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INTERNATIONAL STOCK PORTFOLIO PROSPECTUS DATED MARCH 31, 1994
T. ROWE PRICE INTERNATIONAL SERIES, INC.
INVESTMENT SUMMARY
The Fund's investment objective is to seek long-term growth of capital through
investments primarily in 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 that a prospective Contract Holder or
Participant should know about the Fund before investing. Please keep it for
future reference. A Statement of Additional Information for the Fund (dated
March 31, 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 contacting your insurance company.
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.
TABLE OF CONTENTS
PAGE
INVESTMENT SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVE. . . . . . . . . . . . . . . . . . . . . . . . . . 2
FUND CHARACTERISTICS. . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT PROGRAM. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY OF FUND FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INVESTMENT PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . 5
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 7
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . 9
NAV, PRICING, AND EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . 9
DIVIDENDS AND TAXATION. . . . . . . . . . . . . . . . . . . . . . . . . 9
MANAGEMENT OF THE FUND. . . . . . . . . . . . . . . . . . . . . . . . . 10
EXPENSES AND MANAGEMENT FEE . . . . . . . . . . . . . . . . . . . . . . 11
OTHER INSURANCE PRODUCTS. . . . . . . . . . . . . . . . . . . . . . . . 11
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INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term growth of capital through
investments primarily in common stocks of established, non-U.S. companies.
FUND CHARACTERISTICS
Total return consists of capital appreciation or depreciation, dividend
income, and currency gains or losses.
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Fund should not be relied upon as a
complete investment program, nor used to play short-term swings in the stock
or foreign exchange markets. The Fund is subject to risks unique to
international investing. See extensive discussion under Risk Factors
beginning on page 4. Further, there is no assurance that the favorable trends
discussed below will continue, and the Fund cannot guarantee it will achieve
its investment objective.
Shares of the Fund are currently being offered to insurance company separate
accounts established for the purpose of funding variable annuity contracts.
They may also be offered to insurance company separate accounts established
for the purpose of funding variable life contracts. Variable annuity and
variable life Contract Holders or Participants are not the shareholders of the
Fund. Rather, the separate account is the shareholder. The variable annuity
and variable life contracts are described in separate prospectuses issued by
the insurance companies. The Fund assumes no responsibility for such
prospectuses or variable annuity or life contracts.
INVESTMENT PROGRAM
Over the last 30 years, many foreign economies have grown faster than the
United States' economy, and the return from equity investments in these
countries has often exceeded the return on similar investments in the United
States. Moreover, there has normally been a wide and largely unrelated
variation in performance between international equity markets over this
period. Although there can be no assurance that these conditions will
continue, the Fund's investment manager, Rowe Price-Fleming International,
Inc. (Price-Fleming), within the framework of diversification, seeks to
identify and invest in companies participating in the faster growing foreign
economies and markets. Price-Fleming believes that investment in foreign
securities offers significant potential for long-term capital appreciation and
an opportunity to achieve investment diversification.
The Fund intends to diversify investments broadly among countries and to
normally have at least three different countries represented in the portfolio.
The Fund may invest in countries of the Far East and 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 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.
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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
Management Fee. The Fund pays Price-Fleming a single, all-inclusive fee of
1.05% of the Fund's average daily net assets to cover investment management
and operating expenses.
Variable Annuity and Variable Life Charges. Variable annuity and variable
life fees and charges are in addition to those described above and are
described in the variable annuity prospectuses.
RISK FACTORS
Like U.S. stock investments, common stocks of foreign companies offer
investors a way to build capital over time. 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 as
those in some Asian and Latin American countries, volatility may be heightened
by actions of a few major investors. For example, substantial increases or
decreases in cash flows of mutual funds investing in these markets 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.
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.
o Currency Fluctuations. Transactions in foreign securities are conducted
in local currencies, so dollars must be exchanged for another currency
each time a stock is bought or sold or a dividend is paid. Likewise,
share-price quotations and total return information reflect conversion
into dollars. Fluctuations in foreign exchange rates can significantly
increase or decrease the dollar value of a foreign investment, boosting
or offsetting its local market return. For example, if a French stock
rose 10% in price during a year, but the U.S. dollar gained 5% against
the French franc during that time, the U.S. investor's return would be
reduced to 5%. This is because the franc would "buy" fewer dollars at
the end of the year than at the beginning, or, conversely, a dollar
would buy more francs. Exchange rate movements can be large and endure
for extended periods of time.
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o Costs. It is more expensive for U.S. investors to trade in foreign
markets than in the U.S. Mutual funds offer a very efficient way for
individuals to invest abroad, but the overall expense ratios of
international funds are usually somewhat higher than those of typical
domestic stock funds.
o Political and Economic Factors. The economies, markets and political
structures of some countries in which the Fund can invest may not
compare favorably with the United States and other mature economies in
terms of wealth and stability. Therefore, investments in these
countries may 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 may be 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.
o Legal, Regulatory and Operational. Certain portfolio countries lack
uniform accounting, auditing, and financial reporting standards, may
have less governmental supervision of financial markets than in the
U.S., may not honor legal rights enjoyed in the U.S. and may have
settlement practices which include delays and subject the Fund to risks
of loss not customary in U.S. markets.
o 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.
VOTING RIGHTS
The shares of the Fund have equal voting rights. The various insurance
companies own the outstanding shares of the Fund in their separate accounts.
These separate accounts are registered under the Investment Company Act of
1940 or are excluded from registration thereunder. Under current law the
insurance companies must vote the shares held in registered separate accounts
in accordance with voting instructions received from variable Contract Holders
or Participants having the right to give such instructions.
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INVESTMENT PRACTICES
Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help the Fund achieve its objective.
This section takes a detailed look at some of the types of securities the Fund
may hold in its portfolio and the various kinds of investment practices that
may be used in day-to-day portfolio management. The Fund's investment program
is subject to further restrictions and risks described in the "Statement of
Additional Information."
Shareholder approval is required to substantively change the Fund's 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 its total assets, more than 5% of its total assets
would be invested in securities of the issuer or more than 10% of the voting
securities of the issuer would be held by the Fund.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before 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
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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
objectives and program. Such borrowings may be collateralized with Fund
assets, subject to restrictions.
Fundamental Policy. Borrowings may not exceed 33 1/3% of total Fund assets.
