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PROSPECTUS
May 1, 1999
T. Rowe Price International Stock Portfolio
A stock fund seeking long-term capital growth through investments in non-U.S.
companies.
LOGO
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
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T. Rowe Price International Series, Inc. T. Rowe Price International Stock
Portfolio
Prospectus
May 1, 1999
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ABOUT THE FUND
1
Fund, Market, and Risk Characteristics 2
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Other Information About the Fund 5
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Some Basics of
Fixed
Investing
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ABOUT YOUR ACCOUNT
2
Pricing Shares and Receiving 7
Sale Proceeds
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Rights Reserved by the Fund 8
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Dividends and Distributions 9
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MORE ABOUT THE FUND
3
Organization and Management 10
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Understanding Performance Information 12
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Investment Policies and Practices 13
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Financial Highlights 17
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Rowe Price-Fleming International, Inc. ("Price-Fleming") was founded in 1979
as a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings, Ltd. As of December 31, 1998, Price-Fleming managed $32.9 billion in
foreign stocks and bonds through its offices in Baltimore, London, Tokyo,
Singapore, Hong Kong, Buenos Aires, and Paris.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
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ABOUT THE FUND
1
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
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To help you decide whether this fund is appropriate for you, this section
reviews its investment objective, strategy, and risks.
The fund is designed to serve as a funding vehicle for variable annuity and
variable life insurance contracts.
What is the fund's objective?
Long-term growth of capital through investments primarily in the common
stocks of established, non-U.S. companies.
What is the fund's principal investment strategy?
We expect to invest substantially all of the fund's assets outside the U.S.
and to diversify broadly among developed and emerging countries throughout
the world. Stock selection reflects a growth style. We may purchase the
stocks of companies of any size, but our focus will typically be on large
and, to a lesser extent, medium-sized companies.
Growth Investing
Price-Fleming (the fund's investment adviser) employs in-depth
fundamental research in an effort to identify companies capable of
achieving and sustaining above-average, long-term earnings growth. We
seek to purchase such stocks at reasonable prices in relation to present
or anticipated earnings, cash flow, or book value, and valuation factors
often influence our allocations among large-, mid-, or small-cap shares.
While we invest with an awareness of the global economic backdrop and our
outlook for individual countries, bottom-up stock selection is the focus
of our decision-making. Country allocation is driven largely by stock
selection, though we may limit investments in markets that appear to have
poor overall prospects.
In selecting stocks, we generally favor companies with one or more of the
following characteristics:
. leading market position;
. attractive business niche;
. strong franchise or natural monopoly;
. technological leadership or proprietary advantages;
. seasoned management;
. earnings growth and cash flow sufficient to support growing dividends;
and
. healthy balance sheet with relatively low debt.
While most of the fund's assets will be invested in common stocks, we may
also invest in other securities, including futures and options, in keeping
with the fund's objective.
The fund may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
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T. ROWE PRICE
What are the main risks of investing in the fund?
As with all stock funds, this fund's share price can fall because of
weakness in one or more of its primary equity markets, a particular
industry, or specific holdings. Stock markets can decline for many reasons,
including adverse political or economic developments, changes in investor
psychology, or heavy institutional selling. The prospects for an industry
or company may deteriorate because of a variety of factors, including
disappointing earnings or changes in the competitive environment. In
addition, our assessment of companies held in the fund may prove incorrect,
resulting in losses or poor performance by those holdings, even in rising
markets. Finally, the fund's investment approach could fall out of favor
with the investing public, resulting in lagging performance versus other
types of stock funds.
Even investments in countries with highly developed economies are subject
to significant risks. For example, Japanese stocks have been in a steep
decline for much of the 1990s.
Funds that invest overseas generally carry more risk than funds that invest
strictly in U.S. assets. Some particular risks affecting this fund include
the following:
. Currency risk This refers to a decline in the value of a foreign currency
versus the U.S. dollar, which reduces the dollar value of securities
denominated in that currency. The overall impact on a fund's holdings can
be significant and long-lasting, depending on the currencies represented in
the portfolio, how each one appreciates or depreciates in relation to the
U.S. dollar, and whether currency positions are hedged. Under normal
conditions, the fund does not engage in extensive foreign currency hedging
programs. Further, exchange rate movements are unpredictable and it is not
possible to effectively hedge the currency risks of many developing
countries. The introduction of the new european common currency on January
1, 1999, may have unanticipated adverse effects.
. Geographic risk The economies and financial markets of certain regions -
such as Latin America and Asia -can be highly interdependent and may
decline all at the same time.
. Emerging market risk To the extent the fund invests in emerging markets,
it is subject to the abrupt and severe price declines these holdings can
experience. The economic and political structures of developing nations, in
most cases, do not compare favorably with the U.S. or other developed
countries in terms of wealth and stability, and their financial markets
often lack liquidity. Fund performance will likely be negatively affected
by portfolio exposure to nations suffering severe inflation or currency
devaluations.
. Other risks of foreign investing Other risks result from the varying
stages of economic and political development of foreign countries, the
differing regulatory environments, trading days, and accounting standards
of non-U.S. markets, and higher transaction costs. Acts of government
interfering in capital markets, such as capital or currency controls,
nationalization of companies or industries, expropriation of assets, or
impostion of punitive taxes would also have an adverse effect on the fund.
. While certain countries have made progress in economic growth,
liberalization, fiscal discipline, and political and social stability,
there is no assurance these trends will continue.
. Futures/options risk To the extent the fund uses futures and options, it
is exposed to additional volatility and potential losses.
. Year 2000 risk Companies, organizations, governmental entities, and
markets in which the fund invests will be affected by the Year 2000
problem. (See the discussion in Section 3.)
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ABOUT THE FUND
While at this time the fund cannot predict the degree of impact, it is
possible that foreign markets will be less prepared than U.S. ones. The
fund's return could be adversely affected as a result.
As with all mutual funds, there can be no guarantee the fund will achieve
its objective.
. The fund's share price may decline, so when you sell your shares, you may
lose money.
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for the inherent risk of common stock and international
investments. This fund may be appropriate for you if you are seeking
capital appreciation potential over time and greater diversification for
your equity investments and can accept the volatility associated with
investing in stocks as well as the special risks that accompany
international investing. Be sure that your investment objective is the same
as the fund's: capital appreciation over time. If you will need the money
you plan to invest in the near future, the fund is not suitable.
. The fund should not represent your complete investment program or be used
for short-term trading purposes.
How has the fund performed in the past?
The bar chart and the average annual total return table indicate risk by
illustrating how much returns can differ from one year to the next.The
fund's past performance is no guarantee of its future returns.
The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns accompanying the following chart.
The returns are only for the years depicted in the chart.
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CHART HERE
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Calendar Year Total Returns
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1995 11.18%
1996 14.70
1997 3.09
1998 15.86
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Quarter ended Total return
Best quarter 12/31/1998 18.18%
Worst quarter 9/30/1998 -13.80%
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Table 1 Average Annual Total Returns
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Periods ended December 31, 1998
Since inception
1 year 5 years (3/31/94)
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International Stock Portfolio 15.86% -- 9.66%
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MSCI EAFE 20.33 9.50% 9.21
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These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.
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T. ROWE PRICE
OTHER INFORMATION ABOUT THE FUND
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What are some of the potential rewards of investing overseas through the fund?
Investing abroad increases the opportunities available to you. Many foreign
countries may have greater potential for economic growth than the U.S.
does. Foreign investments also provide effective diversification for an
all-U.S. portfolio, since historically their returns have not moved in sync
with U.S. stocks over long time periods. Investing a portion of your
overall portfolio in foreign stock funds can enhance your diversification
while providing the opportunity to boost long-term returns.
How does the portfolio manager try to reduce risk?
The principal tools we use to try to reduce risk are intensive research and
diversification. Currency hedging techniques may be used from time to time.
. Price-Fleming employs a team of experienced portfolio managers and
analysts, with offices in Baltimore, London, Tokyo, Singapore, Hong Kong,
Buenos Aires, and Paris. In addition to conducting our own on-site research
on portfolio countries and companies, we have close ties to investment
analysts based throughout the world. Portfolio managers keep close watch on
individual investments as well as on political and economic trends in each
country and region. Holdings are adjusted according to the manager's
analysis and outlook.
