272.40 ($1,000 x 1.2724).
++ Assumes purchase of one share of European Stock Fund at the public
offering price of $10.00 on February 28, 1990. Over this time, stock
prices in general have risen.
+++ 03/01/90-12/31/93
PAGE 37
Japan Fund
Cumulative Performance Percentage Change
Since
1 Year Inception
Ended 12/27/91+ to
12/31/93 12/31/93++
__________ ____________
Japan Fund 20.61% 4.45%
Morgan Stanley Pacific
Basin Index 35.97 11.23+++
Morgan Stanley Capital
International World
Index 23.13 17.39+++
EAFE Index 32.94 17.19+++
S&P 500 10.07 21.59
Topix Index 23.10 -6.12+++
Nikkei Average 14.88 -14.82+++
Morgan Stanley Japan Index 25.70 -1.06+++
Lipper Japanese Funds Average 22.94-2.89+++
Average Annual Compound Rates of Return
Since
1 Year Inception
Ended 12/27/91+ to
12/31/93 12/31/93++
__________ ____________
Japan Fund 20.61% 2.19%
Morgan Stanley Pacific
Basin Index 35.97 5.46+++
Morgan Stanley Capital
International World Index23.13 8.35+++
EAFE Index 32.94 8.26+++
S&P 500 10.07 10.21
Topix Index 23.10 -3.11+++
Nikkei Average 14.88 -7.71+++
Morgan Stanley Japan Index 25.70 -0.53+++
Lipper Japanese Funds Average 22.94-1.55+++
+ If you invested $1,000 at the beginning of 1993, the total return on
December 31, 1993 would be $1,206.10 ($1,000 x 1.2061).
++ Assumes purchase of one share of Japan Fund at the public offering
price of $10.00 on December 27, 1991. Over this time, stock prices in
general have risen.
+++ 12/31/91-12/31/93
One reason investors may find the Japanese market attractive is the
proven competitiveness of Japanese companies within their industries. Due to
a commitment to capital investment, technological expertise, and a highly
productive workforce, Japanese companies dominate many of the world's key
industries. Shown below are the number of Japanese companies within the top
ten largest companies of the world+ for the industries indicated:
--- 9 of the top 10 banks
--- 7 of the top 10 appliance/household durable companies
--- 8 of the top 10 financial service companies
--- 7 of the top 10 steel companies
--- 4 of the top 10 automobile companies
PAGE 38
+ Based on total market capitalization in U.S. dollars.
Source: Morgan Stanley Capital International
U.S. S&P 500 VS. JAPAN TOPIX
1981 -- 1993
Chart 2
Sources: Bloomberg
Returns are measured in U.S. currency. Topix Index reflects the first section
of the Tokyo Stock Exchange.
The chart is for illustrative purposes only and should not be
considered representative of an investment in the Fund or of the Fund's
performance. Returns are measured in U.S. currency. Topix Index reflects the
first section of the Tokyo Stock Exchange.
Sources: Nikkei Needs; Bridge Information Systems
Growth of Real GNP in the OECD area!
Annual Percentage Change
Average
1975-84 1985 1986 1987 1988 1989 1990 19911992
_______ ____ ____ ____ ____ ____ ____ ________
United States 2.5 3.2 2.9 3.1 3.9 2.5 0.8 -1.2 2.1
Japan 4.0 5.0 2.6 4.1 6.2 4.7 4.8 4.0 1.3
Source: World Economic Outlook, IMF, May 1993
PAGE 39
Latin America Fund
The following is a line graph depicting the following plot points:
January 1989 - January 1993
Chart 3
IFCI Composite 100 in January, 1989 and climbs steadily to 200 in June, 1990
then declines to 150 in January, 1991 then increases to 250 by May, 1992, then
drops to 220 in September, 1992, and climbs steadily to 240 in January, 1993.
IFCI Latin America 100 drops to 98 in January, 1989 and climbs steadily to 575
in June, 1992 then declines to 425 in November, 1992 then increases to 500 by
March, 1993.
IFCI Asia 100 climbs to 170 in July, 1990 then declines to 130 in September,
1991 then climbs steadily to 170 by March, 1993.
IFCI Europe/Mideast 100 steadily climbs to 330 in July, 1990 then declines to
200 in December, 1990 then climbs to 240 in February, 1991 and slowly declines
to 99 in October, 1992 and slowly climbs to 130 in January, 1993 and then
drops to 120 in March, 1993.
S&P 500 fluctuates between 130 to 150 up to December, 1992 then steadily
climbs to 190 in March, 1993.
EAFE 100 climbs to 110 in January, 1990, then drops to 90 in March, 1990 and
climbs to 100 in June, 1990 and then declines 80 to 90 through March, 1993.
*IFCI represents International Finance Corp. Index
The chart is intended to represent an investment of $100 in each of the
indices at the beginning on 1989 and the investments ending value as of March,
1993.
PAGE 40
New Asia Fund
Cumulative Performance Percentage Change
Since
1 Year 3 Years Inception
Ended Ended 9/28/90+ to
12/31/93 12/31/93 12/31/93++
__________ __________ ____________
New Asia Fund 78.76% 137.25% 141.05%
S&P 500 10.07 54.48 68.65+++
Dow Jones Industrial
Average 16.99 56.11 69.35+++
Lipper Pacific Region
Funds Average 63.81 88.88 91.74+++
EAFE Index 32.94 31.84 45.85+++
CPI 2.75 8.97 9.87+++
Average Annual Compound Rates of Return
Since
1 Year 3 Years Inception
Ended Ended 9/28/90+ to
12/31/93 12/31/93 12/31/93++
__________ __________ ____________
New Asia Fund 78.76% 33.37% 31.02%
S&P 500 10.07 15.60 17.43+++
Dow Jones Industrial
Average 16.99 16.01 17.59+++
Lipper Pacific Region
Funds Average 63.91 22.63 21.33+++
EAFE Index 32.94 9.65 12.31+++
CPI 2.75 2.90 2.94+++
Financial Times
Actuaries Pacific
Excluding Japan 89.78 40.53 35.68+++
+ If you invested $1,000 at the beginning of 1993, the total return on
December 31, 1993 would be $1,787.60 ($1,000 x 1.7876).
++ Assumes purchase of one share of New Asia Fund at the public offering
price of $10.00 on September 28, 1990. Over this time, stock prices in
general have risen.
+++ 09/30/90 - 12/31/93
Price-Fleming believes that foreign economies have performed well, and
emerging economies are significantly better than the world average, as shown
in the chart below.