Operating Policies. The Fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the Fund's
total assets. The Fund may not purchase additional securities when borrowings
exceed 5% of total assets.
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
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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 its 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.
Lending of Portfolio Securities. Like other mutual funds, the Fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the Fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental Policy. The value of loaned securities may not exceed 33 1/3% of
the Fund's total assets.
Portfolio Turnover. The Fund will not generally trade in securities for
short-term profits, but when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The Fund's
portfolio turnover rate is not expected to exceed 100%.
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
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Fund consists of the change in its net asset value per share and the net
income it earns.) Cumulative total return compares the amount invested at the
beginning of a period with the amount redeemed at the end of the period,
assuming the reinvestment of all dividends and capital gain distributions.
The compound average annual total return indicates a yearly compound average
of the Fund's performance, derived from the cumulative total return. The
annual compound rate of return for the Fund may vary from any average.
Further information about the Fund's performance is contained in its annual
report which is available free of charge.
Total returns quoted for the Fund include the effect of deducting the Fund's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since you can only purchase shares of the Fund
through an insurance product, you should carefully review the prospectus of
the insurance product you have chosen for information on relevant charges and
expenses. Excluding these charges from quotations of the Fund's performance
has the effect of increasing the performance quoted.
CAPITAL STOCK
T. Rowe Price International Series, Inc. (the Corporation) is a Maryland
corporation organized in 1994 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." The Corporation is a
series fund and has the authority to issue other series in addition to the T.
Rowe Price International Stock Portfolio currently in existence. 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.
The Fund has an investment advisory group 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. This group has day-to-day
responsibility for managing the portfolio and developing and executing the
Fund's investment program.
Martin Wade joined Price-Fleming in 1979 and has 25 years of experience with
Fleming Group in research, client service and investment management. (Fleming
Group includes Robert Fleming Holdings Ltd. and/or Jardine Fleming
International Holdings Ltd.). 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 multicurrency 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.
PAGE 9
Shareholder Rights. The Fund 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. The
Fund does not routinely hold annual meetings of shareholders. However, if
shareholders representing at least 10% of all votes of the Fund entitled to be
cast so desire, they may call a special meeting of shareholders of the Fund
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 $.0001. As of the date of this prospectus,
Price-Fleming owned 10,000 shares of the Fund which represented all of the
Fund's outstanding shares. As of February 28, 1994, there were 3,272,854
shareholders in the other 55 T. Rowe Price Funds.
PURCHASE AND REDEMPTION OF SHARES
For instructions on how to purchase and redeem shares of the Fund, read the
separate account prospectus.
Shares of the Fund are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain deferred sales charges and
other charges may apply to the annuity contract. Those charges are disclosed
in the separate account prospectus.
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.
Purchases. The insurance companies purchase shares of the Fund for separate
accounts, using premiums allocated by the Contract Holders or Participants.
Shares are purchased at the NAV next determined after the insurance company
receives the premium payment in acceptable form. Initial and subsequent
payments allocated to the Fund are subject to the limits stated in the
separate account prospectus issued by the insurance company.
Redemptions. The insurance companies redeem shares of the Fund to make
benefit or surrender payments under the terms of its Contracts. Redemptions
are processed on any day on which the New York Stock Exchange is open and are
priced at the Fund's NAV next determined after the insurance company receives
a surrender request in acceptable form.
Proceeds. Payment for redeemed shares will be made promptly, but in no event
later than seven days. However, the right of redemption may be suspended or
the date of payment postponed in accordance with the Investment Company Act of
1940. The amount received upon redemption of the shares of the Fund may be
more or less than the amount paid for the shares, depending on the
fluctuations in the market value of the assets owned by the Fund.
The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the New York Stock Exchange closes at
a time other than 4:00 pm ET or an emergency exists.
PAGE 10
DIVIDENDS AND TAXATION
For a discussion of the tax status of your variable annuity contract, refer to
the prospectus of your insurance company's separate account.
Dividends and Distributions. The policy of the Fund is to distribute all of
its net investment income and net capital gains each year to its shareholders,
which are the separate accounts established by the various insurance companies
in connection with their issuance of variable annuity and life contracts. All
Fund distributions made to a separate account will be reinvested automatically
in additional Fund shares, unless a shareholder (separate account) elects to
receive distributions in cash. Under current law, dividends and distributions
made by the Fund to separate accounts, generally, are not taxable to the
separate accounts, the insurance company or the Contract Holder, provided that
the separate account meets the diversification requirements of Section 817(h)
of the Internal Revenue Code of 1986, as amended, and other tax related
requirements are satisfied. The Fund intends to diversify its investments in
the manner required under Code Section 817(h).
Foreign Transactions. If the Fund pays nonrefundable taxes to foreign
governments during the year, the taxes will reduce the Fund's dividends.
MANAGEMENT OF THE FUND
Investment Manager. Price-Fleming is responsible for selection and management
of the Fund's portfolio investments. Price-Fleming's U.S. office is located at
100 East Pratt Street, Baltimore, Maryland 21202. Price-Fleming has offices
in Baltimore, London, Tokyo, and Hong Kong.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture between
T. Rowe Price and Robert Fleming Holdings Limited (Flemings). Flemings is a
diversified investment organization which participates in a global network of
regional investment offices in New York, London, Zurich, Geneva, Tokyo, Hong
Kong, Manila, Kuala Lumpur, South Korea, and Taiwan.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr. in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 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 and Administration. Certain administrative support is provided by T.
Rowe Price which receives from Price-Fleming a fee of .15% of the market value
of all assets in equity accounts, .15% of the market value of all assets in
active fixed income accounts and .035% of the market value of all assets in
passive fixed income accounts under Price-Fleming's management. Additional
PAGE 11
investment research and administrative support for equity investments is
provided to Price-Fleming by Fleming Investment Management Limited (FIM) and
Jardine Fleming Investment Holdings Limited (JFIH) for which each receives
from Price-Fleming a fee of .075% of the market value of all assets in equity
accounts under Price-Fleming's management. FIM and JFIH are wholly-owned
subsidiaries of Flemings and Jardine Fleming, respectively. JFIH receives a
fee of .075% of the market value of all assets in active fixed income accounts
and .0175% of such market value in passive fixed income accounts under
Price-Fleming's management.