. Diversification significantly reduces, but does not eliminate, risk. The
impact on the fund's share price from a drop in the price of a particular
stock is reduced substantially by investing in a portfolio with dozens of
different companies. Likewise, the impact of unfavorable developments in a
particular country is reduced when investments are spread among many
countries. However, the economies and financial markets of countries in a
certain region may be influenced heavily by one another.
. Though the fund doesn't normally engage in extensive currency hedging, fund
managers can employ currency forwards and options to hedge the risk to the
portfolio when foreign exchange movements are expected to be unfavorable
for U.S. investors. In a general sense, these tools allow a manager to lock
in a specified exchange rate for a stated period of time. (For more
details, please see Foreign Currency Transactions under Investment Policies
and Practices.) If the manager's forecast proves to be wrong, such a hedge
may cause a loss. Also, it may be difficult or impractical to hedge
currency risk in many emerging countries.
How may the euro affect the fund?
The introduction of the new european common currency, the euro, on January
1, 1999, should not have an immediate impact on fund share prices. However,
the move to a common currency by 11 diverse nations with varying economic
and political systems does carry risks for funds with significant
investments in euro-denominated assets. (The participating nations are
Germany, France, Italy, the Netherlands, Spain, Portugal, Austria, Belgium,
Finland, Ireland, and Luxembourg.) The new currency, or the economies of
those countries, could be adversely affected if the European Economic and
Monetary Union does not appear to be working smoothly. On the other hand,
the euro may be beneficial over time by encouraging competition and
productivity.
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ABOUT THE FUND
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of investment
management practices the fund may use.
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ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
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Here are some procedures you should know when investing in the fund. For
instructions on how to purchase and redeem shares of the fund, read the
separate account prospectus.
Shares of the fund are designed to be 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.
Shares of the fund are sold and redeemed without the imposition of any
sales commission or redemption charge. However, certain other charges may
apply to annuity or life contracts. Those charges are disclosed in the
separate account prospectus.
Your ability to exchange from this fund to any other one that serves as an
investment option under your insured contract is governed by the terms of
that contract and the separate account prospectus.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the
fund is calculated at the close of the New York Stock Exchange, normally 4
p.m. ET, each day the New York Stock Exchange is open for business. To
calculate the NAV, the fund's assets are valued and totaled, liabilities
are subtracted, and the balance, called net assets, is divided by the
number of shares outstanding. Current market values are used to price fund
shares.
The fund's portfolio securities usually are valued on the basis of the most
recent closing market prices at 4 p.m. ET when the fund calculates its NAV.
Most of the securities in which the fund invests, however, are traded in
markets that close before that time. For securities primarily traded in the
Far East, for example, the most recent closing prices may be as much as 15
hours old at 4 p.m. Normally, developments that could affect the values of
portfolio securities that occur between the close of the foreign market and
4 p.m. ET will not be reflected in the fund's NAV. However, if the fund
determines that such developments are so significant that they will clearly
and materially affect the value of the fund's securities, the fund may
adjust the previous closing prices to reflect fair value or use the next
available opening market prices to value its portfolio securities.
How your purchase, sale, or exchange price is determined
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.
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ABOUT THE FUND
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.
Note: The time at which transactions and shares are priced and the time
until which orders are accepted may be changed in case of an emergency or
if the New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
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.
Excessive Trading
. T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt
management of the fund and raise its expenses. To deter such activity, the
fund has adopted an excessive trading policy. If you violate our excessive
trading policy, you may be barred indefinitely and without further notice
from further purchases of T. Rowe Price funds. Our excessive trading policy
applies to Contract Holders and Participants notwithstanding any provisions
in your insurance contract and has two parts:
. 120-day rule You can make one purchase and sale involving the same fund
within any 120-day period. For example, if you are in fund A, you can move
substantial assets from fund A to fund B and, within the next 120 days,
sell your shares in fund B to return to fund A or move to fund C. If you
exceed this limit, you are in violation of our excessive trading policy.
. 60-day rule If you purchase fund shares and hold them for less than 60
calendar days, you are in violation of our excessive trading policy.
Two types of transactions are exempt from our policy: 1) trades solely in
money market funds (exchanges between a money fund and a nonmoney fund are
not exempt); and 2) systematic purchases or redemptions.
RIGHTS RESERVED BY THE FUND
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The fund and its agents reserve the following rights: (1) to waive or lower
investment minimums; (2) to refuse any purchase or exchange order; (3) to
cancel or rescind any purchase or exchange order (including, but not
limited to, orders deemed to result in excessive trading, market timing,
fraud, or 5% ownership by individual Contract Holders or Participants) upon
notice to the Contract Holder or Participant within five business days of
the trade or if the written confirmation has not been received by the
Contract Holder or Participant, whichever is sooner; (4) to freeze any
account and suspend account services when notice has been received of a
dispute between the registered or beneficial account owners or there is
reason to believe a
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T. ROWE PRICE
fraudulent transaction may occur; (5) to otherwise modify the conditions of
purchase and any services at any time; or (6) to act on instructions
believed to be genuine. These actions will be taken when, in the sole
discretion of management, they are deemed to be in the best interest of the
fund.
In an effort to protect the fund from the possible adverse effects of a
substantial redemption in a large account, as a matter of general policy,
no Contract Holder or Participant or group of Contract Holders or
Participants controlled by the same person or group of persons will
knowingly be permitted to purchase in excess of 5% of the outstanding
shares of the fund, except upon approval of the fund's management.
DIVIDENDS AND OTHER DISTRIBUTIONS
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For a discussion of the tax status of your variable annuity contract,
please refer to the separate account prospectus.
Dividends and other 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. Dividends from net
investment income are declared and paid annually. 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.
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MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
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How is the fund organized?
The T. Rowe Price International Series, Inc. (the "corporation") was
incorporated in Maryland in 1994, and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
Currently, the corporation consists of one series, the International Stock
Portfolio.
While the fund is managed in a manner similar to that of the T. Rowe Price
International Stock Fund, investors should be aware that the fund is not
the same fund and will not have the same performance. Investments made by
the fund at any given time may not be the same as those made by the T. Rowe
Price fund. Different performance will result due to factors such as
differences in the cash flows into and out of the fund, different fees and
expenses, and differences in portfolio size and positions.
What is meant by "shares"?
Contract Holders and Participants indirectly (through the insurance company
separate account) purchase shares when they put money in a fund offered as
an investment option in their insurance contracts. These shares are part of
a fund's authorized capital stock, but share certificates are not issued.
Each share and fractional share entitles the shareholder (the insurance
company separate account) to cast one vote per share on certain fund
matters, including the election of fund directors, changes in fundamental
policies, or approval of changes in the fund's management contract.
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 1940 Act 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.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the fund will
send you proxy materials that explain the issues to be decided and include
instructions on voting by mail or telephone, or on the Internet.
Who runs the fund?
General Oversight
The corporation is governed by a Board of Directors that meets regularly to
review the fund investments, performance, expenses, and other business
affairs. The Board elects the
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corporation's officers. The policy of the corporation is that the majority
of Board members are independent of Price-Fleming.
. All decisions regarding the purchase and sale of fund investments are made
by Price-Fleming - specifically by the fund's Investment Advisory Group.
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 also has offices in
London, Tokyo, Singapore, Hong Kong, Buenos Aires, and Paris. Price-Fleming
was incorporated in Maryland in 1979 as a joint venture between T. Rowe
Price and Robert Fleming Holdings Limited (Flemings).
T. Rowe Price, Flemings, and Jardine Fleming Group Limited (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 a subsidiary of Jardine Fleming. Jardine
Fleming is owned by Flemings. 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.
. Flemings is a diversified investment organization which participates in a
global network of regional investment offices in New York, London, Zurich,
Geneva, Tokyo, Hong Kong, Manila, Kuala Lumpur, Seoul, Taipei, Bombay,
Jakarta, Singapore, Bangkok, and Johannesburg.
Portfolio Management
The fund has an Investment Advisory Group that has day-to-day
responsibility for managing the portfolio and developing and executing the
fund's investment program. The members of the advisory group are: Martin G.
Wade, John R. Ford, James B.M. Seddon, Mark C.J. Bickford-Smith, and David
J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 30 years of experience
with the Fleming Group in research, client service, and investment
management. (Fleming Group includes Robert Fleming and/or Jardine Fleming.)