PAGE 41
GDP Growth Rates
________________
Average
1975-84 1985 1986 1987 1988 1989 1990 19911992
_______ ____ ____ ____ ____ ____ ____ ________
World 3.3 3.8 3.6 3.9 4.6 3.3 2.0 0.6 1.8
Industrialized 2.5 3.3 2.8 3.2 4.3 3.2 2.1 0.2 1.5
Developing (Asia) 6.3 7.2 7.1 8.1 9.1 5.5 5.7 5.8 7.9
Source: World Economic Outlook, IMF, May 1993
Foreign Equity Fund
Cumulative Performance Percentage Change
Since
1 Year 3 Years Inception
Ended Ended 9/7/89 to
12/31/93+ 12/31/93 12/31/93++
_________ ________ __________
Foreign Equity Fund 40.76% 56.41% 53.06%
S&P 500 10.07 54.48 53.91
Dow Jones Industrial Average 16.99 56.11 59.84
Lipper International Funds Average 39.40 50.37 44.50+++
EAFE Index 32.94 31.84 10.75+++
CPI 2.75 8.97 17.01+++
Financial Times Actuaries
Euro-Pacific Index 31.37 28.95 8.22+++
Average Annual Compound Rates of Return
Since
1 Year 3 Years Inception
Ended Ended 9/07/89 to
12/31/93+ 12/31/93 12/31/93++
_________ ________ __________
Foreign Equity Fund 40.76% 16.08% 10.37%
S&P 500 10.07 15.60 10.51
Dow Jones Industrial Average 16.99 16.0111.48
Lipper International Funds Average 39.40 14.298.58+++
EAFE Index 32.94 9.65 2.38+++
CPI 2.75 2.90 3.69+++
Financial Times Actuaries
Euro-Pacific Index 31.37 8.84 0.69+++
+ If you invested $1,000 at the beginning of 1993, the total return on
December 31, 1993 would be $1,407.60 ($1,000 x 1.4076).
++ Assumes purchase of one share of Foreign Equity Fund at the public
offering price of $10.00 on September 7, 1989. Over this time, stock
prices in general have risen.
+++ 8/31/89 - 12/31/93
The EAFE Index (Capital International Europe, Australia, Far East
Index) is a generally accepted benchmark for performance of major overseas
markets.
From time to time, in reports and promotional literature: (1) each
Fund's total return performance or P/E ratio may be compared to any one or
combination of the following: (i) the Standard & Poor's 500 Stock Index and
PAGE 42
Dow Jones Industrial Average so that you may compare the Fund's results with
those of a group of unmanaged securities widely regarded by investors as
representative of the U.S. stock market in general; (ii) other groups of
mutual funds, including T. Rowe Price Funds, tracked by: (A) Lipper
Analytical Services, Inc., a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets which
includes the Lipper Pacific Region Average which tracks the average
performance of funds which concentrate investments in equity securities whose
primary trading markets or operations are in the Western Pacific basin region,
or a single country within this region; (B) Morningstar, Inc., another widely
used independent research firm which rates mutual funds; or (C) other
financial or business publications, such as Business Week, Money Magazine,
Forbes and Barron's, which provide similar information; (iii) The Financial
Times (a London based international financial newspaper)-Actuaries World
Indices, including Europe and sub indices comprising this Index (a wide range
of comprehensive measures of stock price performance for the major stock
markets as well as for regional areas, broad economic sectors and industry
groups); (iv) Morgan Stanley Capital International Indices, including the EAFE
Index, Pacific Basin Index, Japan Index and Pacific Ex Japan Index which is a
widely-recognized series of indices in international market performance; (v)
Baring International Investment Management Limited (an international
securities trading, research, and investment management firm), as a source for
market capitalization, GDP and GNP; (vi) the International Finance Corporation
(an affiliate of the World Bank established to encourage economic development
in less developed countries), World Bank, OECD (Organization for Economic Co-
Operation and Development) and IMF (International Monetary Fund) as a source
of economic statistics; (vii) the Nikkei Average, a generally accepted
benchmark for performance of the Japanese stock market; (viii) indices of
stocks comparable to those in which each Fund invests including the Topix
Index, which reflects the performance of the First Section of the Tokyo Stock
Exchange; and (ix) the performance of U.S. government and corporate bonds,
notes and bills. (The purpose of these comparisons would be to illustrate
historical trends in different market sectors so as to allow potential
investors to compare different investment strategies.); (2) the Consumer Price
Index (measure for inflation) may be used to assess the real rate of return
from an investment in each Fund; (3) other U.S. or foreign government
statistics such as GNP, and net import and export figures derived from
governmental publications, e.g. The Survey of Current Business, may be used to
illustrate investment attributes of the Fund or the general economic,
business, investment, or financial environment in which the Fund operates; (4)
the effect of tax-deferred compounding on each Fund's investment returns, or
on returns in general, may be illustrated by graphs, charts, etc. where such
graphs or charts would compare, at various points in time, the return from an
investment in each Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (5) the sectors or
industries in which each Fund invests may be compared to relevant indices or
surveys (e.g. S&P Industry Surveys) in order to evaluate each Fund's
historical performance or current or potential value with respect to the
particular industry or 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.
PAGE 43
Year Taxable Tax Deferred
____ _______ ____________
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is to
accumulate personal savings for retirement. Due to the long-term nature of
the investment, even slight differences in performance will result in
significantly different assets at retirement. Mutual funds, with their
diversity of choice, can be used for IRA investments. Generally, individuals
may need to adjust their underlying IRA investments as their time to
retirement and tolerance for risk changes.
Other Features and Benefits
Each Fund is a member of the T. Rowe Price Family of Funds and
may help investors achieve various long-term investment goals, such as
investing money for retirement, saving for a down payment on a home, or paying
college costs. To explain how the Fund could be used to assist investors in
planning for these goals and to illustrate basic principles of investing,
various worksheets and guides prepared by T. Rowe Price Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be made available. These
currently include: the Asset Mix Worksheet which is designed to show
shareholders how to reduce their investment risk by developing a diversified
investment plan: the College Planning Guide which discusses various aspects of
financial planning to meet college expenses and assists parents in projecting
the costs of a college education for their children; the Retirement Planning
Kit (also available in a PC version) which includes a detailed workbook to
determine how much money you may need for retirement and suggests how you
might invest to reach your goal; and the Retirees Financial Guide which
includes a detailed workbook to determine how much money you can afford to
spend and still preserve your purchasing power and suggest how you might
invest to reach your goal. From time to time, other worksheets and guides may
be made available as well. Of course, an investment in the Fund cannot
guarantee that such goals will be met.
To assist investors in understanding the different returns and
risk characteristics of various investments, the aforementioned guides will
include presentation of historical returns of various investments using
published indices. An example of this is shown on the next page.