Portfolio Transactions. Decisions with respect to the purchase and sale of
the Fund's portfolio securities are made by Price-Fleming. The Fund's Board
of Directors has authorized Price-Fleming to utilize affiliates of Flemings
and Jardine Fleming in the capacity of broker in connection with the execution
of the Fund's portfolio transactions if Price-Fleming believes that doing so
would result in an economic advantage (in the form of lower execution costs or
otherwise) being obtained by the Fund.
Investment Services. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the distributor for this Fund as well as all
other T. Rowe Price Funds.
Transfer and Dividend Disbursing Agent. TRP Services, a wholly-owned
subsidiary of T. Rowe Price, serves the Fund as transfer and dividend
disbursing agent. T. Rowe Price calculates the daily share price and
maintains the portfolio and general accounting records of the Fund. The
address for TRP Services is 100 East Pratt Street, Baltimore, Maryland 21202.
EXPENSES AND MANAGEMENT FEE
Under the management agreement, all expenses of the Fund will be paid by
Price-Fleming, except interest, taxes, brokerage commissions, directors' fees
and expenses (including counsel fees and expenses) and extraordinary expenses.
The Board of Directors of the Fund reserves the right to impose additional
fees against shareholder accounts to defray expenses which would otherwise be
paid by Price-Fleming under the management agreement. The Board does not
anticipate levying such charges; such a fee, if charged, may be retained by
the Fund or paid to Price-Fleming.
Management Fee. The Fund pays Price-Fleming an annual all-inclusive fee of
1.05% based on its average daily net assets. The Fund calculates and accrues
the fee daily. This fee pays for investment management services and other
operating costs.
OTHER INSURANCE PRODUCTS
The Fund may serve as an investment medium for both variable annuity contracts
and variable life insurance policies. Shares of the Fund may be offered to
separate accounts established by any number of insurance companies. The Fund
currently does not foresee any disadvantages to variable annuity contract
owners due to the fact that the Fund may serve as an investment medium for
both variable life insurance policies and annuity contracts; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of annuity contracts and insurance
policies for which the Fund serves as an investment medium might at some time
be in conflict. However, the Fund's Board of Directors is required to monitor
events to identify any material conflicts between variable annuity contract
owners and variable life policy owners, and will determine what action, if
any, should be taken in the event of such a conflict. If such a conflict were
to occur, an insurance company participating in the Fund might be required to
PAGE 12
redeem the investment of one or more of its separate accounts from the Fund.
This might force the Fund to sell securities at disadvantageous prices.
PAGE 13
The Statement of Additional Information for the T. Rowe Price International
Series, Inc., dated March 31, 1994, should be inserted here.
PAGE 1
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price International Series, Inc. (the "Corporation")
T. Rowe Price International Stock Portfolio
(the "Fund")
Shares of the Fund are currently being offered to insurance company
separate accounts established for the purpose of funding variable annuity
contracts. They may also be offered to insurance company separate accounts
established for the purpose of funding variable life contracts. Variable
annuity and variable life Contract Holders or Participants are not the
shareholders of the Fund. Rather, the separate account is the shareholder.
The variable annuity and variable life contracts are described in separate
prospectuses issued by the insurance companies. The Fund assumes no
responsibility for such prospectuses, or variable annuity or life contracts.
In the future, it is possible that the Fund may offer its shares to
separate accounts funding variable annuities, variable life insurance or
other insurance products of other insurance companies.
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Fund's prospectus dated March 31, 1994, which
may be obtained by contacting your insurance company.
The date of this Statement of Additional Information is March 31, 1994.
PAGE 2
TABLE OF CONTENTS
Page Page
Call and Put Options . . . . . . . 9 Investment Objective and Policies . .2
Capital Stock. . . . . . . . . . .41 Investment Performance. . . . . . . 27
Custodian. . . . . . . . . . . . .35 Investment Program. . . . . . . . . .3
Dealer Options . . . . . . . . . .14 Investment Restrictions . . . . . . 23
Distributor for Fund . . . . . . .34 Legal Counsel . . . . . . . . . . . 43
Dividends. . . . . . . . . . . . .40 Lending of Portfolio Securities . . .8
Federal and State Registration Management of Fund. . . . . . . . . 31
of Shares . . . . . . . . . . . .42 Net Asset Value Per Share . . . . . 39
Foreign Currency Transactions. . .21 Portfolio Transactions. . . . . . . 35
Foreign Futures and Options. . . .20 Pricing of Securities . . . . . . . 38
Futures Contracts. . . . . . . . .15 Principal Holders of Securities . . 32
Hybrid Instrument. . . . . . . . . 7 Repurchase Agreements . . . . . . . .9
Illiquid or Restricted Securities. 7 Risk Factors of Foreign Investing . .3
Independent Accountants. . . . . .43 Tax Status. . . . . . . . . . . . . 40
Investment Management Services . .33 Warrants. . . . . . . . . . . . . . .8
Investment Objective . . . . . . . 2
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed in the Fund's prospectus. Unless
otherwise specified, the investment program and restrictions of the Fund are
not fundamental policies. The operating policies of the Fund are subject to
change by its Board of Directors without shareholder approval. However,
shareholders will be notified of a material change in an operating policy.
The fundamental policies of the Fund may not be changed without the approval
of at least a majority of the outstanding shares of the Fund or, if it is
less, 67% of the shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
The Fund's investment manager, Rowe Price-Fleming International, Inc.
("Price-Fleming"), one of America's largest managers of no-load international
mutual fund assets, regularly analyzes a broad range of international equity
and fixed income markets in order to assess the degree of risk and level of
return that can be expected from each market. Based upon its current
assessment, Price-Fleming believes long-term growth of capital may be achieved
by investing in marketable securities of non-United States companies which
have the potential for growth of capital. Of course, there can be no
assurance that Price-Fleming's forecasts of expected return will be reflected
in the actual returns achieved by the Fund.
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Fund should not be relied upon as a
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
PAGE 3
international investing. See discussion under "Risk Factors of Foreign
Investing" below. Further, there is no assurance that the favorable trends
discussed below will continue, and the Fund cannot guarantee it will achieve
its objective.
INVESTMENT PROGRAM
It is the present intention of Price-Fleming to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Western Europe (for example, United Kingdom,
Germany, Hungary, Poland, Netherlands, France, Spain, and Switzerland), South
Africa, Australia, Canada, and such other areas and countries as Price-Fleming
may determine from time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, Price-Fleming ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Price-Fleming ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which
the Fund invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future
years as earnings increase.