John Ford joined Price-Fleming in 1982 and has 19 years of experience with
the Fleming Group in research and portfolio management. James Seddon joined
Price-Fleming in 1987 and has 12 years of portfolio management experience.
Mark Bickford-Smith joined Price-Fleming in 1995 and has 14 years of
experience in equity research and portfolio management. David Warren joined
Price-Fleming in 1983 and has 18 years of experience in equity research,
fixed income research, and portfolio management.
Portfolio Transactions
Decisions with respect to the purchase and sale of the fund's portfolio
securities on behalf of the fund are made by Price-Fleming. The
corporation's Board of Directors has authorized Price-Fleming to utilize
affiliates of Flemings and Jardine Fleming in the capacity of broker in
connection with the execution of a fund's portfolio transactions if
Price-Fleming believes that doing so would result in an economic advantage
(in the form of lower execution costs or otherwise) being obtained by the
fund.
The 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.
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ABOUT YOUR ACCOUNT
From time to time, Price-Fleming may pay participating insurance companies
for services, provided by such insurance companies for the fund or on
behalf of contract holders.
Research and Administration
Certain administrative support is provided by T. Rowe Price, which receives
from Price-Fleming a fee of 0.15% of the market value of all assets in
equity accounts, 0.15% of the market value of all assets in active fixed
income accounts, and 0.035% of the market value of all assets in passive
fixed income accounts under Price-Fleming's management. Additional
investment research and administrative support for equity investments is
provided to Price-Fleming by Fleming Investment Management Limited (FIM)
and Jardine Fleming International Holdings Limited (JFIH), for which each
receives from Price-Fleming a fee of 0.075% of the market value of all
assets in equity accounts under Price-Fleming's management. FIM and JFIH
also provide research and administration support for fixed income accounts
for which each receive a fee of 0.075% of the market value of all assets in
active fixed income accounts and 0.175% of such market value in passive
fixed income accounts under Price-Fleming's management. FIM is a wholly
owned subsidiary of Flemings. JFIH is a wholly owned subsidiary of Jardine
Fleming.
Variable Annuity and Variable Life Charges
Variable annuity and variable life fees and charges imposed on Contract
Holders and Participants by the insurance companies are in addition to
those described previously and are described in the variable annuity and
life contract prospectuses.
Variable Annuity and Variable Life Conflicts
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 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.
UNDERSTANDING PERFORMANCE INFORMATION
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This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from your insurance company.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends
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T. ROWE PRICE
and capital gains (if any) paid during the period were reinvested in
additional shares. Therefore, total return numbers include the effect of
compounding.
Advertisements for a fund may include cumulative or average annual total
return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment
may have fluctuated during the period. For example, a fund could have a
10-year positive cumulative return despite experiencing three negative
years during that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual
performance to tell you what constant year-by-year return would have
produced the investment's actual cumulative return. This gives you an idea
of an investment's annual contribution to your portfolio, provided you held
it for the entire period.
Total returns and yields 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.
INVESTMENT POLICIES AND PRACTICES
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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 follow certain "operating
policies," which can be changed without shareholder approval. However,
significant changes are discussed with shareholders in fund reports. The
fund adheres to applicable investment restrictions and policies at the time
it makes an investment. A later change in circumstances will not require
the sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total
assets in hybrid instruments. While these restrictions provide a useful
level of detail about the fund's investment program, investors should not
view them as an accurate gauge of the potential risk of such investments.
For example, in a given period, a 5% investment in hybrid instruments could
have significantly more of an impact on the fund's share price than its
weighting in the portfolio. The net effect of a particular investment
<PAGE>
ABOUT YOUR ACCOUNT
depends on its volatility and the size of its overall return in relation to
the performance of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the
contribution of various investments are discussed in the shareholder
reports sent to you.
. Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any
type of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
various types of portfolio securities and investment management practices
of the fund.
Fundamental policy The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer, or if more than 10% of
the voting securities of the issuer would be held by the fund.
The fund invests primarily in common stocks and may, to a lesser degree,
purchase other types of securities described below.
Common and Preferred Stocks
Stocks represent shares of ownership in a company. Generally, preferred
stock has a specified dividend and ranks after bonds and before common
stocks in its claim on income for dividend payments and on assets should
the company be liquidated. After other claims are satisfied, common
stockholders participate in company profits on a pro-rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a company's
stock price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities. While most preferred
stocks pay a dividend, the fund may purchase preferred stock where the
issuer has omitted, or is in danger of omitting, payment of its dividend.
Such investments would be made primarily for their capital appreciation
potential.
Convertible Securities and Warrants
The fund may invest in debt or preferred equity securities convertible
into, or exchangeable for, equity securities. Traditionally, convertible
securities have paid dividends or interest at rates higher than common
stocks but lower than nonconvertible securities. They generally participate
in the appreciation or depreciation of the underlying stock into which they
are convertible, but to a lesser degree. In recent years, convertibles have
been developed which combine higher or lower current income with options
and other features. Warrants are options to buy a stated number of shares
of common stock at a specified price anytime during the life of the
warrants (generally, two or more years).
Fixed Income Securities
From time to time, the fund may invest in any type of investment-grade
security. Such securities would be purchased in companies that 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.
<PAGE>
T. ROWE PRICE
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities
index. Such securities may bear interest or pay dividends at below market
or even relatively nominal rates. Under certain conditions, the redemption
value of such an investment could be zero.
. Hybrids can have volatile prices and limited liquidity, and their use by
the fund may not be successful.
Operating policy The fund may invest up to 10% of its total assets in
hybrid instruments.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may
involve substantial delays and additional costs.
Operating policy The fund may invest up to 15% of its net assets in
illiquid securities.
Types of Investment Management Practices
Reserve Position
The fund will hold a certain portion of its assets in money market
reserves. The fund's reserve position is expected to consist primarily of
shares of one or more T. Rowe Price internal money market funds.
Short-term, high-quality U.S. and foreign dollar-denominated money market
securities, including repurchase agreements, may also be held. For
temporary, defensive purposes, the fund may invest without limitation in
money market reserves. The effect of taking such a position is that the
fund may not achieve its investment objective. The reserve position
provides flexibility in meeting redemptions, expenses, and the timing of
new investments and can serve as a short-term defense during periods of
unusual market volatility.
Borrowing Money and Transferring Assets
The fund can borrow money from banks and other Price funds as a temporary
measure for emergency purposes, to facilitate redemption requests, or for
other purposes consistent with the fund's investment objective and program.
Such borrowings may be collateralized with fund assets, subject to
restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
Operating policy The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. The fund may not purchase additional securities when
borrowings exceed 5% of total assets.
Foreign Currency Transactions
The fund will normally conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market, or through entering into forward
contracts to purchase or sell foreign currencies. The fund will generally
not enter into a forward contract with a term greater than one year.
<PAGE>
MORE ABOUT THE FUND
The fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. First, when the fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when Price-Fleming believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that
currency), approximating the value of some or all of the fund's portfolio
securities denominated in such foreign currency. Under certain
circumstances, the fund may commit a substantial portion or the entire
value of its portfolio to the consummation of these contracts.
Price-Fleming will consider the effect such a commitment of its portfolio
to forward contracts would have on the investment program of the fund and
the flexibility of the fund to purchase additional securities. Although
forward contracts will be used primarily to protect the fund from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted, and the fund's total return
could be adversely affected as a result.
There are certain markets where it is not possible to engage in effective
foreign currency hedging. This may be true, for example, for the currencies
of various emerging markets where the foreign exchange markets are not
sufficiently developed to permit hedging activity to take place.
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to
manage or hedge risk because they enable the investor to buy or sell an
asset in the future at an agreed-upon price. Options (another type of
potentially high-risk derivative) give the investor the right (where the
investor purchases the option), or the obligation (where the investor
writes (sells) the option), to buy or sell an asset at a predetermined
price in the future. The fund may buy and sell futures and options
contracts for any number of reasons, including: to manage its exposure to
changes in securities prices and foreign currencies; as an efficient means
of adjusting its overall exposure to certain markets; in an effort to
enhance income; as a cash management tool; and to protect the value of
portfolio securities. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower 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 exceed 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund writes call or put options may not exceed 25% of its
total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Tax Consequences of Hedging
Under applicable tax law, the fund may be required to limit its gains from
hedging in foreign currency forwards, futures, and options. Although the
fund is expected to comply with such limits, the extent to which these
limits apply is subject to tax regulations as yet unissued. Hedging may
also result in the application of the mark-to-market and straddle
provisions of the Internal Revenue Code. These provisions could result in
an increase (or decrease) in the
<PAGE>
T. ROWE PRICE
amount of taxable dividends paid by the fund and could affect whether
dividends paid by the fund are classified as capital gains or ordinary
income.