PAGE 44
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 years 20 years 10 years 5 years
Small-Company Stocks 15.3% 18.8% 10.0% 13.3%
Large-Company Stocks 12.3 12.8 14.9 14.5
Foreign Stocks N/A 14.4 17.9 2.3
Long-Term Corporate Bonds 5.6 10.2 14.0 13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4 11.3
Treasury Bills 4.6 7.5 6.4 5.6
U.S. Inflation 4.3 5.9 3.7 3.9
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks reflect
performance of The Morgan Stanley Capital International EAFE Index, which
includes some 1,000 companies representing the stock markets of Europe,
Australia, New Zealand, and the Far East. This chart is for illustrative
purposes only and should not be considered as performance for, or the
annualized return of, any T. Rowe Price Fund. Past performance does not
guarantee future results.
Also included will be various portfolios demonstrating how these
historical indices would have performed in various combinations over a
specified time period in terms of return. An example of this is shown on the
next page.
PAGE 45
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/93 $10,000
Investment
After Period
_____________________ ______________________ ____________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.3% 5.4% 24.9% -9.3% $ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2% 29.1%-15.6% $ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0% 33.4%-21.9% $100,031
Source: T. Rowe Price Associates; data supplied by Lehman Brothers, Wilshire
Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of stocks (85%
Wilshire 5000 and 15% Europe, Australia, Far East [EAFE] Index), bonds
(Lehman Brothers Aggregate Bond Index from 1976-93 and Lehman Brothers
Government/Corporate Bond Index from 1974-75), and 30-day Treasury bills
from January 1974 through December 1993. 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 5.9% for the 20-year period ended 12/31/93.
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,
PAGE 46
brokerage fees could be incurred by the shareholder in subsequent sale of such
securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of a Fund's shares for securities or
assets other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment objectives and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
MANAGEMENT OF FUNDS
The officers and directors of the Funds are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Funds' directors who
are considered "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.
*M. DAVID TESTA, Chairman of the Board--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe
Price Trust Company; Chartered Financial Analyst
*MARTIN G. WADE, President and Director--President, Price-Fleming; Director,
Robert Fleming Holdings Limited; Address: 25 Copthall Avenue, London, EC2R
7DR, England
LEO C. BAILEY, Director--Retired; Address: 3396 South Placita Fabula, Green
Valley, Arizona 85614
ANTHONY W. DEERING, Director--Director, President and Chief Operating Officer,
The Rouse Company, real estate developers, Columbia, Maryland; Advisory
Director, Kleinwort, Benson (North America) Corporation, a registered
broker-dealer; Address: 10275 Little Patuxent Parkway, Columbia, Maryland
21044
DONALD W. DICK, JR., Director--Principal, Overseas Partners, Inc., a
financial
investment firm; Director, Waverly Press, Inc., Baltimore, Maryland;
Address: 375 Park Avenue, Suite 2201, New York, New York 10152
ADDISON LANIER, Director--Financial management; President and Director, Thomas
Emery's Sons, Inc., and Emery Group, Inc.; Director, Scinet Development
and Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio
45202-2913
CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-Fleming
!PETER B. ASKEW, Vice President--Executive Vice President, Price-
Fleming
!RICHARD J. BRUCE, Vice President--Vice President of Price-Fleming; formerly
(1985-1990) Investment Manager, Jardine Fleming Investment Advisers, Tokyo
!ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe
Price-Fleming International Inc.; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New York, New
York
!MARK J. T. EDWARDS, Vice President--Vice President, Price-Fleming
JOHN R. FORD, Vice President--Executive Vice President, Price-Fleming
PAGE 47
HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming and T. Rowe
Price Retirement Plan Services, Inc.; Managing Director, T. Rowe Price;
Vice President and Director, T. Rowe Price Investment Services, Inc.,
T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
ROBERT C. HOWE, Vice President--Vice President, Price-Fleming and T. Rowe
Price
!STEPHEN ILOTT, Vice President--Employee, Price-Fleming; formerly (1988-1991)
portfolio management, Fixed Income Portfolios Group, Robert Fleming
Holdings Limited, London
GEORGE A. MURNAGHAN, Vice President--Vice President, Price-Fleming, T. Rowe
Price, T. Rowe Price Trust Company, and T. Rowe Price Investment Services,
Inc.
JAMES S. RIEPE, Vice President--Managing Director, T. Rowe Price; Chairman of
the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan
Services, Inc. and T. Rowe Price Trust Company; President and Director, T.
Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
!CHRISTOPHER ROTHERY, Vice President--Vice President, Price-Fleming;
formerly
(1987-1989) employee of Robert Fleming Holdings Limited, London
!!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
!CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice
President, Rowe Price-Fleming International, Inc.
!BENEDICT R. F. THOMAS, Vice President--Vice President, Price-Fleming
!PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price; Vice
President, Rowe Price-Fleming International, Inc.
DAVID J. L. WARREN, Vice President--Executive Vice President, Price-Fleming
WILLIAM F. WENDLER, II, Vice President--Vice President, Price-Fleming, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
!EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price, Rowe Price-
Fleming International, Inc. and T. Rowe Price Trust Company
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
!ANN B. CRANMER, Assistant Vice President--Vice President, Price-Fleming
ROGER L. FIERY, III, Assistant Vice President--Vice President, Price-Fleming
and T. Rowe Price
!LEAH P. HOLMES, Assistant Vice President--Vice President, Price-Fleming and
Assistant Vice
President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice President, T.
Rowe Price and
Vice President, T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
! Messrs. Askew, 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.
!! Mr. Ruppert is a Vice President of the Foreign Equity Fund.
The Funds' Executive Committee, comprised of Messrs. Testa and Wade, have
been authorized by the Board of Directors to exercise all of the powers of the
Board to manage the Funds in the intervals between meetings of the Board,
except the powers prohibited by statute from being delegated.
PAGE 48
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 December 31, 1993, the following shareholder beneficially
owned more than 5% of the outstanding shares of the International Stock, New
Asia 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; T. Rowe Price Trust Co. TTEE, BAL Fund Employee
Profit Sharing Ret., Plan of Winn Dixie Stores, Inc., Attn.: Marie Seltzer,
100 E. Pratt Street, Baltimore, Maryland 21202-1009; and T. Rowe Price Trust
Co. TTEE, Stocks Plus Fund for Honeywell Ret. and Savings Plans, Attn.: Maria
Seltzer, 100 E. Pratt Street, Baltimore, Maryland 21202-1009.
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; 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.
PAGE 49
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.
