-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pc2mUW8L8G2tEa3DGVsmiaMZX4Hc/pmpiadrzO22X+oPRDCtzRt1V5TRYYTLC8oJ 4r5S0xGIe9e9VdvhPOcZug== 0000852254-00-000006.txt : 20001215 0000852254-00-000006.hdr.sgml : 20001215 ACCESSION NUMBER: 0000852254-00-000006 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20001214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSTITUTIONAL INTERNATIONAL FUNDS INC CENTRAL INDEX KEY: 0000852254 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05833 FILM NUMBER: 788811 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT STREET STREET 2: LEGAL DEPARTMENT 7TH FLOOR CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 MAIL ADDRESS: STREET 1: 100 EAST PRATT STREET CITY: BALTIMORE STATE: MD ZIP: 21202 N-30D 1 0001.txt Annual Report October 31, 2000 Foreign Equity Fund T. Rowe Price, Invest With Confidence (registered trademark) Annual Report October 31, 2000 Foreign Equity Fund Dear Investor International stocks declined during the six months ended October 31, 2000. During the first half of your fund's fiscal year, Internet-related telecom, media, and technology stocks rose sharply. Leadership changed in the second half as a severe correction hit these sectors, while the more defensive consumer staple, pharmaceutical, and banking stocks, which had stumbled in the first half, found their footing. The recovery in defensive issues, however, failed to compensate for the steep decline in tech stocks. Performance Comparison --------------------------------------------------------------------------- Periods Ended 10/31/00 6 Months 12 Months Foreign Equity Fund -10.22% 2.45% MSCI EAFE Index -8.89 -2.66 Lipper International Funds Average -10.00 2.70 Fund performance during the past six months trailed the MSCI EAFE Index and was roughly in line with the Lipper average for similar funds. The fund's focus on telecom, media, and technology stocks, and its lower exposure to recovering defensive shares, hurt relative results. However, for the 12-month period, the media and technology sectors boosted results versus the index although the return lagged the Lipper average. The portfolio's telecom, banking, and technology hardware holdings, as well as an underweighted position in Japan and an overweighted exposure to Latin America, also lifted performance over the fund's fiscal year. Investors had driven telecom, media, and technology stocks higher in 1999 and early 2000 on the expectation that their potential for powerful growth could be sustained. However, signs of moderating demand, profit warnings, and abundant new issuance finally weighed on these sectors and pushed share prices down to more realistic levels. Investors began to focus on established companies whose shares had been beaten down, including food producers, pharmaceuticals, and banks. Broader concerns weighing on the equities markets included slower economic growth, high oil prices, and euro weakness. Economic growth eased in Europe, while in Japan the consumer sector remained weak and rising bankruptcies failed to alleviate concerns about unemployment. Economic growth in the rest of Asia was strong, although recurring worries about financial stability plagued some emerging markets. PORTFOLIO REVIEW At the end of October, Europe represented 64% of net assets, up from 59% in April. Within Europe, the U.K. remained the largest country exposure at 22% of net assets. We had 18% invested in Japan, down slightly from 20% in April. In the Far East, the weighting fell from 8% to 5%, while in Latin America 4% of the portfolio was split between Mexico and Brazil. The fund is underweighted in Europe and Japan relative to the MSCI EAFE Index, and overweighted in the Far East and Latin America. The changes in regional allocations resulted from differences in local performance, as well as from sales of stocks that had risen sharply and which we felt were unlikely to make further gains. Purchases included banks with strong market positions and restructuring potential, and stocks in commercial services. We also added to selected technology and media stocks with valuable assets that we thought were oversold. We reduced positions in technology and some media and service holdings that had soared. Geographic Diversification - -------------------------------------------------------------------------------- Europe Japan Other and Reserves Far East Latin America 64 18 9 5 4 Based on net assets as of 10/31/00. Europe Sharp declines in major telecom, media, and technology stocks and the weakness of the euro impeded stock market performance in Europe. The telecoms hurt markets in Germany and France, while large telecom handset and equipment stocks Nokia and LM Ericsson had a serious impact on Finnish and Swedish markets. On the other hand, Switzerland held up better because telecom stocks are an insignificant part of the Swiss market. Market Performance --------------------------------------------------------------------------- Six Months Local Local Currency U.S. Ended 10/31/00 Currency vs. U.S. Dollar Dollars --------------------------------------------------------------------------- Australia 6.06% -11.20% -5.82% France 0.66 -6.99 -6.37 Germany -5.58 -6.98 -12.18 Hong Kong -11.74 -0.13 -11.85 Italy 9.53 -6.98 1.88 Japan -13.51 -1.02 -14.39 Mexico -0.67 -1.87 -2.53 Netherlands 6.37 -6.98 -1.06 Singapore -10.17 -2.73 -12.63 Sweden -18.52 -10.65 -27.19 Switzerland 7.27 -4.32 2.65 United Kingdom 4.74 -7.20 -2.81 Source: RIMES Online, using MSCI indices. * Telecoms European governments began to auction off the spectrum that telecom operators need to provide third-generation, Internet-compatible mobile telephone services. In the U.K., companies paid unexpectedly high prices, and more licenses than expected were sold in Germany at generally steep prices. Telecom stocks such as British Telecom and Deutsche Telekom fell as investors worried about the high costs for services that will not be rolled out until 2002, with more players than expected in the important German market. In addition, there were fears that until the new services are launched, mobile telecom growth may slow because European penetration is already around 50%. At the end of the period, the withdrawal of one bidder from Italy's auction resulted in lower-than-expected prices. Relief over this development, the conclusion of the largest license auctions, and the low level of telecom stock prices stimulated a modest recovery. Diversified telecoms performed significantly worse than mobile telecoms because earnings from traditional fixed-line services have fallen. Mobile telecoms, including Vodafone Group and Telecom Italia Mobile, performed far better. * Technology The challenges to telecom company growth and profitability have direct implications for technology hardware companies that have benefited from strong demand. Mobile handset suppliers, component manufacturers, and equipment and