Lending of Portfolio Securities
Like other mutual funds, the fund may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The
principal risk is the potential insolvency of the broker-dealer or other
borrower. In this event, the fund could experience delays in recovering its
securities and possibly capital losses.
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund 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. A high turnover rate may
increase transaction costs and result in higher capital gain distributions
by the fund. The fund's portfolio turnover rates for the fiscal years
ending December 31, 1998, 1997, and 1996, were 18.1%, 16.6%, and 9.7%,
respectively.
Year 2000 Processing Issue
Many computer programs use two digits rather than four to identify the
year. These programs, if not adapted, will not correctly handle the change
from "99" to "00" on January 1, 2000, and will not be able to perform
necessary functions. The Year 2000 issue affects virtually all companies
and organizations.
T. Rowe Price and Price-Fleming have implemented steps intended to assure
that major computer systems and processes are capable of Year 2000
processing. We are working with third parties to assess the adequacy of
their compliance efforts and are developing contingency plans intended to
assure that third-party noncompliance will not materially affect our
operations.
Companies, organizations, governmental entities, and markets in which the
T. Rowe Price funds invest will be affected by the Year 2000 issue, but at
this time the funds cannot predict the degree of impact. For funds that
invest in foreign markets, especially emerging markets, it is possible
foreign companies and markets will not be as prepared for Year 2000 as
domestic companies and markets. To the extent the effect of Year 2000 is
negative, a fund's returns could be reduced.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
Table 2, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table
is part of the fund's financial statements, which are included in its
annual report and are incorporated by reference into the Statement of
Additional Information (available upon request). The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the fund (assuming reinvestment of all dividends and
distributions). The financial statements in
<PAGE>
MORE ABOUT THE FUND
the annual report were audited by the fund's independent accountants,
PricewaterhouseCoopers LLP.
<TABLE>
Table 2 Financial Highlights
<CAPTION>
Year ended December 31
03/31/94/*/
through
12/31/94 1995 1996 1997 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.00 $ 10.18 $ 11.26 $ 12.64 $ 12.74
Income From Investment Operations
Net investment income 0.06 0.07 0.09 0.12 0.17
--------------------------------------------------------
Net gains or losses
on securities (both
realized and 0.12 1.06 1.55 0.27/a/ 1.84
unrealized)
--------------------------------------------------------
Total from investment
operations 0.18 1.13 1.64 0.39 2.01
Less Distributions
Dividends (from net -- (0.05) (0.17) (0.12) (0.17)
investment income)
--------------------------------------------------------
Distributions (from -- -- (0.09) (0.06) (0.06)
capital gains)
--------------------------------------------------------
In excess of realized -- -- -- (0.11) --
gain
--------------------------------------------------------
Returns of capital -- -- -- -- --
--------------------------------------------------------
Total distributions -- (0.05) (0.26) (0.29) (0.23)
--------------------------------------------------------
Net asset value, $10.18 $ 11.26 $ 12.64 $ 12.74 $ 14.52
end of period
--------------------------------------------------------
Total return 1.80% 11.18% 14.70% 3.09% 15.86%
Ratios/Supplemental Data
Net assets, end of $9,095 $51,661 $210,746 $369,400 $497,946
period (in thousands)
--------------------------------------------------------
Ratio of expenses to 1.05%/b/ 1.05% 1.05% 1.05% 1.05%
average net assets
--------------------------------------------------------
Ratio of net income 1.50%/b/ 1.47% 1.22% 1.10% 1.25%
to average net assets
--------------------------------------------------------
Portfolio turnover 4.6%/b/ 17.4% 9.7% 16.6% 18.1%
rate
--------------------------------------------------------------------------------
</TABLE>
/a/The amount presented is calculated pursuant to a methodology
prescribed by the Securities and Exchange Commission for a share
outstanding throughout the period. This amount is inconsistent with
the fund's aggregate gains and losses because of the timing of sales
and redemptions of fund shares in relation to fluctuating market
values for the investment portfolio.
/b/ Annualized.
/*/ Inception date.
<PAGE>
A Statement of Additional Information about the fund has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. Further information about the fund's investments, including a review
of market conditions and the manager's recent strategies and their impact on
performance, is available in the annual and semiannual shareholder reports. To
obtain a free copy of a fund report or Statement of Additional Information, or
for inquiries, contact your insurance company.
Fund reports and Statements of Additional Information are also available from
the Securities and Exchange Commission by calling 1-800-SEC-0330 or by writing
the SEC's Public Reference Section, Washington, D.C. 20549-6009 (you will be
charged a duplicating fee); by visiting the SEC's public reference room; or by
consulting the SEC's Web site at www.sec.gov.
1940 Act File No.: 811-07145
5/1/99
LOGO
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is May 1, 1999.
T. ROWE PRICE INTERNATIONAL SERIES, INC. (the "Corporation")
T. Rowe Price International Stock Portfolio (the "Fund")
______________________________________________________________________________
Mailing Address:
T. Rowe Price Investment Services, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
1-800-638-5660
Shares of the Fund are designed to be 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 any
insurance company prospectuses or variable annuity or life contracts.
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate Fund prospectus dated May 1, 1999,
which may be obtained from T. Rowe Price Investment Services, Inc.
("Investment Services").
The Fund's financial statements for the year ended December 31, 1998, and the
report of independent accountants are included in the Fund's Annual Report
and incorporated by reference into this Statement of Additional Information.
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.
SAI-ISP 5/1/99
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock 34 Investment Restrictions 20
- ----------------------------------- ---------------------------------------
Code of Ethics 26 Legal Counsel 35
- ----------------------------------- ---------------------------------------
Custodian 26 Management of Fund 22
- ----------------------------------- ---------------------------------------
Distributor for Fund 25 Net Asset Value Per Share 30
- ----------------------------------- ---------------------------------------
Dividends and Distributions 31 Portfolio Management Practices 8
- ----------------------------------- ---------------------------------------
Federal Registration of 35 Portfolio Transactions 27
Shares
- ----------------------------------- ---------------------------------------
Independent Accountants 35 Pricing of Securities 30
- ----------------------------------- ---------------------------------------
Investment Management 24 Principal Holders of Securities 24
Services
- ----------------------------------- ---------------------------------------
Investment Objectives and 2 Risk Factors 2
Policies
- ----------------------------------- ---------------------------------------
Investment Performance 32 Tax Status 31
- ----------------------------------- ---------------------------------------
Investment Program 6
- ----------------------------------- ---------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of the Fund's investment
objectives and policies discussed in the Fund's prospectus.
The Fund will not make a material change in its investment objectives without
obtaining shareholder approval. Unless otherwise specified, the investment
programs and restrictions of the Fund are not fundamental policies. The
Fund's operating policies 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 Fund's fundamental policies 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. References to the following are as indicated:
Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
Rowe Price-Fleming International, Inc. ("Price-Fleming")
RISK FACTORS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the Fund.
The Fund's investment manager, 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 or 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
<PAGE>
marketable securities of non-United States companies which have the potential
for growth of capital. Of course, there can be no assurance that
Price-Fleming's forecasts of expected return will be reflected in the actual
returns achieved by the Funds.
Risk Factors of Foreign Investing There are special risks in foreign
investing. Certain of these risks are inherent in any international mutual
fund while others relate more to the countries in which the Fund will invest.
Many of the risks are more pronounced for investments in developing or
emerging market countries, such as many of the countries of Asia, Latin
America, Eastern Europe, Russia, Africa, and the Middle East. Although there
is no universally accepted definition, a developing country is generally
considered to be a country which is in the initial stages of its
industrialization cycle with a per capita gross national product of less than
$8,000.
. General Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Funds, and there can be no assurance that the Funds' investment policies will
be successful, or that its investment objectives will be attained. The Funds
are designed for individual and institutional investors seeking to diversify
beyond the United States in actively researched and managed portfolios, and
are intended for long-term investors who can accept the risks entailed when
investing in foreign securities.