It is expected that the Fund's investments will ordinarily be traded on
exchanges located at least in the respective countries in which the various
issuers of such securities are principally based.
Risk Factors of Foreign Investing
There are special risks in investing in a Fund. Certain of these risks
are inherent in any international mutual fund while others relate more to the
countries in which the Fund will invest. 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 Fund, and there can be no assurance that the Fund's investment policies
will be successful, or that its investment objectives will be attained. The
Fund is designed for individual and institutional investors seeking to
diversify beyond the United States in actively researched and managed
portfolios, and are intended for long-term investors who can accept the risks
entailed in investment in foreign securities.
PAGE 4
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 Fund 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 Fund's assets denominated in that currency. Such
changes will also affect the Fund's income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the dollar value of the
Fund's securities denominated in that currency will rise. When a given
currency depreciates against the dollar (the dollar strengthens) the dollar
value of the Fund's securities denominated in that currency would be expected
to decline.
Investment and Repatriation of Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude
investment in certain of such countries and may increase the cost and expenses
of the Fund. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Fund invests. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. 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 Fund's portfolio securities may be less liquid and
subject to more rapid and erratic price movements than securities of
PAGE 5
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on United States exchanges,
although the Fund will endeavor to achieve the most favorable net results on
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 the Fund.
Investment Funds. The Fund may invest in investment funds which have
been authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Fund's investment in these funds
is subject to the provisions of the 1940 Act discussed on page 27. If the
Fund invests in such investment funds, the Fund's shareholders will bear not
only their proportionate share of the expenses of the Fund (including
operating expenses and the fees of the investment manager), but also will bear
indirectly similar expenses of the underlying investment funds. In addition,
the securities of these investment funds may trade at a premium over their net
asset value.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and
ratings that are published about companies in the United States. Foreign
companies are also generally not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to United States companies. 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 Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction for U.S. federal income tax purposes for his or her proportionate
share of such foreign taxes paid by the Fund. (See "Tax Status," page 40.)
Costs. Investors should understand that the expense ratios of the Fund
can be expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Fund are higher.
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 Fund
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-
PAGE 6
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 Fund,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
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 the Fund's assets
invested in such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive relief from
such Act may be required. All of these considerations are among the factors
which could cause significant risks and uncertainties to investment in Eastern
Europe and Russia. The Fund will only invest in a company located in, or a
government of, Eastern Europe and Russia, if it believes the potential return
justifies the risk. To the extent any securities issued by companies in
Eastern Europe and Russia are considered illiquid, the Fund will be required
to include such securities within its 15% restriction on investing in illiquid
securities.
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
PAGE 7
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, options, futures and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures, options, and forward contracts herein for a discussion
of these risks. Further, the prices of the Hybrid Instrument and the related
commodity or currency may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instrument,
the creditworthiness of the contra party to the transaction would be a risk
factor which the Fund would have to consider. Hybrid Instruments also may not
be subject to regulation of the Commodities Futures Trading Commission
("CFTC"), which generally regulates the trading of commodity futures by U.S.
persons, the SEC, which regulates the offer and sale of securities by and to
U.S. persons, or any other governmental regulatory authority.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Fund's Board of Directors. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should
be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
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
PAGE 8
reviewed to determine what, if any, steps are required to assure that the Fund
does not invest more than 15% of its net assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the
amount of the Fund's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
Warrants
The Fund may invest in warrants. Warrants are pure speculation in that
they have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. Warrants basically are options
to purchase equity securities at a specific price valid for a specific period
of time. They do not represent ownership of the securities, but only the
right to buy them. Warrants differ from call options in that warrants are
issued by the issuer of the security which may be purchased on their exercise,
whereas call options may be written or issued by anyone. The prices of
warrants do not necessarily move parallel to the prices of the underlying
securities.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the Fund may invest in these
securities.
PORTFOLIO MANAGEMENT PRACTICES
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.
PAGE 9
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 Ratings Group, P1 by Moody's
Investors Service, or the equivalent rating by T. Rowe Price. At that time,
the bank or securities dealer agrees to repurchase the underlying security at
the same price, plus specified interest. Repurchase agreements are generally
for a short period of time, often less than a week. Repurchase agreements
which do not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter 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
PAGE 10
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid high-
grade debt obligations having a value equal to the fluctuating market value of
the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is
a conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, a Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security or currency during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security or currency. The Fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the
option 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
PAGE 11
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security or currency from its portfolio. In
such cases, additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security or currency, any loss resulting from the repurchase of
a call option is likely to be offset in whole or in part by appreciation of
the underlying security or currency owned by the Fund.
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
PAGE 12
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. In order to comply with the requirements of several states, the
Fund will not write a covered put option if, as a result, the aggregate market
value of all portfolio securities or currencies covering put or call options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating the 25% limit,
the Fund will offset, against the value of assets covering written puts and
calls, the value of purchased puts and calls on identical securities or
currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put options. As the
holder of a put option, the Fund has the right to sell the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided below.
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
PAGE 13
transaction costs, unless the put option is sold in a closing sale
transaction.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
put and call options. Should these state laws change or should the Fund
obtain a waiver of its application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The premium paid by
the Fund when purchasing a put option will be recorded as an asset of the
Fund. This asset will be adjusted daily to the option's current market value,
which will be the latest sale price at the time at which the net asset value
per share of the Fund is computed (close of New York Stock Exchange), or, in
the absence of such sale, the latest bid price. This asset will be terminated
upon expiration of the option, the selling (writing) of an identical option in
a closing transaction, or the delivery of the underlying security or currency
upon the exercise of the option.
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.
PAGE 14
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the option
to perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the Fund may be unable to
liquidate a dealer option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund. For example, since the Fund must maintain a secured position with
respect to any call option on a security it writes, the Fund may not sell the
assets which it has segregated to secure the position while it is obligated
under the option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Fund may 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
PAGE 15
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national
or foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the 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 positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options". This policy may be
modified by the Board of Directors 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 other current obligations.
PAGE 16
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Fund would comply with such
new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, U.S. government securities, suitable money market instruments, or
liquid, high-grade debt securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
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.