infrastructure producers declined after extended periods of extraordinary gains. Despite increasing its market share, world leading handset manufacturer Nokia, our second-largest holding, fell as investors worried about future growth prospects. Results of the handset businesses at LM Ericsson and Philips Electronics were disappointing, and news from other players in the market also indicated that demand for handsets was healthy but softening. A weaker outlook for handsets and reports of poor PC sales in Europe hurt businesses that produce components, such as semiconductors. European semiconductor equipment manufacturer ASM Lithography, specialized semiconductor producer STMicroelectronics, and Philips (which has a major semiconductor business) all fell. Despite excellent results and full order books, disappointments from technology companies such as Intel in the U.S. adversely affected their performance. Optical network equipment producers such as Alcatel performed better, but as the broader sector fell they also slipped lower. Although Europe's technology hardware industry slumped over the recent six months, over the 12-month period it achieved a stunning return approached only by that of the media sector. Earnings growth of technology companies remained far superior to those of companies in other sectors. * Media The media industry performed poorly during the past six months, but 12-month returns were superior. Hopes faded that media companies could accelerate earnings by providing advertising space and program content to Internet portals and interactive TV. Signs that European economic growth was slowing, contributing to weaker advertising spending, raised concerns. French broadcaster Societe Television Francaise 1 declined after a sharp rise. Dutch directory giant VNU, which owns Nielsen Research in the U.S., also gave back some earlier gains. WPP Group was weak until the end of the period largely due to initial concerns about its acquisition of U.S. advertising agency Y&R. U.K. publisher Reed International, which had performed poorly six months ago due to its lack of Internet services, rose strongly in the recent period. New management, progress migrating publications to the Web, and the proposed acquisition of U.S. company Harcourt all supported Reed's rise. Longer term, the liberalization of advertising in Europe and increasing demand for market research and entertainment media bode well for the sector. * Financials Financial companies continued to restructure and make acquisitions. Strong results lifted Royal Bank of Scotland Group, a major holding, which is reaping the benefits of restructuring and cost-cutting after last year's acquisition of U.K. bank NatWest. In Italy, banks Banca Intesa and UniCredito Italiano, as well as insurer Alleanza Assicurazioni, performed well. Banca Intesa has a new, highly regarded CEO and has gained full control of a large subsidiary, enabling the company to fully integrate its businesses, cut costs, and reap synergies. Other European banks also made acquisitions to strengthen their market positions and leverage their expertise. Finnish/Swedish group Nordic Baltic Holding-another strong performer-acquired Christiania Bank of Norway. Dutch banking and insurance group ING Groep acquired U.S. insurer Reliastar and Aetna's financial services businesses, giving it an inside track in U.S. life and annuity premiums. Fortis began to integrate its Dutch and Belgian businesses and announced the acquisition of a Dutch insurer. Both ING and Fortis performed strongly. Swiss bank UBS acquired U.S. financial services group PaineWebber for $12 billion, while Spanish banks Banco Santander Central Hispano and Banco Bilbao Vizcaya Argentaria acquired Mexican banks to extend their presence in the rapidly growing Latin American market. * Food and Beverage Unilever, Nestle, and Diageo rose as investors sought their more predictable defensive characteristics. U.K./Dutch Unilever acquired U.S. Bestfoods for $20 billion to create the world's second-largest food manufacturer. Increased demand from emerging markets together with cost-cutting and sales of noncore, lower-return businesses helped Nestle's earnings. U.K.'s Diageo announced plans to merge its food business, Pillsbury, with General Mills in the U.S. to form the largest listed U.S. food business and the world's fourth-largest food company. Diageo will focus on its higher-margin drinks and spirits businesses. Can the Euro Also Rise? --------------------------------------------------------------------------- Understanding why the euro has been weak helps explain why it should recover. Several factors have pushed the euro-the common currency for 11 countries in Continental Europe-down 27% since its launch on January 1, 1999. Chris Rothery, a portfolio manager at T. Rowe Price International (TRPI), thinks each of these factors could moderate or reverse in the next year. Capital flows into the U.S. have risen sharply in recent years as European companies acquired an unprecedented number of U.S. businesses and as Europeans invested in U.S. financial assets. Both trends are moderating, however. This year's weakness in the U.S. stock market has made investment here less attractive. "The Nasdaq bubble appears to have been pricked, which should also take some steam out of the dollar," says Rothery. The persistent strength of the U.S. economy has also hurt the euro, as it makes the U.S. a more attractive place to invest. But U.S. growth has showed signs of slowing recently, narrowing the advantage over European growth. Higher-yielding U.S. government bonds also lured investors. Recently, however, long-term U.S. rates have declined while those in the euro zone have remained stable. Since the euro's launch, oil prices have more than tripled, and Europe's demand for the dollars needed to pay for oil has surged. But oil prices are stabilizing and expected to trend lower. While the Federal Reserve is respected and well established, the European Central Bank (ECB) has less than two years' experience. ECB officials have aggravated investors' uncertainty by making confusing remarks. Lately, ECB officials have become more politically astute and are expected to make more careful statements. Though TRPI portfolio managers have been surprised by the extent of the euro's decline, they point out that markets often overshoot. It would be a mistake for U.S. investors to shun euro assets, says Rothery. John Ford, TRPI's chief investment officer, sees Europe at an earlier stage of the economic cycle than the U.S., with greater room for productivity improvement. "If we can get into a virtuous cycle, then investors can benefit from better economic performance, higher returns on capital, and a strong chance of currency appreciation to boot," Ford says. The Euro vs. the U.S. Dollar --------------------------------------------------------------------------- Px Last 12/98 1.1667 