. Political and Economic Factors Individual foreign economies of certain
countries 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 1994-1995,
the Mexican peso plunged in value setting off a severe crisis in the Mexican
economy. Asia is still coming to terms with its own crisis and recessionary
conditions sparked off by widespread currency weakness in late 1997. In 1998,
there was substantial turmoil in markets throughout the world. 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 and hostile relations 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 invests 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 value of the Fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens) the value of the 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 limit at times and preclude investment
in certain of such countries and 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 Funds invest. In addition, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including
in some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year. In 1998, the
government of Malaysia imposed currency
<PAGE>
controls which effectively made it impossible for foreign investors to
convert Malaysian ringgits to foreign currencies.
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on securities 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.
Investments in certain markets may be made through American Depository
Receipts ("ADRs") traded in the United States. Foreign securities markets are
generally not as developed or efficient as, and 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 comparable U.S. companies. Securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Commissions on foreign securities are generally higher
than commissions on United States exchanges, and while there is an increasing
number of overseas securities markets that have adopted a system of
negotiated rates, a number are still subject to an established schedule of
minimum commission rates. There is generally less government supervision and
regulation of foreign securities 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 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. 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 is often 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.
. 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 is higher.
. Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of Funds or other assets of the Funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
. 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.
. 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
<PAGE>
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. The collapse of the
ruble from its crawling peg exchange rate against the U.S. dollar has set
back the path of reform for several years. 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 1940 Act 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.
. Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U. S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. Certain Latin American countries also restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is
no significant foreign exchange market for many currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency transactions
designed to protect the value of the Fund's interests in securities
denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
. Asia (ex-Japan)
Political Instability The political history of certain Asian countries has
been characterized by political uncertainty, intervention by the military in
civilian and economic spheres, and political corruption. Such developments,
if they continue to occur, could reverse favorable trends toward market and
economic reform, privatization and removal of trade barriers and result in
significant disruption in securities markets.
Foreign Currency Certain Asian countries may have managed currencies which
are maintained at artificial levels to the U.S. dollar rather than at levels
determined by the market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in 1997 the Thai baht lost
46.75% of its value against the U.S. dollar. Certain Asian countries also may
restrict the free conversion of their currency into foreign currencies,
including the U.S. dollar. There is no significant foreign exchange market
for certain currencies and it would, as a result, be
<PAGE>
difficult for the Fund to engage in foreign currency transactions designed to
protect the value of the Fund's interests in securities denominated in such
currencies.
Debt A number of Asian companies are highly dependent on foreign loans for
their operation. In 1997, several Asian countries were forced to negotiate
loans from the International Monetary Fund ("IMF") and others that impose
strict repayment term schedules and require significant economic and
financial restructuring.
INVESTMENT PROGRAM
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Types of Securities
Set forth below is additional information about certain of the investments
described in the Fund's prospectus.
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a Fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the Fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the Fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of course, there is no guarantee that the strategy will be successful,
and the Fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
<PAGE>
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party of issuer of the Hybrid Instrument would be an additional risk
factor which the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
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 is 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 following: (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
<PAGE>
illiquid securities would be reviewed to determine what, if any, steps are
required to assure that the Fund does not invest more than 15% of its net
assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
Warrants
The Fund may acquire 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
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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,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
Fund will not have the right to vote on 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.
Interfund Borrowing and Lending
The Fund is a party to an exemptive order received from the SEC on December
8, 1998, that permits it to borrow money from and/or lend money to other
funds in the T. Rowe Price complex ("Price Funds"). All loans are set at an
interest rate between the rate charged on overnight repurchase agreements and
short-term bank loans. All loans are subject to numerous conditions designed
to ensure fair and equitable treatment of all participating funds. The
program is subject to the oversight and periodic review of the Boards of
Directors of the Price Funds.
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 S&P, P1 by Moody's, 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
<PAGE>
will be treated as illiquid securities. The Fund will only enter into
repurchase agreements where (1) the underlying securities are of the type
(excluding maturity limitations) which the Fund's investment guidelines would
allow it to purchase directly, (2) 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 (3) 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.
Money Market Reserves
It is expected that the Fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price and
Price-Fleming. Currently, two such money market funds are in
operation-Reserve Investment Fund ("RIF") and Government Reserve Investment
Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. Additional
series may be created in the future. These funds were created and operate
under an Exemptive Order issued by the SEC (Investment Company Act Release
No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
The GRF invests primarily in a portfolio of U.S. government-backed
securities, primarily U.S. Treasuries, and repurchase agreements thereon.
The RIF and GRF provide a very efficient means of managing the cash reserves
of the Fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The Fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.
Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.
Options
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The Fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by the Fund. In
writing covered call options, the Fund expects to generate additional premium
income which should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in Price-Fleming's opinion, are not expected to 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 generally will write only covered call options. This means that the
Fund will either own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having
<PAGE>
an exercise price equal to or less than the exercise price of the "covered"
option. Or from time to time, the Fund will write a call option that is not
covered as indicated above but where the Fund will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as permitted by the SEC having a value equal to the
fluctuating market value of the optioned securities or currencies. While such
an option would be "covered" with sufficient collateral to satisfy SEC
prohibitions on issuing senior securities, this type of strategy would expose
the Fund to the risks of writing uncovered options.
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
generally 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. If the Fund
writes an uncovered option as described above, it will bear the risk of
having to purchase the security subject to the option at a price higher than
the exercise price of the option. As the price of a security could appreciate
substantially, the Fund's loss could be significant.
The premium received is the market value of an option. The premium the Fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, Price-Fleming, in
determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Fund is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at favorable prices. If the Fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the Fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
<PAGE>
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.
The Fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the Fund's net assets. 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 to 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, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the Fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in circumstances where
Price-Fleming wishes to purchase the underlying security or currency for the
Fund's portfolio at a price lower than the current market price of the
security or currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums 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.
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. 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.
<PAGE>
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 next.
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 T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the Fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The Fund will not commit more than 5% of its assets to premiums when
purchasing put and call 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 next.
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.
<PAGE>
The Fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The Fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as loss
of the expected benefit of the transaction.
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 Over-the-Counter ("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.
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The Fund may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
Stock index futures contracts may be used to provide a hedge for a portion of
the Fund's portfolio, as a cash management tool, or as an efficient way for
Price-Fleming to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Fund's portfolio successfully, the Fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange
<PAGE>
rates and purchase such futures as an offset against the effect of expected
declines in interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. 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
If the Fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation 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 instances involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the Fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a Fund's
assets to cover or identified accounts could impede portfolio management or
the Fund's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
Trading in Futures 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, or liquid assets known as "initial margin." The margin required for
a particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
<PAGE>
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 market."
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.
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 (as adjusted by a
multiplier) 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.
Margin deposits required on futures trading are low. 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.
. Liquidity The Fund may elect to close some or all of its futures positions
at any time prior to their expiration. The Fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The Fund may close its positions by taking opposite positions which would
operate to terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the Fund, and the Fund would realize
a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have
<PAGE>
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 next, there is no
guarantee that the price of the underlying instruments will, in fact,
correlate with the price movements in the futures contract and thus provide
an offset to losses on a futures contract.
. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the Fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. Price-Fleming will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the Fund's underlying
instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is also
subject to Price-Fleming's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might decline. If this
were to occur, the Fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, Price-Fleming believes that over time
the value of the Fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that, if
the Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the Fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The Fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of 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 (another type of potentially high-risk derivative) 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
<PAGE>
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
financial 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
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the Fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. 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: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (6) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers'
orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the Fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the Fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received
<PAGE>
in respect of transactions on United States futures exchanges. In addition,
the price of any foreign futures or foreign options contract and, therefore,
the potential profit and loss thereon may be affected by any variance in the
foreign exchange rate between the time the Fund's order is placed and the
time it is liquidated, offset or exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when Price-Fleming believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount
of the foreign 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 parties 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, currency
available for cover of the forward contract(s) or other suitable cover as
permitted by the SEC. 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
<PAGE>
foreign currency. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a foreign currency
and the date it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent of the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by Price-Fleming. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and there are costs
associated with 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 options, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will
be treated as Section 1256 contracts or straddles.
Transactions that 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 (taxable at a maximum rate of 20%) or loss and
40% short-term capital gain or loss regardless of the holding period of the
instrument (ordinary income or loss for foreign exchange contracts). 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. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the Fund.