PAGE 17
For example, one contract in the Financial Times Stock Exchange 100
Index future is a contract to buy 25 pounds sterling multiplied by the level
of the UK Financial Times 100 Share Index on a given future date. Settlement
of a stock index futures contract may or may not be in the underlying
security. If not in the underlying security, then settlement will be made in
cash, equivalent over time to the difference between the contract price and
the actual price of the underlying asset at the time the stock index futures
contract expires.
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
the market and interest rates, which in turn are affected by fiscal and
monetary policies and national and international political and economic
events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of 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.
PAGE 18
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by the Fund of
futures contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the futures contracts
and movements in the prices of the underlying instruments which are the
subject of the hedge. Price-Fleming will, however, attempt to reduce this
risk by entering into futures contracts whose movements, in its judgment, will
have a significant correlation with movements in the prices of the Fund's
underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to Price-Fleming's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the underlying
instruments held in the Fund's portfolio might decline. If this were to
occur, the Fund would lose money on the futures and also would experience a
decline in value in its 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
PAGE 19
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of the imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by Price-Fleming might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of futures in
which it may invest.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on
stock index futures, the Fund may write or purchase call and put options on
stock indices. Such options would be used in a manner similar to the use of
options on futures contracts. From time to time, a single order to purchase
or sell futures contracts (or options thereon) may be made on behalf of the
Fund and other T. Rowe Price Funds. Such aggregated orders would be allocated
among the Funds and the other T. Rowe Price Funds in a fair and non-
discriminatory manner.
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
PAGE 20
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution
of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in futures or
options transactions other than those described above, it reserves the right
to do so. Such futures and options trading might involve risks which differ
from those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, customers who trade foreign
futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from customers for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time your order is placed and the time it is liquidated, offset or
exercised.
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:
PAGE 21
First, when the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when Price-Fleming believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount of
the foreign 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
PAGE 22
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by Price-Fleming. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
PAGE 23
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
or securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income.
In order to avoid realizing excessive gains on securities or currencies held
less than three months, the Fund may be required to defer the closing out of
option, futures or foreign forward exchange contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on Section 1256 option, futures and foreign forward exchange contracts,
which have been open for less than 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 the Fund may not be changed without the
approval of the lesser of (1) 67% of a Fund's shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of a Fund's outstanding
shares. Other restrictions, in the form of operating policies, are subject to
change by the Fund's Board of Directors without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may (i) borrow for
non-leveraging, temporary or emergency purposes and (ii) engage in
reverse repurchase agreements and make other investments or engage
in other transactions, which may involve a borrowing, in a manner
consistent with the Fund's investment objective and program,
provided that the combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed
this amount will be reduced in accordance with applicable law.
The Fund may borrow from banks, other Price Funds or other persons
to the extent permitted by applicable law;
(2) Commodities. Purchase or sell physical commodities; except that
it may enter into futures contracts and options thereon;
PAGE 24
(3) Industry Concentration. Purchase the securities of any issuer if,
as a result, more than 25% of the value of the Fund's total assets
would be invested in the securities of issuers having their
principal business activities in the same industry;
(4) Loans. Make loans, although the Fund may (i) lend portfolio
securities and participate in an interfund lending program with
other Price Funds provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed 33 1/3% of the
value of the Fund's total assets; (ii) purchase money market
securities and enter into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and
purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer. Purchase a
security if, as a result, with respect to 75% of the value of 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);
(6) Percent Limit on Share Ownership of Any One Issuer. Purchase a
security if, as a result, with respect to 75% of the value of 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);
(7) Real Estate. Purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments (but this
shall not prevent the Fund from investing in securities or other
instruments backed by real estate or securities of companies
engaged in the real estate business);
(8) Senior Securities. Issue senior securities except in compliance
with the Investment Company Act of 1940; or
(9) Underwriting. Underwrite securities issued by other persons,
except to the extent that 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.
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 Price Fund (defined as
any other mutual fund managed or 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.
PAGE 25
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
could result from any 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;
(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;
PAGE 26
(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 of issuers which at the
time of purchase had been in operation for less than three years
(for this purpose, the period of operation of any issuer shall
include the period of operation of any predecessor or
unconditional guarantor of such issuer). This restriction does
not apply to securities of pooled investment vehicles or mortgage
or asset-backed securities; or
(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. The Fund is subject to certain percentage limitations
under the 1940 Act and certain states relating to the purchase of securities
of investment companies, and may be subject to the limitation that no more
than 10% of the value of the Fund's total assets may be invested in such
securities.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Fund may invest all of its assets in a
single investment company or a series thereof in connection with a "master-
feeder" arrangement. Such an investment would be made where the Fund (a
"Feeder"), and one or more other Funds with the same investment objective and
program as the Fund, sought to accomplish its investment objective and program
by investing all of its assets in the shares of another investment company
PAGE 27
(the "Master"). The Master would, in turn, have the same investment objective
and program as the Fund. The Fund would invest in this manner in an effort to
achieve the economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of Feeder funds.
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the percentage change
between the beginning value of a static account in the Fund and the ending
value of that account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual
compound rate of return is derived from the cumulative performance of the Fund
over the time period specified. The annual compound rate of return for the
Fund over any other period of time will vary from the average.
Price-Fleming believes that foreign economies have performed well, and
emerging economies are significantly better than the world average, as shown
in the chart below.