Robert Fleming personnel have extensive research resources
throughout the world. A strong emphasis is placed on direct contact with
companies in the research universe. Robert Fleming personnel, who frequently
speak the local language, have access to the full range of research products
available in the market place and are encouraged to produce independent work
dedicated solely to portfolio investment management, which adds value to that
generally available.
All Funds, except Foreign Equity Fund
Management Fee
Each Fund pays Price-Fleming a fee ("Fee") which consists of two
components: a Group Management Fee ("Group Fee") and an Individual Fund Fee
("Fund Fee"). The Fee is paid monthly to Price-Fleming on the first business
day of the next succeeding calendar month and is calculated as described
below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily
Group Fee accruals ("Daily Group Fee Accruals") for each month. The Daily
Group Fee Accrual for any particular day is computed by multiplying the Price
Funds' group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of each Fund's net assets for that day to the sum of
the aggregate net assets of the Price Funds for that day. The Daily Price
Funds' Group Fee Accrual for any particular day is calculated by multiplying
the fraction of one (1) over the number of calendar days in the year by the
annualized Daily Price Funds' Group Fee Accrual for that day as determined in
accordance with the following schedule:
PAGE 50
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
_________________________________
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the Price Funds
include all the mutual funds distributed by T. Rowe Price Investment Services,
Inc. (excluding T. Rowe Price Spectrum Fund, Inc. and any institutional or
private label mutual funds). For the purpose of calculating the Daily Price
Funds' Group Fee Accrual for any particular day, the net assets of each Price
Fund are determined in accordance with the Funds' prospectus as of the close
of business on the previous business day on which the Fund was open for
business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily
Fund Fee accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund
Fee Accrual for any particular day is computed by multiplying the fraction of
one (1) over the number of calendar days in the year by the Fund Fee Rate of
0.35% for the International Stock Fund, 0.50% each for the European Stock,
Japan and New Asia Funds, 0.75% each for the International Discovery and Latin
America Funds, and multiplying this product by the net assets of the Fund for
that day, as determined in accordance with the Funds' prospectus as of the
close of business on the previous business day on which the Fund was open for
business.
The following chart sets forth the total management fees if any,
paid to Price-Fleming by the Funds, during the last three years:
International Stock International Discovery Japan
1993 $14,955,000 1993 $1,982,000 1993 $458,000
1992 $12,522,000 1992 $1,798,000 1992 $ 19,000
1991 $ 9,233,000 1991 $1,549,000 1991 *
European Stock New Asia Latin America
1993 $1,422,000 1993 $4,937,000 1993 *
1992 $1,198,000 1992 $1,954,000 1992 *
1991 $ 976,000 1991 $ 449,000 1991 *
*Prior to commencement of Fund operations.
Limitation on Fund Expenses
The Management Agreement between each Fund and Price-Fleming
provides that each Fund will bear all expenses of its operations not
specifically assumed by Price-Fleming. However, in compliance with certain
state regulations, Price-Fleming will reimburse each Fund for certain expenses
which in any year exceed the limits prescribed by any state in which the
PAGE 51
Fund's shares are qualified for sale. Presently, the most restrictive expense
ratio limitation imposed by any state is 2.5% of the first $30 million of a
Fund's average daily net assets, 2% of the next $70 million of the average
daily net assets, and 1.5% of net assets in excess of $100 million. For the
purpose of determining whether a Fund is entitled to reimbursement, the
expenses of each Fund are calculated on a monthly basis. If the Fund is
entitled to reimbursement, that month's management fee will be reduced or
postponed, with any adjustment made after the end of the year.
International Discovery Fund
In the interest of limiting the expenses of the Fund, Price-Fleming
agreed to bear any expenses through December 31, 1990, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.50%. Effective
January 1, 1991, Price-Fleming agreed to extend the Fund's expense ratio for a
period of two years through December 31, 1992. Effective January 1, 1993
Price-Fleming agreed to extend the 1.50% expense limitation through December
31, 1993. Expenses paid or assumed by Price-Fleming under each agreement, are
subject to reimbursement to Price-Fleming the Fund whenever the Fund's expense
ratio is below 1.50%; however, no reimbursement will be made after December
31, 1992 (for the initial agreement), December 31, 1994 (for the first
extension), December 31, 1995 (for the second extension), or if it would
result in the expense ratio exceeding 1.50%. The Management Agreement also
provides that one or more additional expense limitation periods may be
implemented after the expiration of the one on December 31, 1990, and that
with respect to any additional limitation period (of the same or different
time periods), the Fund 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.
Pursuant to the Fund's past expense limitations, management fees
aggregating $85,000, $185,000 and $360,000 were not accrued for the ten-month
fiscal period ended October 31, 1993 and the fiscal years ended December 31
1992 and December 31, 1991, respectively. These unaccrued fees are subject to
reimbursement through December 31, 1995.
Japan Fund
In the interest of limiting the expenses of the Fund during its
initial period of operations, Price-Fleming agreed to bear any expenses
through December 31, 1993, which would cause the Fund's ratio of expenses to
average net assets to exceed 1.50%. Effective January 1, 1994 Price-Fleming
agreed to extend the 1.50% expense limitation through October 31, 1995.
Expenses paid or assumed by Price-Fleming under each agreement are subject to
reimbursement to Price-Fleming by the Fund whenever the Fund's expense ratio
is below 1.50%; however, no reimbursement will be made after December 31, 1995
(for the initial agreement), October 31, 1997 (for the second agreement), or
if it would result in the expense ratio exceeding 1.50%. The Management
Agreement also provides that one or more additional expense limitation periods
(of the same or different time periods) may be implemented after the
expiration of the one on December 31, 1993, and that with respect to any such
additional limitation period, the Fund may reimburse Price-Fleming, provided
the reimbursement does not result in the Fund's aggregate expenses exceeding
the additional expense limitation.
Pursuant to the Fund's past expense limitation, management fees
aggregating $100,000 and $211,000 were not accrued for the ten-month fiscal
period ended October 31, 1993 and the fiscal period ended December 31, 1992,
respectively. These unaccrued fees are subject to reimbursement through
December 31, 1995.
PAGE 52
Latin America Fund
In the interest of limiting the expenses of the Fund during its
initial period of operations, Price-Fleming agreed to bear any expenses
through October 31, 1995, which would cause the Fund's ratio of expenses to
average net assets to exceed 2.00%. Expenses paid or assumed under this
agreement are subject to reimbursement to Price-Fleming by the Fund whenever
the Fund's expense ratio is below 2.00%; however, no reimbursement will be
made after October 31, 1997, or if it would result in the expense ratio
exceeding 2.00%. The Management Agreement also provides that one or more
additional expense limitation periods (of the same or different time periods)
may be implemented after the expiration of the current one on October 31,
1995, and that with respect to any such additional limitation period, the
Fund's may reimburse Price-Fleming, provided the reimbursement does not result
in the Fund's aggregate expenses exceeding the additional expense limitation
or any applicable state expense limitation.