<PAGE>
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the 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. Calculation of the Fund's total assets for
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the Fund's prospectus or Statement
of Additional Information will not include cash collateral held in connection
with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing Borrow money except that the Fund may (i) borrow for
non-leveraging, temporary or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the Fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The Fund may borrow from banks, other
Price Funds, or other persons to the extent permitted by applicable law;
(2) Commodities Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;
(3) Industry Concentration Purchase the securities of any issuer if, as a
result, more than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry;
(4) Loans Make loans, although the Fund may (i) lend portfolio securities and
participate in an interfund lending program 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 its total assets,
more than 5% of the value of the Fund's total assets would be invested in
the securities of a single issuer, except securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of 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, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the Fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act; or
<PAGE>
(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 1933 Act 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 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 semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.
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 Purchase additional securities when money borrowed exceeds 5%
of its total assets;
The Fund will limit borrowing for any variable annuity separate account
to (a) 10% of net asset value when borrowing for any general purpose, and
(b) 25% of net asset value when borrowing as a temporary measure to
facilitate redemptions.
Net asset value of a portfolio is the market value of all investments or
assets owned less outstanding liabilities of the portfolio at the time
that any new or additional borrowing is undertaken.
(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 options would exceed 5% of the Fund's net asset value;
(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% of its net assets would be invested in such securities;
(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; or (ii)
securities of the Reserve Investment or Government Reserve Investment
Funds;
(6) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging or hypothecating may not exceed
33/1//\\/3/\\% of the Fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the Fund would be invested in such
programs;
<PAGE>
(9) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(10) Short Sales Effect short sales of securities; or
(11) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the Fund would be invested in warrants.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment funds to permit indirect foreign investment in
such securities. For tax purposes, these funds may be known as Passive
Foreign Investment Companies. Each Fund is subject to certain percentage
limitations under the 1940 Act and certain states relating to the purchase of
securities of investment companies, and may be subject to the limitation that
no more than 10% of the value of the Fund's total assets may be invested in
such securities.
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 (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.
MANAGEMENT OF THE 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 as defined under Section
2(a)(19) of the 1940 Act 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.
Independent Directors/(a)/
ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, 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., 1/27/43, Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm; formerly (5/89-6/95) Principal,
Overseas Partners, Inc., a financial investment firm; formerly (6/65-3/89)
Director and Vice President; Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc., Baltimore,
Maryland; Address: 925 Cleveland Street, #177, Greenville, South Carolina
29601
PAUL M. WYTHES, 6/23/33, Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership, providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005
(a) Unless otherwise indicated, the Independent Directors have been at their
respective companies for at least five years.
<PAGE>
Inside Directors/Officers
* M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
* MARTIN G. WADE, 2/16/43, Director and President - Director, Chief
Investment Officer; and Vice Chairman of the Board, Price-Fleming; Director,
Robert Fleming Holdings Limited; Director, Robert Fleming Asset Management;
Address: 25 Copthall Avenue, London, EC2R 7DR, England
MARK C.J. BICKFORD-SMITH, 4/30/62, Vice President -Vice President and
portfolio manager of Price-Fleming; formerly a Director and portfolio manager
of Jardine Fleming Investment Management
JOHN R. FORD, 11/25/57, Vice President -Executive Vice President and Chief
Investment Officer, Price-Fleming; Chartered Financial Analyst
HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, Price-Fleming and
T. Rowe Price Retirement Plan Services, Inc.; Director and 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
GEORGE A. MURNAGHAN, 5/1/56, Vice President -Managing Director, T. Rowe
Price; Executive Vice President, Price-Fleming; Vice President, T. Rowe Price
Trust Company and T. Rowe Price Investment Services, Inc.
JAMES S. RIEPE, 6/25/43, Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
JAMES B.M. SEDDON, 6/17/64, Vice President -Vice President, Price-Fleming
DAVID J.L. WARREN, 4/14/57, Vice President -President, Price-Fleming
WILLIAM F. WENDLER II, 3/14/62, Vice President -Vice President, T. Rowe
Price, Price-Fleming, and T. Rowe Price Investment Services, Inc.
EDWARD A. WIESE, 4/12/59, Vice President -Vice President, T. Rowe Price and
T. Rowe Price Trust Company
PATRICIA S. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
CARMEN F. DEYESU, 8/1/41, Treasurer-Vice President, T. Rowe Price, T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
ANN B. CRANMER, 3/23/47, Assistant Vice President-Vice President,
Price-Fleming
ROGER L. FIERY III, 2/10/59, Assistant Vice President-Vice President,
Price-Fleming and T. Rowe Price
LEAH P. HOLMES, 2/11/44, Assistant Vice President-Vice President,
Price-Fleming; Assistant Vice President, T. Rowe Price
INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price
Compensation Table
The Fund does not pay pension or retirement benefits to its officers or
directors. Also, any director of the Fund who is an officer or employee of T.
Rowe Price or Price-Fleming does not receive any remuneration from the Fund.
<PAGE>
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and
Position ------- Fund Complex Paid to Directors(b)
- -------------------------------------- ---------------------------------
- ----------------------------------------------------------------------------
---------------------------------------------------------------------------------
<C> <S> <S>
Anthony W. Deering, Director $1,897 $80,000
Donald W. Dick, Jr., Director 1,853 82,000
Paul M. Wythes, Director 1,853 80,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts in this column are based on accrued compensation for calendar
year 1998.
(b) Amounts in this column are based on compensation received from January
1, 1998, to December 31, 1998. The T. Rowe Price complex included 87 funds
as of December 31, 1998.
The Fund's Executive Committee, consisting of the Fund's interested
directors, has been authorized by its respective Board of Directors to
exercise all powers of the Board to manage the Funds in the intervals between
meetings of the Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors of the Fund, as
a group, owned less than 1% of the outstanding shares of the Fund.
As of April 1, 1999, the following shareholders beneficially owned more than
5% of the outstanding shares of the Fund:
CUNA Mutual Life Insurance Company, Century Variable Annuity Account, c/o
Fund Accounting, 2000 Heritage Way, Waverly, IA 50677-9208; SMA Life, 440
Lincoln Street S134, Worcester, MA 01653-0002; Lincoln National Life
Insurance Co., Separate Account L, Mutual fund Accounting 4C-01, Attn.:
Theresa Burke, 1300 South Clinton Street, Fort Wayne, IN 46802-3518; United
of Omaha-Series V, Attn.: John Martin, Corporate General Ledger, Mutual of
Omaha Plaza, Omaha, NE 68175; PRUCO Life Flexible Premium Variable Annuity
Account, Attn.: Kathy McClunn/SEP, 213 Washington St., 7th Floor, Newark, NJ
07102-2917.
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 objectives, 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 and corporate
records; registering and qualifying Fund shares under federal 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.
<PAGE>
Under the Management Agreement, Price-Fleming is permitted to utilize the
services or facilities of others to provide it or the Funds with statistical
and other factual information, advice regarding economic factors and trends,
advice as to occasional transactions in specific securities, and such other
information, advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations under the
Management Agreement or otherwise helpful to the Funds.
Certain administrative support is provided by T. Rowe Price, which receives
from Price-Fleming a fee of 0.15% of the market value of all assets in equity
accounts, 0.15% of the market value of all assets in active fixed income
accounts, and 0.035% of the market value of all assets in passive fixed
income accounts under Price-Fleming's management. Additional investment
research and administrative support for equity investments is provided to
Price-Fleming by Fleming Investment Management Limited (FIM) and Jardine
Fleming International Holdings Limited (JFIH), for which each receives from
Price-Fleming a fee of 0.075% of the market value of all assets in equity
accounts under Price-Fleming's management. FIM and JFIH also provide research
and administration support for fixed income accounts for which each receive a
fee of 0.075% of the market value of all assets in active fixed income
accounts and 0.175% of such market value in passive fixed income accounts
under Price-Fleming's management. FIM is a wholly owned subsidiary of
Flemings. JFIH is a wholly owned subsidiary of Jardine Fleming.
Under these agreements, Price-Fleming paid the following amounts for the
years indicated:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C>
$455,460.00 $983,937.75 $1,379,891.25
</TABLE>
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.
Under the Management Agreement, the Fund paid Price-Fleming the following
amounts for the years indicated:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C>
$1,125,000 $2,791,000 $3,755,000
</TABLE>
DISTRIBUTOR FOR THE FUND
-------------------------------------------------------------------------------
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.