1.1697 1.1837 1.1761 1.1628 1.1712 1.1585 1.1494 1.1560 1.1669 1.1690 1.1555 1.1613 1.1595 1.1565 1.1602 1.1588 1.1535 1.1560 1.1444 1.1420 1.1362 1.1309 1.1351 1.1314 1.1340 1.1266 1.1323 1.1315 1.1326 1.1223 1.1308 1.1223 1.1209 1.1248 1.1195 1.1069 1.1021 1.1007 1.1007 1.1034 1.1028 1.0892 1.0941 1.0875 1.0799 1.0823 1.0888 1.0881 1.0943 1.1042 1.0905 1.0932 1.0996 1.1002 1.0972 1.0896 1.0907 1.0892 1.0870 1.0839 1.0800 1.0732 1.0732 3/99 1.0762 1.0795 1.0786 1.0712 1.0830 1.0775 1.0742 1.0797 1.0804 1.0782 1.0802 1.0713 1.0705 1.0660 1.0625 1.0584 1.0646 1.0599 1.0590 1.0662 1.0620 1.0608 1.0570 1.0567 1.0630 1.0762 1.0792 1.0757 1.0782 1.0712 1.0646 1.0656 1.0659 1.0671 1.0674 1.0662 1.0623 1.0584 1.0607 1.0624 1.0443 1.0423 1.0429 1.0420 1.0448 1.0359 1.0324 1.0377 1.0328 1.0466 1.0466 1.0482 1.0519 1.0423 1.0426 1.0308 1.0343 1.0397 1.0347 1.0325 1.0337 1.0412 1.0430 1.0331 1.0319 6/99 1.0351 1.0230 1.0249 1.0223 1.0236 1.0222 1.0222 1.0196 1.0145 1.0170 1.0136 1.0190 1.0201 1.0313 1.0400 1.0500 1.0508 1.0504 1.0647 1.0632 1.0662 1.0725 1.0711 1.0691 1.0680 1.0776 1.0758 1.0742 1.0717 1.0710 1.0658 1.0674 1.0567 1.0581 1.0507 1.0520 1.0644 1.0672 1.0490 1.0544 1.0424 1.0453 1.0464 1.0482 1.0566 1.0582 1.0689 1.0612 1.0575 1.0587 1.0598 1.0538 1.0374 1.0424 1.0358 1.0409 1.0383 1.0423 1.0355 1.0491 1.0439 1.0503 1.0439 1.0462 1.0525 1.0645 9/99 1.0684 1.0725 1.0737 1.0737 1.0687 1.0717 1.0632 1.0638 1.0772 1.0806 1.0776 1.0894 1.0812 1.0825 1.0749 1.0802 1.0690 1.0675 1.0592 1.0518 1.0511 1.0549 1.0513 1.0527 1.0489 1.0375 1.0421 1.0383 1.0403 1.0447 1.0405 1.0318 1.0332 1.0302 1.0416 1.0296 1.0300 1.0321 1.0279 1.0185 1.0179 1.0171 1.0103 1.0093 1.0086 1.0013 1.0017 1.0228 1.0254 1.0278 1.0214 1.0134 1.0144 1.0057 1.0071 1.0170 1.0087 1.0133 1.0085 1.0093 1.0156 1.0110 1.0132 1.0070 1.0051 1.0086 12/99 1.0062 1.0243 1.0296 1.0321 1.0328 1.0295 1.0256 1.0336 1.0309 1.0258 1.0122 1.0122 1.0137 1.0133 1.0168 1.0098 1.0072 1.0009 1.0019 0.9882 0.9747 0.9707 0.9711 0.9765 0.9894 0.9832 0.9815 0.9855 0.9942 0.9854 0.9875 0.9783 0.9815 0.9863 0.9878 0.9839 0.9877 1.0038 1.0036 0.9920 0.9749 0.9709 0.9642 0.9727 0.9656 0.9586 0.9586 0.9584 0.9610 0.9669 0.9637 0.9642 0.9686 0.9669 0.9696 0.9721 0.9728 0.9615 0.9610 0.9715 0.9779 0.9672 0.9605 0.9514 0.9613 3/00 0.9553 0.9553 0.9596 0.9625 0.9584 0.9553 0.9627 0.9592 0.9590 0.9524 0.9622 0.9527 0.9453 0.9402 0.9374 0.9385 0.9380 0.9208 0.9235 0.9099 0.9119 0.9158 0.9100 0.8948 0.8895 0.8970 0.8977 0.9075 0.9068 0.9016 0.9197 0.9112 0.9003 0.8959 0.8946 0.8975 0.9031 0.9071 0.9044 0.9115 0.9309 0.9266 0.9301 0.9380 0.9312 0.9463 0.9479 0.9548 0.9622 0.9560 0.9536 0.9538 0.9596 0.9579 0.9547 0.9650 0.9567 0.9548 0.9442 0.9355 0.9359 0.9369 0.9459 0.9401 0.9520 6/00 0.9525 0.9502 0.9513 0.9525 0.9507 0.9484 0.9553 0.9527 0.9424 0.9372 0.9385 0.9366 0.9248 0.9246 0.9331 0.9369 0.9337 0.9385 0.9428 0.9317 0.9230 0.9266 0.9147 0.9136 0.9061 0.9083 0.9071 0.9022 0.9006 0.9083 0.9026 0.9056 0.9135 0.9161 0.9162 0.9064 0.9017 0.8964 0.9017 0.9021 0.9021 0.9002 0.8921 0.8940 0.8878 0.8997 0.8978 0.8903 0.8702 0.8713 0.8672 0.8577 0.8640 0.8594 0.8644 0.8543 0.8537 0.8509 0.8493 0.8599 0.8766 0.8745 0.8828 0.8834 0.8791 0.8827 0.8772 0.8757 0.8735 0.8692 0.8684 0.8686 0.8716 0.8683 0.8629 0.8560 0.8499 0.8544 0.8389 0.8435 0.8420 0.8354 0.8359 0.8272 0.8303 0.8405 0.8411 10/00 0.8489 Chart shows the euro-the common currency of 11 countries in Continental Europe-has declined steadily in value versus the U.S. dollar since its January 1, 1999, launch. * Pharmaceuticals Sanofi-Synthelabo, Aventis, AstraZeneca Group, and biotech company Celltech Group were among your portfolio's leading performers. Healthy sales growth and cost-cutting pushed Sanofi and Aventis higher. AstraZeneca climbed as new drugs with encouraging prospects were approved or launched. Celltech's results were above expectations, raising confidence in its already-launched drugs, strong U.S. corporate partners, and a pipeline with many late-stage drugs. * Economic Review for Europe European indicators point to gently slowing economic growth. Euro zone GDP grew 3.7% in the second quarter year-over-year. Regional business surveys and industrial production peaked around June, then eased but remained at healthy levels. Unemployment across the region continued to fall. Oil price strength and euro weakness lifted euro zone year-over-year inflation to 2.8% by September (1.4% excluding oil). Given its 2.0% inflation target, the European Central Bank raised interest rates half a percentage point in two steps, to 4.75%. The U.K. economy weakened, in part because the strength of sterling relative to the depressed euro caused difficulty for exporters. U.K. inflation remained below the Bank of England's target, and GDP rose in the third quarter. The euro and sterling both fell 7% over the six months. The decline of sterling was a welcome correction from a high level, but the euro's decline caused concern as the currency was already depressed. Factors contributing to euro weakness included the sharp increase of corporate acquisitions in the U.S. and-until recently-surprisingly strong U.S. economic growth and stock market strength. In mid-September, the European Central Bank intervened in currency markets in concert with the U.S. Federal Reserve and other G7 central banks. Progress with structural reforms continued. The German parliament's final approval of significant business tax cuts-expected to stimulate business and improve shareholder returns-was a major achievement. Germany's action spurred France and other euro zone countries to announce similar tax cuts so they would remain attractive to businesses that might otherwise relocate to countries with lower taxes. Germany later pressed ahead with proposals for important pension reforms that would further reduce the cost burden on businesses. Industry Diversification --------------------------------------------------------------------------- Percent of Net Assets 10/31/00 --------------------------------------------------------------------------- Services 29.8% Finance 21.3 Capital Equipment 18.6 Consumer Goods 14.5 Energy 6.7 Materials 1.8 Multi-industry 1.7 Reserves 5.6 Net Assets 100.0% --------------------------------------------------------------------------- Japan International concerns about technology component demand, sales by foreign investors and banks, and bankruptcies of major businesses hurt Japan's stock market. Weakness was broadly based, and only a few cyclical and defensive sectors rose. Banks, pharmaceuticals, and consumer goods declined moderately, but telecom and technology stocks fell more sharply. As a result of the controversy surrounding Bridgestone's Firestone tires, the stock and its sector suffered. Your fund had only a small position in Bridgestone, which we sold shortly after the initial allegations were revealed. * Banks The bankruptcies of major