T. Rowe Price Spectrum Fund, Inc. (International Stock Fund)
The Fund is a party to a Special Servicing Agreement ("Agreement")
between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum Fund"), T. Rowe
Price, T. Rowe Price Services, Inc. and various other T. Rowe Price funds
which, along with the Fund, are funds in which Spectrum Fund invests
(collectively all such funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors of any
Underlying Price Fund determines that such Underlying Fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly
in the Underlying Price Funds and the resulting reduction in shareholder
servicing costs. Although such cost savings are not certain, the estimated
savings to the Underlying Price Funds generated by the operation of Spectrum
Fund are expected to be sufficient to offset most, if not all, of the expenses
incurred by Spectrum Fund.
Foreign Equity Fund
Limitation on Fund Expenses
Price-Fleming agreed that through February 29, 1992, the Fund's
expense ratio would not exceed 1.00% of the average daily net assets of the
Fund. However, any amount paid or assumed by Price-Fleming pursuant to this
expense ratio limitation is subject to reimbursement monthly by the Fund to
Price-Fleming after February 29, 1992, provided, that no such reimbursement
will be made to Price-Fleming after February 28, 1994, and any such
reimbursement will only be made to the extent it does not result in the Fund's
aggregate expenses exceeding an expense ratio limitation of 1.00% (or such
lower amount as may be imposed by a state expense ratio limitation to which
the Fund is subject) in any month. The Management Agreement also provides
that one or more additional expense limitation periods may be implemented
after the expiration of the one on February 29, 1992, and that with respect to
any additional limitation period, the Fund may reimburse Price-Fleming for a
period of up to two years, provided the reimbursement does not result in the
PAGE 53
Fund's aggregate expenses exceeding the additional expense limitation (or any
applicable state expense limitation). Although Price-Fleming may at any time
voluntarily extend an expense limitation without shareholder approval, this
provision permits Price-Fleming to adopt an additional expense limitation from
time to time and be reimbursed for any amount it assumed or waived under such
an additional expense limitation after the expiration of the present expense
limitation on February 29, 1992. Effective January 1, 1992, Price-Fleming
agreed to bear any expenses through December 31, 1993, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.00%. Expenses paid
or assumed under the agreement are subject to reimbursement to Price-Fleming
by the Fund whenever the Fund's expense ratio is below 1.00%; however, no
reimbursement will be made after December 31, 1993, or if it would result in
the expense ratio exceeding 1.00%.
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 1993,
1992, and 1991, Price-Fleming received from the Fund management fees totaling
$2,064,000, $1,437,000, and $767,000, respectively.
DISTRIBUTOR FOR FUNDS
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Funds' distributor. Investment Services is registered as
a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. The offering of each
Fund's shares is continuous.
Investment Services is located at the same address as the Funds and
T. Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Funds pursuant to
an Underwriting Agreement ("Underwriting Agreement"), which provides that each
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
The Underwriting Agreement provides that Investment Services will
pay all fees and expenses in connection with: printing and distributing
prospectuses and reports for use in offering and selling Fund shares;
preparing, setting in type, printing, and mailing all sales literature and
advertising; Investment Services' federal and state registrations as a
broker-dealer; and offering and selling Fund shares, except for 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.
PAGE 54
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the custodian
for the Funds' U.S. securities and cash, but it does not participate in the
Funds' investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Funds have entered into a Custodian Agreement with The
Chase Manhattan Bank, N.A., London, pursuant to which portfolio securities
which are purchased outside the United States are maintained in the custody of
various foreign branches of The Chase Manhattan Bank and such other
custodians, including foreign banks and foreign securities depositories in
accordance with regulations under the Investment Company Act of 1940. The
Bank's main office is at 225 Franklin Street, Boston, Massachusetts 02110.
The address for The Chase Manhattan Bank, N.A., London is Woolgate House,
Coleman Street, London, EC2P 2HD, England.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Funds are made by Price-Fleming. Price-Fleming is
also responsible for implementing these decisions, including the allocation of
portfolio brokerage and principal business and the negotiation of commissions.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling each Fund's portfolio securities, it is
Price-Fleming's policy to obtain quality execution at the most favorable
prices through responsible broker-dealers and, in the case of agency
transactions, at competitive commission rates where such rates are
negotiable. However, under certain conditions, a Fund may pay higher
brokerage commissions in return for brokerage and research services. In
selecting broker-dealers to execute a Fund's portfolio transactions,
consideration is given to such factors as the price of the security, the rate
of the commission, the size and difficulty of the order, the reliability,
integrity, financial condition, general execution and operational capabilities
of competing brokers and dealers, their expertise in particular markets and
the brokerage and research services they provide to Price-Fleming or the
Funds. It is not the policy of Price-Fleming to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
Transactions on stock exchanges involve the payment of brokerage
commissions. In transactions on stock exchanges in the United States, these
commissions are negotiated. Traditionally, commission rates have generally
not been negotiated on stock markets outside the United States. In recent
years, however, an increasing number of overseas stock markets have adopted a
system of negotiated rates, although a number of markets continue to be
subject to an established schedule of minimum commission rates. 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
PAGE 55
undisclosed commission or markup. In underwritten offerings, the price
includes a disclosed, fixed commission or discount.
Fixed Income Securities
For fixed income securities, it is expected that purchases and
sales will ordinarily be transacted with the issuer, the issuer's underwriter,
or with a primary market maker acting as principal on a net basis, with no
brokerage commission being paid by the Fund. However, the price of the
securities generally includes compensation which is not disclosed separately.
Transactions placed though dealers who are serving as primary market makers
reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, Price-Fleming
may effect principal transactions on behalf of the Funds with a broker or
dealer who furnishes brokerage and/or research services, designate any such
broker or dealer to receive selling concessions, discounts or other allowances
or otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. The prices the Fund pays to
underwriters of newly-issued securities usually include a concession paid by
the issuer to the underwriter. Price-Fleming may receive research services in
connection with brokerage transactions, including designations in fixed price
offerings
Price-Fleming may cause a Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission for executing a transaction
that is in excess of the commission another broker-dealer would have received
for executing the transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or research services
which have been provided. In some cases, research services are generated by
third parties but are provided to Price-Fleming by or through broker-dealers.