<PAGE>
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: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling Fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling 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 the various states 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 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. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
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 as are approved
in accordance with regulations under the 1940 Act. The address for The Chase
Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
2HD, England.
CODE OF ETHICS
-------------------------------------------------------------------------------
The Fund's investment adviser (Price-Fleming) has a written Code of Ethics
which requires all employees to obtain prior clearance before engaging in
personal securities transactions. Transactions must be executed within three
business days of their clearance. In addition, all employees must report
their personal securities transactions within 10 days after the end of the
calendar quarter. Employees will not be permitted to effect transactions in a
security: if there are pending client orders in the security; the security
has been purchased or sold by a client within seven calendar days; the
security is being considered for purchase for a client; or the security is
subject to internal trading restrictions. In addition, employees are
prohibited from profiting from short-term trading (e.g., purchases and sales
involving the same security within 60 days). Any material violation of the
Code of Ethics is reported to the Board of the Fund. The Board also reviews
the administration of the Code of Ethics on an annual basis.
<PAGE>
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by Price-Fleming. Price-Fleming is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
How Brokers and Dealers Are Selected
Equity Securities
In purchasing and selling equity securities, it is Price-Fleming's policy to
obtain quality execution at the most favorable prices through responsible
brokers and dealers and, in the case of agency transactions, at competitive
commission rates. However, under certain conditions, the Fund may pay higher
brokerage commissions in return for brokerage and research services. As a
general practice, over-the-counter orders are executed with market-makers. In
selecting among market-makers, Price-Fleming generally seeks to select those
it believes to be actively and effectively trading the security being
purchased or sold. In selecting broker-dealers to execute the Fund's
portfolio transactions, consideration is given to such factors as the price
of the security, the rate of the commission, the size and difficulty of the
order, the reliability, integrity, financial condition, general execution and
operational capabilities of competing brokers and dealers, their expertise in
particular markets and brokerage and research services provided by them. 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 services.
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 through dealers who are serving as primary market makers
reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, Price-Fleming may effect
principal transactions on behalf of the Funds with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. The prices the Fund pays to
underwriters of newly-issued securities usually include a concession paid by
the issuer to the underwriter. Price-Fleming may receive research services in
connection with brokerage transactions, including designations in fixed price
offerings.
Price-Fleming may cause a Fund to pay a broker-dealer who furnishes brokerage
and/or research services a commission for executing a transaction that is in
excess of the commission another broker-dealer would have received for
executing the transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or research services
which have been provided. In some cases, research services are generated by
third parties but are provided to Price-Fleming by or through broker-dealers.
<PAGE>
How Evaluations Are Made of the Overall Reasonableness of Brokerage Commissions
Paid
On a continuing basis, Price-Fleming seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
Price-Fleming considers: (a) historical commission rates; (b) rates which
other institutional investors are paying, based on available public
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business
done with a particular firm over a period of time; and (g) the extent to
which the broker or dealer has capital at risk in the transaction.
Descriptions of Research Services Received From Brokers and Dealers
Price-Fleming receives a wide range of research services from brokers and
dealers covering investment opportunities throughout the world, including
information on the economies, industries, groups of securities, individual
companies, statistics, political developments, technical market action,
pricing and appraisal services, and performance analyses of all the countries
in which a Fund's portfolio is likely to be invested. Price-Fleming cannot
readily determine the extent to which commissions charged by brokers reflect
the value of their research services, but brokers occasionally suggest a
level of business they would like to receive in return for the brokerage and
research services they provide. To the extent that research services of value
are provided by brokers, Price-Fleming may be relieved of expenses which it
might otherwise bear. In some cases, research services are generated by third
parties but are provided to Price-Fleming by or through brokers.
Commissions to Brokers Who Furnish Research Services
Certain brokers-dealers that 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 Fund. Price-Fleming may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is Price-Fleming's policy not to favor one client over another
in making recommendations or in placing orders. Price-Fleming frequently
follows the practice of grouping orders of various clients for execution
which generally results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of transactions at
various prices on a given day, each participating client's proportionate
share of such order reflects the average price paid or received with respect
to the total order. Price-Fleming has established a general investment policy
that it will ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if, as a result
of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.
<PAGE>
The Fund does not allocate business to any broker-dealer on the basis of its
sales of the Fund's shares. However, this does not mean that broker-dealers
who purchase Fund shares for their clients will not receive business from the
Fund.
Transactions With Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
Price-Fleming, Price-Fleming is responsible not only for making decisions
with respect to the purchase and sale of the Fund's portfolio securities, but
also for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
It is expected, from time to time, that Price-Fleming may place orders for
the Fund's portfolio transactions with broker-dealer affiliates of Robert
Fleming Holdings Limited ("Robert Fleming" or "Flemings"), an affiliate of
Price-Fleming. Robert Fleming, through Copthall Overseas Limited, a wholly
owned subsidiary, owns 25% of the common stock of Price-Fleming. Fifty
percent of the common stock of Price-Fleming is owned by TRP Finance, Inc., a
wholly owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of Jardine Fleming Group
Limited ("JFG"). JFG is owned by Robert Fleming. 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"), RF&Co., Robert Fleming, Inc. (a New York brokerage firm), Ord
Minnett, Stockbrokers Botswana Ltd, and Fleming Martin.
The following amounts and percentages were paid to JFS during the last three
fiscal years:
<TABLE>
<CAPTION>
Year Total Brokerage Commissions Aggregate Brokerage Commissions Aggregate Dollar Amount
---- --------------------------- ------------------------------- -----------------------
<S> <C> <C> <C>
1998 $11,069 0.26% 0.62%
1997 10,325 1.53 1.07
1996 6,154 1.44 1.05
</TABLE>
The following amounts and percentages were paid to RF&Co during the last
three fiscal year:
<TABLE>
<CAPTION>
Year Total Brokerage Commissions Aggregate Brokerage Commissions Aggregate Dollar Amount
---- --------------------------- ------------------------------- -----------------------
<S> <C> <C> <C>
1998 $14,352 3.51% 4.08%
1997 14,527 2.16 2.51
1996 853 0.20 0.19
</TABLE>
The following amounts and percentages were paid to Ord Minnett during the
last three fiscal years:
<TABLE>
<CAPTION>
Year Total Brokerage Commissions Aggregate Brokerage Commissions Aggregate Dollar Amount
---- --------------------------- ------------------------------- -----------------------
<S> <C> <C> <C>
1998 $2,788 0.68% 0.51%
1997 1,584 0.24 0.16
1996 6,970 1.61 2.42
</TABLE>
<PAGE>
Other
For the fiscal years ended December 31, 1998, 1997, and 1996, the total
brokerage commissions paid by the Fund, including the discounts received by
securities dealers in connection with underwritings, were $409,000, $674,000,
and $432,043, respectively. Of these commissions, approximately 95.5%, 96.1%,
and 97%, respectively, were paid to firms which provided research,
statistical, or other services to Price-Fleming in connection with the
management of the Fund or, in some cases, to the Fund.
The portfolio turnover rates for the fiscal years ending December 31, 1998,
1997, and 1996, were 18.2%, 16.6%, and 9.7%, respectively.
PRICING OF SECURITIES
-------------------------------------------------------------------------------
Equity securities are valued at the last quoted sales price at the time the
valuations are made. A security that 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.
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 amortized cost in local
currency which, when combined with accrued interest, approximates fair value.
For the purposes of determining the Fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value, are stated at fair
value as determined in good faith by or under the supervision of the officers
of the Fund, as authorized by the Board of Directors.
Trading in the portfolio securities of each Fund may take place in various
foreign markets on certain days (such as Saturday) when the Funds are not
open for business and do not calculate their net asset values. In addition,
trading in a Fund's portfolio securities may not occur on days when the Fund
is open.
NET ASSET VALUE PER SHARE
-------------------------------------------------------------------------------
The purchase and redemption price of the Fund's shares is equal to the Fund's
net asset value per share or share price. The Fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the Fund is normally
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, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
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 SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c),
or (d) exist.
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless the separate account elects otherwise, the Fund's annual capital gain
distribution will be reinvested on the reinvestment date using the NAV per
share of that date. The reinvestment date normally precedes the payment date
by one day, although the exact timing is subject to change and can be as
great as 10 days.
TAX STATUS
-------------------------------------------------------------------------------
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code and also intends to diversify its assets in
accordance with regulations under Code Section 817(h).