companies depressed bank stocks to multiyear lows. As fears diminished and investors continued to avoid telecom and technology stocks, the banking sector recovered somewhat. The banks resisted some requests for debt forgiveness and the government refused to rescue a major retailer. Despite these signs of progress, Japan needs to show a greater willingness to let insolvent businesses collapse rather than prop them up with subsidies. Banks continued their sales of cross-holdings in one another's shares and in other Japanese companies. The announced merger of Daichi Kangyo, IBJ, and Fuji Bank proceeded with the stock market listing of the newly formed holding company for the merged group, Mizuho Holdings. * Technology and Consumer Electronics Hardware component makers were hurt by concerns about slackening demand for mobile telecom parts, PCs, and semiconductors. Suppliers including Kyocera, Murata Manufacturing, Toshiba, and NEC announced better-than-expected results and raised their forecasts, but fears about future earnings caused their stocks to fall over the six-month period. However, they outperformed the overall market over 12 months. Canon, benefiting from its success in gaining market share as its competitors struggled, outperformed the general market during the recent six months and turned in excellent results for the fiscal year. Consumer electronics giant Matsushita Electric Industrial, known for its Panasonic brand, performed strongly, but Sony fell sharply. Parts shortages forced Sony to halve the size of its eagerly awaited PlayStation 2 launch in the U.S., and the firm's quarterly results disappointed investors. * Telecoms Following increased pressure from the U.S., the government reduced the interconnection rates that the government-controlled Nippon Telegraph & Telephone (NTT), one of our larger holdings, charges other companies. Concerns that this will increase competition and reduce NTT's revenues spurred the company to expand its international interests and acquire U.S. Web host Verio. In October, the government sold over $11 billion worth of its shares in NTT, reducing its stake to 46%. This put pressure on NTT's share price, although over the longer term reduced government control should open the door for more rigorous management that could enhance shareholder value. NTT's mobile subsidiary, NTT DoCoMo, outstripped forecasts as the number of its Internet subscribers climbed to 12 million. NTT DoCoMo also expanded abroad, buying stakes in Dutch and U.K. mobile telecom operators, signing a strategic alliance with AOL, and acquiring control of AOL's Japanese subsidiary. The prospect of further share issuance hurt NTT DoCoMo's recent performance, although the stock performed well relative to the general market over the year. * Economic Review for Japan While Japan is no longer technically in a recession, pockets of economic strength are limited to major manufacturers. The confidence of large manufacturing firms has been better than that of nonmanufacturing and smaller firms. Capital expenditure was also heavily skewed toward the large manufacturers. Second-quarter GDP was higher than anticipated, and industrial production was solid in the third quarter. However, consumers remained reluctant to spend as corporate restructuring and rising bankruptcies kept unemployment above historic levels. Perceiving the economy to be stable enough to withstand a slight interest rate increase, The Bank of Japan ended its zero-interest-rate policy and raised rates to 0.25%. Yet, the continuing fragility of the economic recovery led the government to announce an economic stimulus package amounting to $100 billion. The measure has been criticized since Japan's debt is already 130% of GDP and fiscal spending is only a short-term fix that postpones painful, but essential, structural changes. Moody's downgraded Japanese government debt, reflecting the rating agency's concern about the country's increasing indebtedness. Far East Strong oil prices and slowing global growth hurt markets across the Pacific. High levels of stock issuance planned for the coming quarters also dampened regional performance. Local problems added to the pressure on South Korea, Taiwan, and to a lesser extent India. Economic data and company results were mostly equal to or above expectations. However, other negative factors prevented telecom, media, and technology stocks from maintaining earlier peaks. Over the six-month period, banks rose as concerns about U.S. interest rate hikes subsided. * Telecom and Media Telecom stocks China Mobile (Hong Kong) and China Unicom, registered in Hong Kong but providing services across China, both reported better-than-expected results, and their subscriber numbers continued to climb sharply. The advent of mobile telecom services, marketed in ways that are affordable to the Chinese population, has opened vast markets. Hong Kong-based Internet company Pacific Century CyberWorks acquired Hong Kong's largest telecom and formed a joint venture with Australian telecom Telstra. Conglomerate Hutchison Whampoa and its parent, Cheung Kong Holdings, reported robust earnings. Hutchison's telecom interests include stakes in Vodafone Group, Voicestream, and China Unicom, as well as shared interests in several 3G licenses in Europe. * Technology Technology stocks including Samsung Electronics and Taiwan Semiconductor Manufact-uring (TSMC) struggled due to indications of slower demand for mobile handset components, weak PC sales, and falling semiconductorprices. Following earlier shortages, manufacturers over-ordered components, but demand failed to meet expectations and prices fell. Despite strong results from Samsung and TSMC, negative sentiment about the outlook drove share prices lower. * Economic Review for the Far East Economic growth and industrial production in smaller countries moderated but remained strong. In Hong Kong and China, a strong recovery took hold. The U.S. Senate's vote to grant China normal trade status removed a major hurdle in China's path to join the World Trade Organization. The government of Singapore took steps to reduce its control of business and put pressure on local companies to restructure and become globally competitive. In South Korea, the government and banks appeared to take a firmer line with debt-laden companies but failed to follow through. In Taiwan, political infighting and the poor health of the banks created uncertainty. The government stepped in with an economic stimulus package and raised the possibility of allowing foreigners to invest in or acquire Taiwanese banks. Latin America Mexican and Brazilian markets performed better than most international markets, largely because of the lack of technology stocks. The clear victory of opposition candidate Vicente Fox in Mexico's presidential election also helped. Mexico's banks and Brazil's energy companies performed strongly. The Mexican