Descriptions of Research Services Received from Brokers and Dealers
Price-Fleming receives a wide range of research services from
brokers and dealers covering investment opportunities throughout the world,
including information on the economies, industries, groups of securities,
individual companies, statistics, political developments, technical market
action, pricing and appraisal services, and performance analyses of all the
countries in which a Fund's portfolio is likely to be invested. Price-Fleming
cannot readily determine the extent to which commissions charged by brokers
reflect the value of their research services, but brokers occasionally suggest
a level of business they would like to receive in return for the brokerage and
research services they provide. To the extent that research services of value
are provided by brokers, Price-Fleming may be relieved of expenses which it
might otherwise bear. In some cases, research services are generated by third
parties but are provided to Price-Fleming by or through brokers.
Commissions to Brokers who Furnish Research Services
Certain broker-dealers which provide quality execution services
also furnish research services to Price-Fleming. Price-Fleming has adopted a
brokerage allocation policy embodying the concepts of Section 28(e) of the
Securities Exchange Act of 1934, which permits an investment adviser to cause
its clients to pay a broker which furnishes brokerage or research services a
higher commission than that which might be charged by another broker which
does not furnish brokerage or research services, or which furnishes brokerage
or research services deemed to be of lesser value, if such commission is
deemed reasonable in relation to the brokerage and research services provided
by the broker, viewed in terms of either that particular transaction or the
PAGE 56
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.
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
PAGE 57
the use of their trading desks, although orders for a Fund's portfolio
transactions may be placed with affiliates of Robert Fleming and JFG who may
receive a commission.
The Board of Directors of the Funds has authorized Price-Fleming to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of each Fund's portfolio transactions,
provided that Price-Fleming believes that doing so will result in an economic
advantage (in the form of lower execution costs or otherwise) being obtained
for each Fund. These affiliates include Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, RF&Co., Jardine Fleming Australia
Securities Limited, and Robert Fleming, Inc. (a New York brokerage firm).
The above-referenced authorization was made in accordance with
Section 17(e) of the Investment Company Act of 1940 (the "1940 Act") and
Rule 17e-1 thereunder which require the Funds' independent directors to
approve the procedures under which brokerage allocation to affiliates is to be
made and to monitor such allocations on a continuing basis. Except with
respect to tender offers, it is not expected that any portion of the
commissions, fees, brokerage, or similar payments received by the affiliates
of Robert Fleming in such transactions will be recaptured by the Funds. The
directors have reviewed and from time to time may continue to review whether
other recapture opportunities are legally permissible and available and, if
they appear to be, determine whether it would be advisable for a Fund to seek
to take advantage of them.
During the year 1993, the International Stock, International
Discovery, New Asia, Japan, and Foreign Equity Funds paid $1,198,000,
$245,000, $1,834,000, $111,000, and $71,000, respectively, in total brokerage
commissions in connection with their portfolio transactions. The brokerage
commissions paid to JFS represented 22%, 19%, 27%, 27%, and 13%, respectively,
of the Funds' aggregate brokerage commissions paid during 1993. The aggregate
dollar amount of transactions effected through JFS, involving the payment of
commissions represented 18%, 13%, 28%, 25%, and 12%, respectively, of the
aggregate dollar amount of all transactions involving the payment of
commissions during 1993. International Stock and European Stock Funds paid to
RF&Co., $100,000, and $1,000, respectively, in total brokerage commissions in
connection with their portfolio transactions. The brokerage commissions paid
to RF&Co. represented 2%, and 1%, respectively, of the Funds' aggregate
brokerage commissions paid during 1993. The aggregate dollar amount of
transactions effected through RF&Co., involving the payment of commissions
represented 2%, and 1%, respectively, of the aggregate dollar amount of all
transactions involving the payment of commissions during 1993. Japan Fund
paid to Robert Fleming, Inc. (a New York brokerage firm), $1,000 in total
brokerage commissions in connection with their portfolio transactions. The
brokerage commissions paid to Robert Fleming, Inc. (a New York brokerage firm)
represented 1%, of the Funds' aggregate brokerage commissions paid during
1993. The aggregate dollar amount of transactions effected through RF&Co.,
involving the payment of commissions represented 1%, of the aggregate dollar
amount of all transactions involving the payment of commissions during 1993.
In accordance with the written procedures adopted pursuant to Rule 17e-1, the
independent directors of each Fund reviewed the 1993 transactions with
affiliated brokers and determined that such transactions resulted in an
economic advantage to the Funds either in the form of lower execution costs or
otherwise.
Other
For the years 1993, 1992, and 1991, the total brokerage commissions
paid by International Stock Fund, including the discounts received by
PAGE 58
securities dealers in connection with underwritings, were $5,419,000,
$4,052,000, and $3,119,000, respectively. Of these commissions, approximately
76%, 85%, and 90%, respectively, were paid to firms which provided research,
statistical, or other services to Price-Fleming in connection with the
management of the Fund or, in some cases, to the Fund.
The portfolio turnover rate of the International Stock Fund for
each of the last three years has been as follows: 1993--29.8%, 1992--37.8%,
and 1991--45.0%, respectively.
For the years 1993, 1992, and 1991, the total brokerage commissions
paid by the International Discovery Fund, including the discounts received by
securities dealers in connection with underwritings, were $1,277,000,
$458,000, and $778,000, respectively. Of these commissions, approximately
81%, 81%, and 78%, respectively, were paid to firms which provided research,
statistical, or other services to Price-Fleming in connection with the
management of the Fund or, in some cases, to the Fund.
The portfolio turnover rate of the International Discovery Fund for
each of the last three years has been as follows: 1993--71.8%, 1992--38.0%,
and 1991--56.3%, respectively.
For the years 1993, 1992, and 1991, the total brokerage commissions
paid by the European Stock Fund, including the discounts received by
securities dealers in connection with underwritings, were $182,000, $328,000,
and $214,000, respectively. Of these commissions, approximately 99% was paid
for 1993 and for 1992, and 1991, all commissions were paid to firms which
provided research, statistical, or other services to Price-Fleming in
connection with the management of the Fund or, in some cases, to the Fund.
The portfolio turnover rate of the European Stock Fund for each of
the last three years has been as follows: 1993--21.3%, 1992--52.0%, and 1991-
- -57.7%, respectively.
For the years 1993, and 1992, the total brokerage commissions paid
by the Japan Fund, including the discounts received by securities dealers in
connection with underwritings, were $412,000, and $277,000, respectively. Of
these commissions, approximately 73%, and 91% were paid to firms which
provided research, statistical, or other services to Price-Fleming in
connection with the management of the Fund or, in some cases, to the Fund.
The portfolio turnover rate of the Japan Fund for the years 1993,
and 1992, has been as follows: 1993--61.4%, and 1992--41.6%.