Dividends and distributions paid by the Fund (other than Global Stock Fund)
are not eligible for the dividends-received deduction for corporate
shareholders, if as expected, none of the Fund's income consists of dividends
paid by United States corporations. Income dividends paid by the Global Stock
Fund are eligible for the dividends-received deduction for corporate
shareholders, only to the extent the Global Stock Fund's income consists of
dividends paid by United States Corporations. Capital gain distributions paid
from this Fund is never eligible for this deduction. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends by
December 31 of each year equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to avoid a federal
excise tax and distribute within 12 months 100% of ordinary income and
capital gains as of December 31 to avoid federal income tax.
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate
fluctuation, are taxable as ordinary income. If the net effect of these
transactions is a gain, the ordinary income dividend paid by the Fund will be
increased. If the result is a loss, the income dividend paid by the Fund will
be decreased, or to the extent such dividend has already been paid a portion
may be classified as a return of capital. Adjustments, to reflect these gains
and losses will be made at the end of the Fund's taxable year.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to you of such
amounts, although constituting a return of your investment, would be taxable
either as dividends or capital gain distributions. For federal income tax
purposes, the Fund is permitted to carry forward its net realized capital
losses, if any, for eight years and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute
such gains.
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 the Fund's total assets at the close of its
taxable year comprise securities issued by foreign corporations or
governments, the Fund may file an election with the Internal Revenue Service
to "pass through" to the Fund's shareholders the amount of any foreign income
taxes paid by the Fund. Pursuant to this election, shareholders will be
required to: (1) include in gross income, even though not actually received,
their respective pro rata share of foreign taxes paid by the Fund; (2) treat
their pro rata share of foreign taxes as paid by them; and (3) either deduct
their pro rata share of foreign taxes in computing their taxable income, or
use it as a foreign tax credit against U.S. income taxes (but not both). No
deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions.
The Fund intends to meet the requirements of the Code to "pass through" to
its shareholders foreign income taxes paid, but there can be no assurance
that a Fund will be able to do so. Each shareholder will be notified within
60 days after the close of each taxable year of the Fund, if the Fund will
"pass through" foreign taxes paid for that year, and, if so, the amount of
each shareholder's pro rata share (by country) of (1) the foreign taxes paid,
and (2) the Fund's gross income from foreign sources. Of course, shareholders
who are not liable for federal income taxes, such as retirement plans
qualified under Section 401 of the Code, will not be affected by any such
"pass through" of foreign tax credits.
<PAGE>
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (1) 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; (2) the Fund's
distributions to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital gain
dividends), and the Fund may qualify for the 70% deduction for dividends
received by corporations; and (3) foreign tax credits would not "pass
through" to shareholders.
Taxation of Foreign Shareholders
The Code provides that dividends from net income (which are deemed to include
for this purpose each shareholder's pro rata share of foreign taxes paid by
the Fund--see discussion of "pass through" of the foreign tax credit to U.S.
shareholders), will be subject to U.S. tax. For shareholders who are not
engaged in a business in the U.S., this tax would be imposed at the rate of
30% upon the gross amount of the dividends in the absence of a Tax Treaty
providing for a reduced rate or exemption from U.S. taxation. Distributions
of net long-term capital gains realized by the Fund are not subject to tax
unless the foreign shareholder is a nonresident alien individual who was
physically present in the U.S. during the tax year for more than 182 days.
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. Such trusts have been the
only or primary way to invest in certain countries. In addition to bearing
their proportionate share of the trust's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses
of such trusts. Capital gains on the sale of such holdings are considered
ordinary income regardless of how long the fund held its investment. In
addition, the Fund may be subject to corporate income tax and an interest
charge on certain dividends and capital gains earned from these investments,
regardless of whether such income and gains are distributed to shareholders.
To avoid such tax and interest, the Fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; deductions for losses are allowable only to the extent
of any gains resulting from these deemed sales for prior taxable years. Such
gains and losses will be treated as ordinary income. The Fund will be
required to distribute any resulting income even though it has not sold the
security and received cash to pay such distributions.
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 gain 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
<PAGE>
specified. The annual compound rate of return for the Fund over any other
period of time will vary from the average.
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/98 12/31/98 12/31/98 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
S & P 500 Stock Index 28.57% 193.88% 479.58% 205.47%
Dow Jones Industrial
Average 18.13 173.37 461.09 180.43
CPI 1.86 12.69 36.35 11.35
International Stock 15.86 -- -- 55.05 03/31/94
Portfolio
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/98 12/31/98 12/31/98 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
S & P 500 Stock Index 28.57% 24.06% 19.21% 26.48%
Dow Jones Industrial
Average 18.13 22.28 18.82 24.22
CPI 1.86 2.42 3.15 2.29
International Stock 15.86 -- -- 9.66 03/31/94
Portfolio
- -------------------------------------------------------------------------------
</TABLE>
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the Fund's
total return performance, ranking, or any other measure of the Fund's
performance may be compared to any one or combination of the following: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
Funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities comparable to those in which the Fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the Fund or the general economic, business, investment, or
financial environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and other
persons may be used to illustrate aspects of the Fund's performance; (4) the
effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the Fund invests may be compared to
relevant indices or surveys in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by Investment
Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
financial and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the Fund;
individual securities within the Fund's portfolio; and their philosophy
regarding the selection of individual stocks, including why specific stocks
have been added, removed or excluded from the Fund's portfolio.
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, which include, but are
not limited to, 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
<PAGE>
planning for these goals and to illustrate basic principles of investing,
various worksheets and guides prepared by T. Rowe Price and/or Investment
Services may be made available.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
investors or use fund assets to finance distribution activities. These fees
are in addition to the normal advisory fees and expenses charged by all
mutual funds. There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or "load") can be
charged at the time the fund is purchased (front-end load) or at the time of
redemption (back-end load). Front-end loads are charged on the total amount
invested. Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1 plans allow for
the payment of marketing and sales expenses from fund assets. These expenses
are usually computed daily as a fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges or 12b-1 fees.
No-load funds are generally sold directly to the public without the use of
commissioned sales representatives. This means that 100% of your purchase is
invested for you.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the Fund, brokerage fees could be incurred by the
shareholder in a 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.
CAPITAL STOCK
-------------------------------------------------------------------------------
The Fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, 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 Board of Directors may
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the Fund has authorized to issue
without shareholder approval.
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.
<PAGE>
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
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 meeting of shareholders for the purpose of electing
directors unless and until such time as less than a majority of the directors
holding office have been elected by shareholders, at which time the directors
then in office will call a shareholders' meeting for the election of
directors. Except as set forth above, the directors shall continue to hold
office and may appoint successor directors. Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors of the Fund,
in which event the holders of the remaining shares will be unable to elect
any person as a director. As set forth in the By-Laws of the Corporation, a
special meeting of shareholders of the Corporation shall be called by the
Secretary of the Corporation on the written request of shareholders entitled
to cast at least 10% of all the votes of the Corporation entitled to be cast
at such meeting. Shareholders requesting such a meeting must pay to the
Corporation the reasonably estimated costs of preparing and mailing the
notice of the meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating to the
other shareholders of the Corporation to the extent required by Section 16(c)
of the 1940 Act.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The Fund's shares are registered for sale under the 1933 Act. Registration of
the Fund's shares is not required under any state law, but the Fund is
required to make certain filings with and pay fees to the states in order to
sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is 919 Third Avenue, New
York, New York 10022-9998, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the Funds.
The financial statements of the Fund for the year ended December 31, 1998,
and the report of independent accountants are included in the Fund's Annual
Report for the year ended December 31, 1998. A copy of the Annual Report
accompanies this Statement of Additional Information. The following financial
statements and
<PAGE>
the report of independent accountants appearing in the Annual Report for the
year ended December 31, 1998, are incorporated into this Statement of
Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCE:
INTERNATIONAL
STOCK PORTFOLIO
---------------
<S> <C>
Report of Independent Accountants 20
Portfolio of Investments, December 31, 1998 9-14
Statement of Assets and Liabilities, December 31, 1998 15
Statement of Operations, year ended December 31, 1998 16
Statement of Changes in Net Assets, years ended
December 31, 1998 and December 31, 1997 17
Notes to Financial Statements, December 31, 1998 18-19
Financial Highlights 8
</TABLE>