government promoted banking reforms, and the acquisition of Mexican banks by foreign banks fostered confidence in Mexico's banking system. Brazil's leading energy group, Petroleo Brasileiro (Petrobras), capped off a buoyant six months by announcing a significant oil discovery. Strong oil prices, a successful listing on the New York Stock Exchange, and the Brazilian government's steps to remove limits on energy prices contributed to Petrobras's rise over the six months. Mexico's dominant telecom, Telefonos de Mexico (Telmex), split its business into mobile and fixed-line divisions. The good news was balanced by a government decision to cut fixed-line rates that Telmex can charge and to increase competition in the industry. The Brazilian telecom sector struggled because the government announced auctions for a significant number of next-generation mobile spectrum licenses in the first quarter of 2001. * Economic Review for Latin America Mexico's fiscal prudence, progress with banking reforms, and strong exports fostered better growth, lower inflation, and a firm currency. Close ties to the booming U.S. economy and higher oil prices were other reasons for the country's prosperity. There have been concerns that the vigorous economy would suffer if the U.S. economy slowed and oil prices returned to previous levels, but banking system improvements, fiscal reforms, and other fundamental changes may enable Mexico to avoid a boom-bust scenario. In Brazil, economic recovery remained on track. During the period, the central bank cut interest rates from 18.5% to 16.5% and the government passed additional reforms. INVESTMENT OUTLOOK In Europe, increasing management focus on returns and fiscal reforms should aid earnings growth. The backdrop for stocks should also improve as interest rates and oil prices peak, and the undervalued euro begins to recover. In Japan, the economic environment is more challenging, but valuations are moving toward the bottom of their recent ranges. Although it is difficult to see a short-term catalyst for the Japanese stock market, the downside appears limited. Elsewhere in Asia, further market liberalization, structural reforms,and improved corporate governance are essential if the region's superior long-term economic growth is to translate into strong stock market performance. The recent period of greater political stability and economic health bode well for Mexico and Brazil. Internationally, economies have been slowing, but we expect them to improve by the second half of 2001. Technology sector earnings growth is likely to ease from recent peaks but should remain significantly above that of other sectors. Due to the short-term uncertainty about economic growth, oil prices, technology trends, and the direction of the euro, markets could continue to be weak or volatile. However, we expect these factors to mitigate in coming months and remain cautiously optimistic about the prospects for the fund in the year ahead. Respectfully submitted, John R. Ford President, T. Rowe Price International Funds, Inc. November 24, 2000 Portfolio Highlights Twenty-Five Largest Holdings - -------------------------------------------------------------------------------- Percent of Net Assets Company Country 10/31/00 - ------------------------------------------------------------------------------ Vodafone Group United Kingdom 3.0% Nokia Finland 2.2 Royal Bank of Scotland Group United Kingdom 2.0 Glaxo Wellcome United Kingdom 2.0 TotalFinaElf France 1.6 Shell Transport & Trading United Kingdom 1.6 Sony Japan 1.6 Vivendi France 1.6 Reed International United Kingdom 1.4 Philips Electronics Netherlands 1.4 LM Ericsson Sweden 1.4 ING Groep Netherlands 1.4 Canon Japan 1.3 Banca Intesa Italy 1.2 Cable & Wireless United Kingdom 1.2 Nestle Switzerland 1.2 Granada Compass United Kingdom 1.2 SmithKline Beecham United Kingdom 1.2 Aventis France 1.2 Matsushita Electric Industrial Japan 1.1 AXA France 1.1 VNU Netherlands 1.1 Kyocera Japan 1.1 Nippon Telegraph & Telephone Japan 1.0 Securitas Sweden 1.0 Total 36.1% Note: Table excludes reserves Security Classification Percent Market of Net Cost Value 10/31/00 Assets (000) (000) - -------------------------------------------------------------------------------- Common Stocks 93.1% $2,273,511 $2,922,604 Preferred Stocks 1.3 35,938 42,301 Short-Term Investments 0.8 23,287 23,287 Total Investments 95.2 2,332,736 2,988,192 Other Assets Less Liabilities 4.8 149,594 149,594 Net Assets 100.0% $2,482,330 $3,137,786 - -------------------------------------------------------------------------------- Summary of Investments and Cash - -------------------------------------------------------------------------------- October 31, 2000 Percent of Equities Cash Total MSCI EAFE - -------------------------------------------------------------------------------- Europe - -------------------------------------------------------------------------------- Austria -- -- -- 0.2% Belgium 0.8% -- 0.8% 0.8 Denmark 0.1 -- 0.1 0.9 Finland 2.2 -- 2.2 2.6 France 12.0 -- 12.0 11.2 Germany 3.8 -- 3.8 8.6 Ireland 0.3 -- 0.3 0.4 Italy 5.7 -- 5.7 4.5 Netherlands 6.4 -- 6.4 5.5 Norway 0.2 -- 0.2 0.4 Portugal 0.1 -- 0.1 0.5 Spain 2.7 -- 2.7 2.9 Sweden 3.6 -- 3.6 2.9 Switzerland 3.7 -- 3.7 6.1 United Kingdom 22.0 -- 22.0 21.4 Total Europe 63.6% -- 63.6% 68.9% - -------------------------------------------------------------------------------- Pacific Basin - -------------------------------------------------------------------------------- Australia 1.6% -- 1.6% 2.6% Hong Kong 2.7 -- 2.7 2.0 India 0.7 -- 0.7 -- Japan 18.4 -- 18.4 25.4 New Zealand 0.1 -- 0.1 0.1 Singapore 0.9 -- 0.9 1.0 South Korea 0.7 -- 0.7 -- Taiwan 0.6 -- 0.6 -- Total Pacific Basin 25.7% -- 25.7% 31.1% - -------------------------------------------------------------------------------- Americas - -------------------------------------------------------------------------------- Argentina -- -- -- -- Brazil 1.6% -- 1.6% -- Canada 1.3 -- 1.3 -- Chile -- -- -- -- Mexico 2.0 -- 2.0 -- Panama -- -- -- -- Peru -- -- -- -- United States 0.2 0.8% 1.0 -- Venezuela -- -- -- -- Total Americas 5.1% 0.8% 5.9% 0.0% - -------------------------------------------------------------------------------- Other Assets Less Liabilities -- 4.8 4.8 -- - -------------------------------------------------------------------------------- TOTAL 94.4% 5.6% 100.0% 100.0%* - -------------------------------------------------------------------------------- * Total may not add to 100.0% due to rounding. - -------------------------------------------------------------------------------- Foreign Equity Fund 10/31/00 Performance Comparison - -------------------------------------------------------------------------------- This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with a broad-based average or index. The index return does not reflect expenses, which have been deducted from the fund's return. Foreign Equity