For the years 1993, 1992, and 1991, the total brokerage commissions
paid by the New Asia Fund, including the discounts received by securities
dealers in connection with underwritings, were $6,642,000, $1,757,000, and
$794,000, respectively. Of these commissions, approximately 72%, 64%, and
64%, respectively, were paid to firms which provided research, statistical, or
other services to Price-Fleming in connection with the management of the Fund
or, in some cases, to the Fund.
The portfolio turnover rate of the New Asia Fund for each of the
last three years has been as follows: 1993-40.4%, 1992--36.3%, and 1991--
49.0%, respectively.
For the years 1993, 1992, and 1991, the total brokerage commissions
paid by the Foreign Equity Fund, including the discounts received by
securities dealers in connection with underwritings, were $853,000, $563,000,
PAGE 59
and $389,000, respectively. Of these commissions, approximately 79.0%, 87.0%,
and 84.0%, respectively, were paid to firms which provided research,
statistical, or other services to Price-Fleming in connection with the
management of the Fund or, in some cases, to the Fund.
The portfolio turnover rate of the Foreign Equity Fund for each of
the last three years has been as follows: 1993--27.4%, 1992--35.1%, and 1991--
46.7%.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities
exchange (including NASDAQ) are valued at the last quoted sales price at the
time the valuations are made. A security which is listed or traded on more
than one exchange is valued at the quotation on the exchange determined to be
the primary market for such security. Other equity securities and those
listed securities that are not traded on a particular day are valued at a
price within the limits of the latest bid and asked prices deemed by the Board
of Directors or by persons delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter market
and are valued at a price deemed best to reflect fair value as quoted by
dealers who make markets in these securities or by an independent pricing
service. Short-term debt securities are valued at their cost in local
currency which, when combined with accrued interest, approximates fair value.
For purposes of determining each Fund's net asset value per share,
all assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Funds, as authorized by the Board of Directors.
Trading in the portfolio securities of each Fund may take place in
various foreign markets on certain days (such as Saturday) when the Funds are
not open for business and do not calculate their net asset values. In
addition, trading in a Fund's portfolio securities may not occur on days when
the Fund is open. The calculation of each Fund's net asset value normally
will not take place contemporaneously with the determination of the value of
the Fund's portfolio securities. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
time each Fund's net asset value is calculated will not be reflected in the
Fund's net asset value unless Price-Fleming, under the supervision of the
Fund's Board of Directors, determines that the particular event should be
taken into account in computing the Fund's net asset value.
NET ASSET VALUE PER SHARE
The purchase and redemption price of each Fund's shares is equal to
that Fund's net asset value per share or share price. Each Fund determines
its net asset value per share by subtracting its liabilities (including
accrued expenses and dividends payable) from its total assets (the market
value of the securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by the total
number of shares outstanding. The net asset value per share of each Fund,
PAGE 60
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: 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 1994: January 3; February 11; March 21; April 29; May
3, 4, 5; September 15, 23; October 10; November 3, 23; and December 23, as
well as the following week days in 1995: January 2, 3, 16; March 21; May 3, 4,
5; September 15; October 10; and November 3, 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 are not eligible for
the dividends-received deduction for corporate shareholders, if as expected,
none of the Fund's income consists of dividends paid by United States
corporations. Capital gain distributions paid from these Funds are never
eligible for this deduction. For tax purposes, it does not make any
difference whether dividends and capital gain distributions are paid in cash
or in additional shares. Each Fund must declare dividends equal to at least
98% of ordinary income (as of December 31) and capital gains (as of October
31) in order to avoid a federal excise tax and distribute 100% of ordinary
income and capital gains as of December 31 to avoid federal income tax.
Foreign currency gains and losses, including the portion of gain or
loss on the sale of debt securities attributable to foreign exchange rate
fluctuations are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the fund will be increased; if
the result is a loss, the income dividend paid by the Funds will be decreased.
Adjustments, to reflect these gains and losses will be made at the end of each
Fund's taxable year.
PAGE 61
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 March 31, 1994, the books of each Fund indicated
that each Fund's aggregate net assets included undistributed net income, net
realized capital gains or losses, and unrealized appreciation or depreciation
which are listed below.
Undistributed Net Realized Unrealized
Fund Net Income Capital Gains Appreciation
International Stock $22,022,000 $131,726,000 $598,128,000
International Discovery 361,000 23,231,000 42,930,000
European Stock (45,000) 5,175,000 34,689,000
Japan (86,000) 4,302,000 12,845,000
New Asia 4,570,000 170,946,000 10,351,000
Undistributed Net Realized Unrealized
Fund Net Income Capital Gains Depreciation
Latin America $ (193,000) $ 213,000 $18,638,000
Foreign Equity 3,718,000 13,846,000 2,683,000
Income received by each Fund from sources within various foreign
countries may be subject to foreign income taxes withheld at the source.
Under the Code, if more than 50% of the value of a Fund's total assets at the
close of its taxable year comprise securities issued by foreign corporations,
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
PAGE 62
earnings and profits would be taxable to shareholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital gain
dividends), and the Funds may qualify for the 70% deduction for dividends
received by corporations; and (iii) foreign tax credits would not "pass
through" to shareholders.
Taxation of Foreign Shareholders
The Code provides that dividends from net income (which are deemed
to include for this purpose each shareholder's pro rata share of foreign taxes
paid by each Fund - see discussion of "pass through" of the foreign tax credit
to U.S. shareholders), will be subject to U.S. tax. For shareholders who are
not engaged in a business in the U.S., this tax would be imposed at the rate
of 30% upon the gross amount of the dividend in the absence of a Tax Treaty
providing for a reduced rate or exemption from U.S. taxation. Distributions
of net long-term capital gains realized by each Fund are not subject to tax
unless the foreign shareholder is a nonresident alien individual who was
physically present in the U.S. during the tax year for more than 182 days.