GDP Growth Rates
________________
Average
1975-84 1985 1986 1987 1988 1989 1990 1991 1992
_______ ____ ____ ____ ____ ____ ____ ____ ____
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
From time to time, in reports and promotional literature: (1) the Fund's
total return performance or P/E ratio may be compared to any one or
combination of the following: (i) the Standard & Poor's 500 Stock Index and
Dow Jones Industrial Average so that you may compare the Fund's results with
those of a group of unmanaged securities widely regarded by investors as
representative of the U.S. stock market in general; (ii) other groups of
mutual funds, including T. Rowe Price Funds, tracked by: (A) Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; (B)
Morningstar, Inc., another widely used independent research firm which ranks
mutual funds; or (C) other financial or business publications, such as
Business Week, Money Magazine, Forbes and Barron's, which provide similar
information; (iii) The Financial Times (a London based international financial
newspaper)-Actuaries World Indices, including Europe and sub indices
comprising this Index (a wide range of comprehensive measures of stock price
performance for the major stock markets as well as for regional areas, broad
economic sectors and industry groups); (iv) Morgan Stanley Capital
International Indices, including the EAFE Index, Pacific Basin Index and
Pacific Ex Japan Index which is a widely-recognized series of indices in
international market performance; (v) Baring International Investment
Management Limited (an international securities trading, research, and
investment management firm), as a source for market capitalization, GDP and
PAGE 28
GNP; (vi) the International Finance Corporation (an affiliate of the World
Bank established to encourage economic development in less developed
countries), World Bank, OECD (Organization for Economic Co-Operation and
Development) and IMF (International Monetary Fund) as a source of economic
statistics; (vii) indices of stocks comparable to those in which the Fund
invests; and (viii) the performance of U.S. government and corporate bonds,
notes and bills. (The purpose of these comparisons would be to illustrate
historical trends in different market sectors so as to allow potential
investors to compare different investment strategies.); (2) the Consumer Price
Index (measure for inflation) may be used to assess the real rate of return
from an investment in the Fund; (3) other U.S. or foreign government
statistics such as GNP, and net import and export figures derived from
governmental publications, e.g. The Survey of Current Business, may be used to
illustrate investment attributes of the Fund or the general economic,
business, investment, or financial environment in which the Fund operates; (4)
the effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general, may be illustrated by graphs, charts, etc. where such
graphs or charts would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (5) the sectors or
industries in which the Fund invests may be compared to relevant indices or
surveys (e.g. S&P Industry Surveys) in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available. These currently
include: the Asset Mix Worksheet which is designed to show shareholders how to
reduce their investment risk by developing a diversified investment plan: the
College Planning Guide which discusses various aspects of financial planning
to meet college expenses and assists parents in projecting the costs of a
college education for their children; the Retirement Planning Kit (also
available in a PC version) which includes a detailed workbook to determine how
much money you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggest how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
presentation of historical returns of various investments using published
indices. An example of this is shown below.
PAGE 29
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 below.
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.
PAGE 30
* 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.
Redemptions in Kind
In the unlikely event a shareholder of the Fund were to receive an in
kind redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for securities or assets
other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment objective and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's directors who
are considered "interested persons" of T. Rowe Price or the Fund as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are noted with an
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; formerly (6/65-3/89) Director and Vice President-Consumer
Products Division, McCormick & Company, Inc., international food processors;
Director, Waverly Press, Inc., Baltimore, Maryland; Address: 375 Park Avenue,
Suite 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
PAGE 31
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
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
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
BENEDICT R. F. THOMAS, Vice President--Vice President, Price-Fleming
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
The Fund's 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 Fund in the intervals between meetings of the
Board, except the powers prohibited by statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
PAGE 32
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, Price-Fleming provides the Fund with
discretionary investment services. Specifically, Price-Fleming is responsible
for supervising and directing the investments of the Fund in accordance with
the Fund's investment objective, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. Price-Fleming is
also responsible for effecting all security transactions on behalf of the
Fund, including the negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these services,
Price-Fleming provides the Fund with certain corporate administrative
services, including: maintaining the Fund's corporate existence, corporate
records, and registering and qualifying Fund shares under federal and state
laws; monitoring the financial, accounting, and administrative functions of
the Fund; maintaining liaison with the agents employed by the Fund such as the
Fund's custodian and transfer agent; assisting the Fund in the coordination of
such agents' activities; and permitting Price-Fleming's employees to serve as
officers, directors, and committee members of the Fund without cost to the
Fund.
The Management Agreement also provides that Price-Fleming, its
directors, officers, employees, and certain other persons performing specific
functions for the Fund will only be liable to the Fund for losses resulting
from willful misfeasance, bad faith, gross negligence, or reckless disregard
of duty.
Under the Management Agreement, Price-Fleming is permitted to utilize
the services or facilities of others to provide it or the Fund with
statistical and other factual information, advice regarding economic factors
and trends, advice as to occasional transactions in specific securities, and
such other information, advice or assistance as Price-Fleming may deem
necessary, appropriate, or convenient for the discharge of its obligations
under the Management Agreement or otherwise helpful to the Fund.
Certain administrative support is provided by T. Rowe Price which
receives from Price-Fleming a fee of .15% of the market value of all assets in
equity accounts, .15% of the market value of all assets in active fixed income
accounts and .035% of the market value of all assets in passive fixed income
accounts under Price-Fleming's management.
Price-Fleming has entered into separate letters of agreement with
Fleming Investment Management Limited ("FIM") 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
.075% of the market value of all assets in equity accounts under
Price-Fleming's management. JFIH receives a fee of .075% of the market value
of all assets in active fixed income accounts and .0175% of such market value
in passive fixed income accounts under Price-Fleming's management.
PAGE 33
Robert Fleming personnel have extensive research resources throughout
the world. A strong emphasis is placed on direct contact with companies in
the research universe. Robert Fleming personnel, who frequently speak the
local language, have access to the full range of research products available
in the market place and are encouraged to produce independent work dedicated
solely to portfolio investment management, which adds value to that generally
available.
Management Fee
The Fund pays Price-Fleming an annual all-inclusive fee (the "Fee") of
1.05%. The Fee is paid monthly to the Price-Fleming on the first business day
of the next succeeding calendar month and is the sum of the daily Fee accruals
for each month. The daily 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 appropriate Fee rate and multiplying this product by the net
assets of the Fund for that day as determined in accordance with the Fund's
prospectus as of the close of business from the previous business day on which
the Fund was open for business.
The Management Agreement between the Fund and Price-Fleming provides
that Price-Fleming will pay all expenses of the Fund's operations, except
interest, taxes, brokerage commissions and other charges incident to the
purchase, sale or lending of the Fund's portfolio securities, directors' fee
and expenses (including counsel fees and expenses) and such nonrecurring or
extraordinary expenses that may arise, including the costs of actions, suits,
or proceedings to which the Fund is a party and the expenses the Fund may
incur as a result of its obligation to provide indemnification to its
officers, directors and agents. However, the Board of Directors of the Fund
reserves the right to impose additional fees against shareholder accounts to
defray expenses which would otherwise be paid by Price-Fleming under the
Management Agreement. The Board does not anticipate levying such charges;
such a fee, if charged, may be retained by the Fund or paid to Price-Fleming.