Fund MSCI EAFE Lipper 10/31/90 10 10 10 10/91 10.98 10.731 10.842 10/92 10.623 9.347 10.307 10/93 14.271 12.887 13.762 10/94 15.977 14.225 15.36 10/95 16.08 14.216 15.444 10/96 18.408 15.751 17.328 10/97 19.935 16.526 19.433 10/98 21.461 18.17 20.457 10/99 25.921 22.416 24.878 10/00 26.557 21.819 24.902 Total Return Performance - -------------------------------------------------------------------------------- 1 3 Calendar 1 3 5 10 Periods Ended Month Months Year- Year Years* Years* Years 10/31/00 to-Date - -------------------------------------------------------------------------------- Foreign Equity Fund -4.01% -8.15% -15.07% 2.45% 10.03% 10.56% 10.26% S&P 500 Index -0.42 0.18 -1.81 6.09 17.60 21.67 19.44 MSCI EAFE Index -2.34 -6.25 -13.71 -2.66 9.70 8.95 8.11 Lipper International -3.75 -7.71 -14.8 2.70 9.96 9.33 9.30 FT-A Euro Pacific Ind -2.81 -5.82 -14.46 -3.75 9.58 8.51 7.67 * Average annual compound total return. This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. Investment return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase. Financial Highlights Foreign Equity Fund For a share outstanding throughout each period - -------------------------------------------------------------------------------- Year Ended 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96 NET ASSET VALUE - -------------------------------------------------------------------------------- Beginning of period $ 20.08 $ 17.03 $ 16.51 $ 15.62 $ 13.99 - -------------------------------------------------------------------------------- Investment activities Net investment income (loss) 0.13 0.21 0.28 0.21 0.21 Net realized and unrealized gain (loss) 0.46 3.26 0.93 1.07 1.78 Total from investment activities 0.59 3.47 1.21 1.28 1.99 Distributions Net investment income (0.17) (0.29) (0.21) (0.22) (0.18) Net realized gain (1.34) (0.13) (0.48) (0.17) (0.18) Total distributions (1.51) (0.42) (0.69) (0.39) (0.36) NET ASSET VALUE End of period $ 19.16 $ 20.08 $ 17.03 $ 16.51 $ 15.62 - -------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------- Total return(diamond) 2.45% 20.79% 7.65% 8.30% 14.48% Ratio of total expenses to average net assets 0.74% 0.74% 0.74% 0.75% 0.76% Ratio of net investment income (loss) to average net assets 0.57% 1.08% 1.58% 1.40% 1.67% Portfolio turnover rate 39.7% 18.2% 18.6% 15.9% 13.8% Net assets, end of period (in millions) $ 3,138 $ 3,361 $ 3,204 $ 3,160 $ 2,322 (diamond) Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. The accompanying notes are an integral part of these financial statements. Portfolio of Investments - -------------------------------------------------------------------------------- Foreign Equity Fund October 31, 2000 Shares Value - -------------------------------------------------------------------------------- In thousands AUSTRALIA 1.6% Common Stocks 1.0% Brambles Industries 314,500 $ 8,154 Commonwealth Bank of Australia 337,691 5,026 Publishing & Broadcasting 1,156,904 7,898 Telstra 2,712,098 8,851 29,929 Preferred Stocks 0.6% News Corporation 2,243,362 20,117 20,117 Total Australia (Cost $44,525) 50,046 BELGIUM 0.8% Common Stocks 0.8% Dexia (EUR) 62,381 9,375 Fortis B (EUR) 376,198 11,525 Societe Europeenne des Satellites (Class A) (EUR) 16,676 2,222 UCB (EUR) 40,015 1,426 Total Belgium (Cost $14,776) 24,548 BRAZIL 1.6% Common Stocks 0.9% Embratel Participacoes ADR (USD) 151,000 2,444 Petrol Brasileiro (Petrobas) ADR (USD) * 143,400 4,168 Telebras ADR (USD) 233,052 17,071 Unibanco GDR (USD) 114,158 2,883 26,566 Preferred Stocks 0.7% Petrol Brasileiro (Petrobas) 772,060 20,468 Telesp Cellular Participacoes ADR (USD) 145,075,041 1,716 22,184 Total Brazil (Cost $45,282) 48,750 CANADA 1.3% Common Stocks 1.3% Alcan Aluminum 125,100 3,935 Celestica (USD) * 347,936 25,008 Nortel Networks (USD) 49,900 2,271 Nortel Networks 139,580 6,314 Royal Bank of Canada 108,420 $ 3,428 Total Canada (Cost $23,164) 40,956 DENMARK 0.1% Common Stocks 0.1% Tele Danmark 40,850 1,933 Total Denmark (Cost $1,523) 1,933 FINLAND 2.2% Common Stocks 2.2% Nokia (EUR) 1,701,564 70,017 Total Finland (Cost $8,593) 70,017 FRANCE 12.0% Common Stocks 12.0% Alcatel (EUR) 482,715 29,453 Altran Technologies (EUR) 28,150 5,755 Aventis (EUR) 435,086 31,383 Aventis (DAX Exchange) (EUR) 67,709 4,855 AXA (EUR) 269,411 35,665 BNP Paribas (EUR) 342,770 29,553 Bouygues (EUR) 117,960 6,006 Canal Plus (EUR) 18,190 2,632 Cap Gemini (EUR) 55,160 8,800 Compagnie de St. Gobain (EUR) 70,046 9,267 Groupe Danone (EUR) 37,240 5,208 Hermes International (EUR) 44,320 5,980 L'Oreal (EUR) 51,620 3,942 Lafarge (EUR) 19,550 1,443 Legrand (EUR) 65,339 10,535 LVMH (EUR) 52,665 3,844 Sanofi-Synthelabo (EUR) 441,140 23,210 Schneider Electric (EUR) 59,878 3,900 Societe Generale (EUR) 100,724 5,718 Societe Television Francaise 1 (EUR) 483,560 26,386 Sodexho Alliance (EUR) 26,110 4,088 STMicroelectronics (EUR) 326,989 16,496 TotalFinaElf (Class B) (EUR) 360,914 51,637 Vivendi (EUR) 695,154 49,965 Total France (Cost $253,311) 375,721 GERMANY 3.8% Common Stocks 3.8% Allianz (EUR) 52,210 $17,702 Bayer (EUR) 104,824 4,550 Bayerische Vereinsbank (EUR) 336,014 18,449 Deutsche Bank (EUR) 335,427 27,462 Deutsche Telekom (EUR) 80,762 3,033 E.On (EUR) 143,236 7,279 Gehe (EUR) 162,214 5,905 Rhoen-Klinikum (EUR) 61,502 3,353 SAP (EUR) 151,740 24,968 Siemens (EUR) 38,751 4,934 Total Germany (Cost $91,406) 117,635 HONG KONG 2.7% Common Stocks 2.7% Cheung Kong Holdings 1,665,670 18,421 China Mobile (Hong Kong) * 4,046,130 25,940 China Unicom * 1,472,000 2,954 Dao Heng Bank Group 1,265,500 6,393 Henderson Land Development 570,050 2,456 Hutchison Whampoa 1,738,626 21,624 Pacific Century CyberWorks * 7,036,327 5,413 Total Hong Kong (Cost $53,629) 83,201 INDIA 0.7% Common Stocks 0.7% Global Tele-Systems* 380,060 8,553 Hindustan Lever 1,856,000 7,064 ICICI 1,750,000 2,798 ICICI ADR (USD) 439,970 4,152 Total India (Cost $35,034) 22,567 IRELAND 0.3% Common Stocks 0.3% SmartForce ADR (USD) * 212,538 10,667 Total Ireland (Cost $5,377) 10,667 ITALY 5.7% Common Stocks 5.7% Alleanza Assicurazioni (EUR) 1,017,000 13,489 Assicurazioni Generali (EUR) 109,000 3,584 Banca Intesa (EUR) 9,059,848 37,595 Bipop-Carire (EUR) 1,641,300 $12,981 ENI (EUR) 2,744,532 14,859 Mediaset (EUR) 260,000 3,762 Mediolanum (EUR) 803,845 11,781 Olivetti (EUR) 5,029,268 15,236 San Paolo IMI (EUR) 140,006 2,269 Tecnost (EUR) * 1,608,000 5,417 Telecom Italia (EUR) 820,244 9,501 Telecom Italia Mobile (EUR) 2,987,256 25,401 UniCredito Italiano (EUR) 4,375,719 22,280 Total Italy (Cost $126,161) 178,155 JAPAN 18.4% Common Stocks 18.4% Canon 1,003,000 39,802 DDI 588 2,759 East Japan Railway 708 4,068 Fanuc 129,900 11,667 Fuji Television 1,501 16,507 Fujitsu 679,000 12,097 Furukawa Electric * 247,000 6,497 Hitachi 449,000 4,814 Ito-Yokado 113,000 5,106 Kao 203,000 6,084 Kokuyo 315,000 4,850 Kyocera 255,000 33,185 Makita 404,000 2,944 Marui 629,000 9,281 Matsushita Communication Industrial 41,000 5,373 