CAPITAL STOCK
The T. Rowe Price International Funds, Inc. (the "International
Corporation") was organized in 1979, as a Maryland corporation under the name
T. Rowe Price International Fund, Inc. ("the Old Corporation"). Pursuant to
the Annual Meeting of Shareholders held on April 22, 1986, an Agreement and
Plan of Reorganization and Liquidation was adopted in order to convert the Old
Corporation from a Maryland corporation to a Massachusetts Business Trust,
named the T. Rowe Price International Trust ("the Trust"). This conversion
became effective on May 1, 1986. Pursuant to the Annual Meeting of
Shareholders held on April 19, 1990, an Agreement and Plan of Reorganization
and Liquidation was adopted in order to convert the Trust from a Massachusetts
Business Trust to a Maryland corporation. This conversion become effective
May 1, 1990. The Institutional International Funds, Inc. (the "Institutional
Corporation") was organized in 1989, as a Maryland corporation. 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 nine series,
each of which represents a separate class of the Corporation's shares and has
different objectives and investment policies. The International Bond Fund was
added as a separate series of the Trust in 1986, and the designation of the
existing series of the Trust was, at that time, changed to the International
Stock Fund. In 1988 and 1990, respectively, the International Discovery and
European Stock Funds were added as separate series of the Trust. Effective
May 1, 1990, all series of the Trust became series of the Corporation. In the
same year, after the May 1, 1990 reorganization, the New Asia and Global
Government Bond Funds were added as separate series of the Corporation. The
Japan, Short-Term Global Income and Latin America Funds were added as separate
series of the Corporation in 1991, 1992, and 1993, respectively. The Short-
Term Global Income, Global Government Bond and International 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
PAGE 63
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 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
PAGE 64
states which require registration, as well as the District of Columbia and
Puerto Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, whose address is 919 Third
Avenue, New York, New York 10022, is legal counsel to the Funds.
INDEPENDENT ACCOUNTANTS
International Stock, International Discovery, European Stock, Japan and Latin
America Funds
Price Waterhouse, 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, and Japan Funds for the ten months ended October 31, 1993, and the
report of independent accountants are included in each Fund's Annual Report
for the ten months ended October 31, 1993, on pages 9-21, 7-21, 5-15, and 5-
12, respectively. A copy of each Annual Report accompanies this Statement of
Additional Information. The following financial statements and the report of
independent accountants appearing in each Annual Report for the ten months
ended October 31, 1993, are incorporated into this Statement of Additional
Information by reference:
International International
Stock Fund Discovery Fund
Annual Report Annual Report
Page Page
______________________________
Report of Independent Accountants 21 21
Statement of Net Assets, October 31, 1993 9-14 7-14
Statement of Operations, ten months ended
October 31, 1993 15 15
Statement of Changes in Net Assets,
ten months ended October 31, 1993 and the
years ended December 31, 1992 and December 31, 1991 1616
Notes to Financial Statements
October 31, 1993 17-19 17-19
Financial Highlights 20 19
PAGE 65
European
Stock Fund
Annual
Report Page
_____________
Report of Independent Accountants 15
Statement of Net Assets, October 31, 1993 5-9
Statement of Operations, ten months ended
October 31, 1993 and year ended December 31, 1992 10
Statement of Changes in Net Assets, ten months ended
October 31, 1993 and years ended December 31, 1992
and December 31, 1991 11
Notes to Financial Statements, October 31, 1993 12-13
Financial Highlights 14
Japan Fund
Annual
Report Page
_____________
Report of Independent Accountants 12
Statement of Net Assets, October 31, 1993 5-6
Statement of Operations, ten months ended
October 31, 1993 and December 30, 1991
(Commencement of Operations) to December 31, 1992 7
Statement of Changes in Net Assets, ten months ended
October 31, 1993 and December 30, 1991
(Commencement of Operations) to December 31, 1992 8
Notes to Financial Statements, October 31, 1993 9-10
Financial Highlights, ten months ended October 31, 1993
December 30, 1991 (Commencement of Operations)
to December 31, 1992 11
New Asia and Foreign Equity Funds
Coopers & Lybrand, 217 East Redwood Street, Baltimore, Maryland
21202, are independent accountants to the Fund. The financial statements of
the New Asia and Foreign Equity Funds for the ten months ended October 31,
1993, and the report of independent accountants are included in each Fund's
Annual Report for the ten months ended October 31, 1993, on pages 9-15 and 4-
18, respectively. A copy of each Annual Report accompanies this Statement of
Additional Information. The following financial statements and the report of
independent accountants appearing in each Annual Report for the ten months
ended October 31, 1993, are incorporated into this Statement of Additional
Information by reference:
PAGE 66
New Asia Foreign
Fund Equity
Annual Annual
Report Page Report Page
___________ ___________
Report of Independent Accountants 15 18
Statement of Net Assets, October 31, 1993 9 3-12
Statement of Operations, ten months ended October 31, 1993
and year ended December 31, 1992 10 13
Statement of Changes in Net Assets, ten months ended
October 31, 1993 and years ended December 31, 1992
and December 31, 1991 11 14
Notes to Financial Statements, October 31, 1993 12-13 15-16
Financial Highlights 13 17
PAGE 67
APPENDIX A
Chart 1
Bar graph appears here comparing small companies of the U.S., Japan, U.K.,
and the U.S. to large companies in the same countries for the years 12/31/83
to 12/31/93.
9.71 15.11 18.06 18.56 10.78 14.92
Japan-Small Japan-Large U.K.-Small U.K.-Large U.S.-Small U.S.-Large
Chart 2
A line graph with the vertical axis representing percent return+ ranging
from - 0 to 3,000 for the Japan Topix and 0 to 200 for U.S. S&P 500 and the
horizontal axis indicating periods ended December 31 from 1981 to 1993. The
Topix Index hovers around 600 from 12/81 to 12/82, followed by increases to
approximately 2,800 during 1989, and then declines to 1,600 during 1993. The
S&P 500 hovers around 30 from 12/81 thru 12/82 then steadily increases to
2,500 as of 12/93. The chart is for illustrative purposes only and should not
be considered representative of an investment in the Fund or of the Fund's
performance.
Chart 3
The following is a line graph depicting the following plot points:
IFCI Composite 100 in January, 1989 and climbs steadily to 200 in June, 1990
then declines to 150 in January, 1991 then increases to 250 by May, 1992, then
drops to 220 in September, 1992, and climbs steadily to 240 in January, 1993.
IFCI Latin America 100 drops to 98 in January, 1989 and climbs steadily to 575
in June, 1992 then declines to 425 in November, 1992 then increases to 500 by
March, 1993.
IFCI Asia 100 climbs to 170 in July, 1990 then declines to 130 in September,
1991 then climbs steadily to 170 by March, 1993.
IFCI Europe/Mideast 100 steadily climbs to 330 in July, 1990 then declines to
200 in December, 1990 then climbs to 240 in February, 1991 and slowly declines
to 99 in October, 1992 and slowly climbs to 130 in January, 1993 and then
drops to 120 in March, 1993.
S&P 500 fluctuates between 130 to 150 up to December, 1992 then steadily
climbs to 190 in March, 1993.
EAFE 100 climbs to 110 in January, 1990, then drops to 90 in March, 1990 and
climbs to 100 in June, 1990 and then declines 80 to 90 through March, 1993.
*IFCI represents International Finance Corp. Index
The chart is intended to represent an investment of $100 in each of the
indices at the beginning on 1989 and the investments ending value as of March,
1993.
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