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Fund's distributor. Investment Services is registered as
a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. The offering of the
Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
The Underwriting Agreement provides that Investment Services will pay
all fees and expenses in connection with: printing and distributing
prospectuses and reports for use in offering and selling Fund shares;
preparing, setting in type, printing, and mailing all sales literature and
advertising; Investment Services' federal and state registrations as a
PAGE 34
broker-dealer; and offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services' expenses are
paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with
the sale of its shares in all states in which the shares are qualified and in
which Investment Services is qualified as a broker-dealer. Under the
Underwriting Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the custodian for
the Fund's U.S. securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Fund has 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.
PAGE 35
Transactions on stock exchanges involve the payment of brokerage
commissions. In transactions on stock exchanges in the United States, these
commissions are negotiated. Traditionally, commission rates have generally
not been negotiated on stock markets outside the United States. In recent
years, however, an increasing number of overseas stock markets have adopted a
system of negotiated rates, although a number of markets continue to be
subject to an established schedule of minimum commission rates. It is
expected that equity securities will ordinarily be purchased in the primary
markets, whether over-the-counter or listed, and that listed securities may be
purchased in the over-the-counter market if such market is deemed the primary
market. In the case of securities traded on the over-the-counter markets,
there is generally no stated commission, but the price usually includes an
undisclosed commission or markup. In underwritten offerings, the price
includes a disclosed, fixed commission or discount.
Fixed Income Securities
For fixed income securities, it is expected that purchases and sales
will ordinarily be transacted with the issuer, the issuer's underwriter, or
with a primary market maker acting as principal on a net basis, with no
brokerage commission being paid by the Fund. However, the price of the
securities generally includes compensation which is not disclosed separately.
Transactions placed though dealers who are serving as primary market makers
reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, Price-Fleming may
effect principal transactions on behalf of the Funds with a broker or dealer
who furnishes brokerage and/or 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.
PAGE 36
Commissions to Brokers who Furnish Research Services
Certain broker-dealers which provide quality execution services also
furnish research services to Price-Fleming. Price-Fleming has adopted a
brokerage allocation policy embodying the concepts of Section 28(e) of the
Securities Exchange Act of 1934, which permits an investment adviser to cause
its clients to pay a broker which furnishes brokerage or research services a
higher commission than that which might be charged by another broker which
does not furnish brokerage or research services, or which furnishes brokerage
or research services deemed to be of lesser value, if such commission is
deemed reasonable in relation to the brokerage and research services provided
by the broker, viewed in terms of either that particular transaction or the
overall responsibilities of the adviser with respect to the accounts as to
which it exercises investment discretion. Accordingly, Price-Fleming may
assess the reasonableness of commissions in light of the total brokerage and
research services provided by each particular broker.
Miscellaneous
Research services furnished by brokers through which Price-Fleming
effects securities transactions may be used in servicing all accounts managed
by Price-Fleming, Conversely, research services received from brokers which
execute transactions for a particular Fund will not necessarily be used 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
PAGE 37
Limited, a wholly-owned subsidiary, owns 25% of the common stock of Price-
Fleming. Fifty percent of the common stock of Price-Fleming is owned by TRP
Finance, Inc., a wholly-owned subsidiary of T. Rowe Price, and the remaining
25% is owned by Jardine Fleming Holdings Limited, a subsidiary of Jardine
Fleming Group Limited ("JFG"). JFG is 50% owned by Robert Fleming and 50%
owned by Jardine Matheson Holdings Limited. The affiliates through whose
trading desks such orders may be placed include Fleming Investment Management
Limited ("FIM"), and Robert Fleming & Co. Limited ("RF&Co."). FIM and RF&Co.
are wholly-owned subsidiaries of Robert Fleming. These trading desks will
operate under strict instructions from the Fund's portfolio manager with
respect to the terms of such transactions. Neither Robert Fleming, JFG, nor
their affiliates will receive any commission, fee, or other remuneration for
the use of their trading desks, although orders for a Fund's portfolio
transactions may be placed with affiliates of Robert Fleming and JFG who may
receive a commission.
The Board of Directors of the Funds has authorized Price-Fleming to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of each Fund's portfolio transactions,
provided that Price-Fleming believes that doing so will result in an economic
advantage (in the form of lower execution costs or otherwise) being obtained
for each Fund. These affiliates include Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, RF&Co., Jardine Fleming Australia
Securities Limited, and Robert Fleming, Inc. (a New York brokerage firm).
The above-referenced authorization was made in accordance with
Section 17(e) of the Investment Company Act of 1940 (the "1940 Act") and
Rule 17e-1 thereunder which require the Funds' independent directors to
approve the procedures under which brokerage allocation to affiliates is to be
made and to monitor such allocations on a continuing basis. Except with
respect to tender offers, it is not expected that any portion of 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.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors or by persons delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost in local currency which,
when combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
PAGE 38
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors.
Trading in the portfolio securities of the Fund may take place in
various foreign markets on certain days (such as Saturday) when the Fund is
not open for business and does not calculate its net asset value. In
addition, trading in the Fund's portfolio securities may not occur on days
when the Fund is open. The calculation of the Fund's net asset value normally
will not take place contemporaneously with the determination of the value of
the Fund's portfolio securities. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
time the Fund's net asset value is calculated will not be reflected in the
Fund's net asset value unless Price-Fleming, under the supervision of the
Fund's Board of Directors, determines that the particular event should be
taken into account in computing the Fund's net asset value.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting the Fund's liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Fund is calculated as of
the close of trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale, redemption
and repurchase of shares) for the Fund may be suspended at times (a) during
which the NYSE is closed, other than customary weekend and holiday closings,
(b) during which trading on the NYSE is restricted (c) during which an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or (d) during which
a governmental body having jurisdiction over the Fund may by order permit such
a suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
DIVIDENDS
Unless the separate account elects otherwise, dividends and capital
gain distributions will be reinvested on the reinvestment date using the NAV
per share of that date. The reinvestment date normally precedes the payment
date by about 10 days although the exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code") and
PAGE 39
also intends to diversify its assets in accordance with regulations under Code
Section 817(h).
In 1987, the Treasury Department indicated that it may issue
regulations addressing the circumstances in which a policyholder's control of
the investments of the insurance company separate account would result in the
policyholder being treated as the owner of such assets. Although there is no
present indication that such regulations will be issued, their adoption could
alter the tax treatment of the policyholder, separate account or insurance
company.