Matsushita Electric Industrial 1,230,000 35,734 Mitsui Fudosan 1,128,000 13,667 Mizuho Holdings * 3,925 30,180 Murata Manufacturing 263,100 31,491 NEC 1,528,000 29,127 Nippon Telegraph & Telephone 3,559 32,389 Nomura Securities 1,208,000 25,629 NTT DoCoMo 984 24,258 Sankyo 401,000 8,838 Seven-Eleven Japan 212,000 13,795 Shin-Etsu Chemical 242,000 9,936 Shiseido 370,000 4,781 Softbank 89,400 $ 5,367 Sony 628,600 50,235 Sumitomo 922,000 8,112 Sumitomo Bank 1,854,000 22,513 TDK 99,000 9,980 Tokyo Electron 159,700 12,499 Toshiba 3,338,000 23,861 Yamanouchi Pharmaceutical 458,000 20,735 Total Japan (Cost $471,703) 578,161 MEXICO 2.0% Common Stocks 2.0% Femsa UBD, Units (Represents 1 Series B and 4 Series D shares) 2,164,690 8,240 Grupo Iusacell ADR (USD) * 266,000 3,458 Grupo Televisa GDR (USD) * 493,362 26,703 Telefonos de Mexico (Telmex) (Class L) ADR (USD) 474,328 25,584 Total Mexico (Cost $51,421) 63,985 NETHERLANDS 6.4% Common Stocks 6.4% ABN Amro Holding (EUR) 160,699 3,723 Akzo Nobel (EUR) 29,831 1,358 ASM Lithography (EUR) * 630,150 17,224 CSM (EUR) 178,928 4,084 Equant (EUR) * 49,010 1,641 Fortis (EUR) 535,444 16,358 ING Groep (EUR) 632,695 43,446 KPN (EUR) 145,016 2,937 Philips Electronics (EUR) 1,120,434 44,032 Royal Dutch Petroleum (EUR) 349,538 20,731 United Pan-Europe Communications (EUR) * 69,987 1,226 VNU (EUR) 707,650 33,328 Wolters Kluwer (EUR) 429,090 9,657 Total Netherlands (Cost $146,811) 199,745 NEW ZEALAND 0.1% Common Stocks 0.1% Telecom Corporation of New Zealand 1,656,592 3,666 Total New Zealand (Cost $7,359) 3,666 NORWAY 0.2% Common Stocks 0.2% Orkla (Class A) 418,395 $ 7,553 Total Norway (Cost $4,737) 7,553 PORTUGAL 0.1% Common Stocks 0.1% Jeronimo Martins (EUR) 250,281 2,413 Total Portugal (Cost $2,051) 2,413 SINGAPORE 0.9% Common Stocks 0.9% DSB Group Holdings 294,000 3,465 Flextronics (USD) * 174,200 6,614 Singapore Telecommunications 2,223,000 3,683 United Overseas Bank 2,121,560 15,704 Total Singapore (Cost $27,413) 29,466 SOUTH KOREA 0.7% Common Stocks 0.7% Korea Telecom ADR (USD) 278,000 10,251 Pohang Iron & Steel ADR (USD) 98,572 1,559 Samsung Electronics 81,583 10,220 Total South Korea (Cost $21,272) 22,030 SPAIN 2.7% Common Stocks 2.7% Banco Bilbao Vizcaya Argentaria (EUR) 1,611,523 21,470 Banco Santander Central Hispano (EUR) 1,964,384 19,037 Empresa Nacional de Electricidad (EUR) 899,108 14,649 Repsol (EUR) 438,521 6,966 Telefonica (EUR) * 856,914 16,340 Telefonica ADR (USD) * 129,700 7,515 Total Spain (Cost $70,740) 85,977 SWEDEN 3.6% Common Stocks 3.6% Atlas Copco (Class B) 88,352 1,826 Electrolux (Class B) 376,305 4,745 Hennes & Mauritz (Class B) 566,320 10,598 LM Ericsson (Class B) * 3,299,610 $43,919 Nordic Baltic Holding * 2,286,278 17,160 Nordic Baltic Holding (DKK) 352,167 2,651 Sandvik 58,670 1,295 Securitas (Class B) 1,513,135 32,254 Total Sweden (Cost $99,946) 114,448 SWITZERLAND 3.7% Common Stocks 3.7% ABB 93,947 8,349 ABB (SEK) 72,100 6,407 Adecco 21,673 14,986 Credit Suisse Group 67,555 12,665 Nestle 17,643 36,560 Roche Holding * 1,437 13,126 UBS 178,214 24,686 Total Switzerland (Cost $75,708) 116,779 TAIWAN 0.6% Common Stocks 0.6% Hon Hai Precision 1,365,100 7,143 Taiwan Semiconductor Manufacturing * 4,026,988 12,218 Total Taiwan (Cost $20,519) 19,361 UNITED KINGDOM 22.0% Common Stocks 22.0% Abbey National 424,100 5,889 AstraZeneca Group 561,307 26,420 Autonomy Corporation * 43,000 2,196 Baltimore Technologies * 338,647 2,604 BG Group 409,600 1,652 BP Amoco 1,497,304 12,698 British Telecom 1,052,000 12,349 Cable & Wireless 2,605,500 36,935 Cadbury Schweppes 1,618,378 10,044 Celltech Group * 466,000 9,385 Centrica 869,710 3,013 David S. Smith Holdings 532,185 1,174 Diageo 1,702,924 16,080 Dimension Data * 303,000 2,651 Electrocomponents 510,640 5,127 GKN 117,700 $ 1,364 Glaxo Wellcome 2,164,700 62,346 Granada Compass * 4,209,250 36,461 Granada Media * 274,103 1,607 Hays 2,313,000 12,627 Hilton Group 646,940 1,800 HSBC Holdings (HKD) 471,600 6,561 Kingfisher 1,370,977 8,235 Lattice Group * 409,600 871 Marconi 1,460,000 18,483 Reckitt Benckiser 120,000 1,580 Reed International 4,918,691 45,247 Rio Tinto 1,116,060 18,056 Royal Bank of Scotland Group 2,824,599 63,401 Shell Transport & Trading 6,275,400 50,534 SmithKline Beecham 2,812,880 36,324 Standard Chartered 1,047,000 15,115 Tesco 3,199,504 12,209 Tomkins 2,849,256 6,832 Unilever 1,416,946 9,596 United News & Media 536,510 6,681 Vodafone Group 22,568,087 94,306 WPP Group 2,322,000 31,282 Total United Kingdom (Cost $601,731) 689,735 UNITED STATES 1.0% Common Stocks 0.2% Comverse Technology * 66,145 7,390 Total United States (Cost $5,257) 7,390 SHORT-TERM INVESTMENTS 0.8% Money Market Funds 0.8% Reserve Investment Fund 6.68% # 23,287,540 23,287 Total Short-Term Investments (Cost $23,287) 23,287 Total Investments in Securities 95.2% of Net Assets (Cost $2,332,736) $2,988,192 Other Assets Less Liabilities 149,594 NET ASSETS $3,137,786 * Non-income producing # Seven-day yield ADR American depository receipt DKK Danish krone EUR Euro GDR Global depository receipt HKD Hong Kong dollar SEK Swedish krona USD U.S. dollar The accompanying notes are an integral part of these financial statements. Statement of Assets and Liabilities Foreign Equity Fund October 31, 2000 In thousands Assets Investments in securities, at value (cost $2,332,736) $2,988,192 Other assets 179,834 Total assets 3,168,026 Liabilities Total liabilities 30,240 NET ASSETS $3,137,786 ---------- Net Assets Consist of: Accumulated net investment income - net of distributions $ 17,766 Accumulated net realized gain/loss - net of distributions 227,415 Net unrealized gain (loss) 652,695 Paid-in-capital applicable to 163,747,380 shares of $0.01 par value capital stock outstanding; 1,000,000,000 shares authorized 2,239,910 NET ASSETS $3,137,786 ---------- NET ASSET VALUE PER SHARE $ 19.16 ---------- The accompanying notes are an integral part of these financial statements. Statement of Operations Foreign Equity Fund In thousands Year Ended 10/31/00 Investment Income (Loss) Income Dividend (net of foreign taxes of $5,257) $ 41,076 Interest (net of foreign taxes of $32) 6,175 Total income 47,251 Expenses Investment management 25,279 Custody and accounting 1,128 Registration 48 Shareholder servicing 34 Legal and audit 34 Directors 9 Prospectus and shareholder reports 3 Miscellaneous 17 Total expenses 26,552 Expenses paid indirectly (2) Net expenses 26,550 Net investment income (loss) 20,701 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 281,812 Foreign currency transactions (14,767) Net realized gain (loss) 267,045 Change in net unrealized gain or loss Securities (171,371) Other assets and liabilities denominated in foreign currencies (2,320) Change in net unrealized gain or loss (173,691) Net realized and unrealized gain (loss) 93,354 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 114,055 ---------- The accompanying notes are an integral part of these financial