For tax purposes, the Fund must declare dividends equal to at least 98%
of ordinary income (as of December 31) and capital gains (as of October 31) in
order to avoid a federal excise tax and distribute 100% of ordinary income and
capital gains as of December 31 to avoid a federal income tax. In certain
circumstances, the Fund may not be required to comply with the excise tax
distribution requirements. It does not make any difference whether dividends
and capital gain distributions are paid in cash or in additional shares.
At the time a shareholder acquires Fund shares, the Fund's net asset
value may reflect undistributed income, capital gains or net unrealized
appreciation of securities held by the Fund which may be subsequently
distributed as either dividends or capital gain distributions.
Income received by the 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).
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income without deduction
for dividends or other distributions to shareholders; (ii) the Fund's
distributions to the extent made out of the Fund's current or accumulated
earnings and profits would be treated as ordinary dividends by shareholders
(regardless of whether they would otherwise have been considered capital gain
dividends); (iii) foreign tax credits would not "pass through" to
shareholders; and (iv) the separate accounts investing in the Fund may fail to
satisfy the requirements of Code Section 817(h) which in turn could adversely
affect the tax status of life insurance and annuity contracts with premiums
invested in the affected separate accounts.
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign investment
funds or trusts called passive foreign investment companies. In addition to
bearing their proportionate share of the fund's expenses (management fees and
operating expenses) shareholders will also indirectly bear similar expenses of
such funds. Capital gains on the sale of such holdings will be deemed to be
ordinary income regardless of how long the Fund holds its investment. In
addition, the Fund may be subject to corporate income tax and an interest
PAGE 40
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.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or
loss on the sale of debt securities attributable to foreign exchange rate
fluctuations are ordinary income for tax purposes. If the net effect of these
transactions is a gain, the dividend paid by the Fund will be increased; if
the result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments, to reflect these gains and losses will be made at the end of the
Fund's taxable year.
CAPITAL STOCK
The Fund's Charter authorizes its Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions, as
shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions 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 Corporation's Board of
Directors may increase or decrease the aggregate number of shares of stock or
the number of shares of stock of any class or series that the Funds have
authorized to issue without shareholder approval.
Except to the extent that the Corporation's Board of Directors might
provide by resolution that holders of shares of a particular class are
entitled to vote as a class on specified matters presented for a vote of the
holders of all shares entitled to vote on such matters, there would be no
right of class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no provision
entitling the holders of the present class of capital stock to a vote as a
class on any matter. Accordingly, the preferences, rights, and other
characteristics attaching to any class of shares, including the present class
of capital stock, might be altered or eliminated, or the class might be
combined with another class or classes, by action approved by the vote of the
holders of a majority of all the shares of all classes entitled to be voted on
the proposal, without any additional right to vote as a class by the holders
of the capital stock or of another affected class or classes.
The various insurance companies own the outstanding shares of the Fund
in their separate accounts. These separate accounts are registered as
investment companies under the 1940 Act or are excluded from registration.
Each insurance company, as the Shareholder, is entitled to one vote for each
full share held (and fractional votes for fractional shares held). Under the
PAGE 41
current laws the insurance companies must vote the shares held in registered
separate accounts in accordance with voting instructions received from
variable Contract Holders or Participants. Fund shares for which Contract
Holders or Participants are entitled to give voting instructions, but as to
which no voting instructions are received, and shares owned by the insurance
companies or affiliated companies in the separate accounts, will be voted in
proportion to the shares for which voting instructions have been received.
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
Investment Company Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the Securities Act of
1933, and the Fund or its shares are registered under the laws of all states
which require registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, whose address is 919 Third
Avenue, New York, New York 10022, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland
21202, are independent accountants to the Fund. The Statement of Assets and
Liabilities of the Fund as of March 28, 1994, included in the Statement of
Additional Information, has been included in reliance on the report of Price
Waterhouse, given on the authority of said firm as experts in auditing and
accounting.
PAGE 42
T. ROWE PRICE INTERNATIONAL SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 28, 1994
International
Stock
Portfolio
______________
Assets
Receivable for Fund shares sold. . . . . . . . . . . . . $100,000
Deferred organizational expenses . . . . . . . . . . . . 4,323
________
Total assets. . . . . . . . . . . . . . . . . . . . $104,323
Liabilities
Amount due Manager . . . . . . . . . . . . . . . . . . . 1,823
Accrued expenses . . . . . . . . . . . . . . . . . . . . 2,500
________
Total liabilities . . . . . . . . . . . . . . . . . 4,323
________
Net Assets - offering and redemption
price of $10.00 per share; 1,000,000,000
shares of $.0001 par value capital
stock authorized; 10,000 shares
outstanding. . . . . . . . . . . . . . . . . . . . . . . $100,000
_________
_________
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price International Series, Inc. (the "Corporation") was organized
on January 31, 1994, as a Maryland corporation and is registered under the
Investment Company Act of 1940. The Corporation is a series fund, of which
the T. Rowe Price International Stock Portfolio (the "Fund"), a diversified,
open-end management investment company is the only portfolio currently
established. The Corporation has had no operations other than those matters
related to organization and registration as an investment company, the
registration of shares for sale under the Securities Act of 1933, and the sale
of 10,000 shares of the T. Rowe Price International Stock Portfolio at $10.00
per share on March 28, 1994 to T. Rowe Price Associates, Inc. The Fund's
receivable for Fund shares sold was funded by T. Rowe Price Associates, Inc.
on March 29, 1994. The Fund has entered into an investment management
agreement with T. Rowe Price Associates, Inc. (the Manager) which is described
in the Statement of Additional Information under the heading "Investment
Management Services."
Organizational expenses of $4,323 have been accrued at March 28, 1994, and
will be amortized on a straight-line basis over a period not to exceed sixty
months. The Manager has agreed to advance certain organizational expenses
incurred by the Fund and will be reimbursed for such expenses approximately
six months after the commencement of the Fund's operations.
The Manager has agreed that in the event any of its initial shares are
redeemed during the 60-month amortization period of the deferred
organizational expenses, proceeds from a redemption of the shares representing
the initial capital will be reduced by a pro rata portion of any unamortized
organizational expenses.
PAGE 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
T. Rowe Price International Series, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of the T.
Rowe Price International Stock Portfolio (a fund constituting T. Rowe Price
International Series, Inc.) at March 28, 1994, in conformity with generally
accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/Price Waterhouse
PRICE WATERHOUSE
Baltimore, Maryland
March 29, 1994