statements. Statement of Changes in Net Assets Foreign Equity Fund In thousands Year Ended 10/31/00 10/31/99 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 20,701 $ 35,439 Net realized gain (loss) 267,045 254,287 Change in net unrealized gain or loss (173,691) 328,965 Increase (decrease) in net assets from operations 114,055 618,691 Distributions to shareholders Net investment income (28,399) (53,955) Net realized gain (223,838) (24,187) Decrease in net assets from distributions (252,237) (78,142) Capital share transactions * Shares sold 605,925 534,332 Distributions reinvested 198,990 58,440 Shares redeemed (889,767) (976,185) Increase (decrease) in net assets from capital share transactions (84,852) (383,413) Net Assets Increase (decrease) during period (223,034) 157,136 Beginning of period 3,360,820 3,203,684 End of period $3,137,786 $3,360,820 ------------------------ *Share information Shares sold 28,248 28,737 Distributions reinvested 9,716 3,394 Shares redeemed (41,613) (52,874) Increase (decrease) in shares outstanding (3,649) (20,743) The accompanying notes are an integral part of these financial statements. Notes to Financial Statements Foreign Equity Fund October 31, 2000 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Institutional International Funds, Inc. (the corporation) is registered under the Investment Company Act of 1940. The Foreign Equity Fund (the fund), a diversified, open-end management investment company, is the sole portfolio established by the corporation, and commenced operations on September 7, 1989. The fund seeks long-term growth of capital through investments primarily in the common stocks of established, non-U.S. companies. The accompanying financial statements were prepared in accordance with generally accepted accounting principles, which require the use of estimates made by fund management. Valuation 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. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. 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. Currency Translation Assets and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and offer prices of such currencies against U.S. dollars quoted by a major bank. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing exchange rate on the dates of such transactions. The effect of changes in foreign exchange rates on realized and unrealized security gains and losses is reflected as a component of such gains and losses. Other Income and expenses are recorded on the accrual basis. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Dividend income and distributions to shareholders are recorded by the fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with federal income tax regulations and may differ from net investment income and realized gains determined in accordance with generally accepted accounting principles. Expenses paid indirectly reflect credits earned on daily uninvested cash balances at the custodian and are used to reduce the fund's custody charges. NOTE 2 - INVESTMENT TRANSACTIONS Purchases and sales of portfolio securities, other than short-term securities, aggregated $1,364,427,000 and $1,741,475,000, respectively, for the year ended October 31, 2000. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. In order for the fund's capital accounts and distributions to shareholders to reflect the tax character of certain transactions, the following reclassifications were made during the year ended October 31, 2000. The reclassifications relate primarily to a tax practice that treats a portion of the proceeds from each redemption of capital shares as a distribution of taxable net investment income and/or realized capital gain. The results of operations and net assets were not affected by the increases/(decreases) to these accounts. - -------------------------------------------------------------------------------- Undistributed net investment income $(1,782,000) Undistributed net realized gain (29,882,000) Paid-in-capital 31,664,000 At October 31, 2000, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $2,332,736,000. Net unrealized gain aggregated $655,456,000 at period-end, of which $814,549,000 related to appreciated investments and $159,093,000 to depreciated investments. NOTE 4 - FOREIGN TAXES The fund is subject to foreign income taxes imposed by certain countries in which it invests. Foreign income taxes are accrued by the fund as a reduction of dividend and interest income. NOTE 5 - RELATED PARTY TRANSACTIONS The fund is managed by T. Rowe Price International, Inc. (the manager), a wholly owned subsidiary of T. Rowe Price Associates, Inc. (Price Associates). The investment management agreement between the fund and the manager provides for an annual investment management fee, of which $1,864,000 was payable at October 31, 2000. The fee is computed daily and paid monthly, and is equal to 0.70% of average daily net assets. In addition, the fund has entered into agreements with Price Associates and two wholly owned subsidiaries of Price Associates, pursuant to which the fund receives certain other services. Price Associates computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc. is the fund's transfer and dividend disbursing agent and provides shareholder and administrative services to the fund. T. Rowe Price Retirement Plan Services, Inc. provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. The fund incurred expenses pursuant to these related party agreements totaling approximately $134,000 for the year ended October 31, 2000, of which $12,000 was payable at period-end. The fund may invest in the Reserve Investment Fund and Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by Price Associates. The Reserve Funds are offered as cash management options only to mutual funds and other accounts managed by Price Associates or T. Rowe Price International, and are not available to the public. The Reserve Funds pay no investment management fees. Distributions from the Reserve Funds to the fund for the year ended October 31, 2000, totaled $5,021,000 and are reflected as interest income in the accompanying Statement of Operations. During the year ended October 31, 2000, the fund, in the ordinary course of business, placed security purchase and sale orders aggregating $83,092,000 with certain affiliates of the manager and paid commissions of $105,000 related thereto. Report of Independent Accountants To the Board of Directors of Institutional International Funds, Inc. and Shareholders of Foreign Equity Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Foreign Equity Fund (the portfolio comprising Institutional International Funds, Inc., hereafter referred to as the "Fund") at October 31, 2000, and the results of its operations, the changes in its net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2000 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland November 17, 2000 Foreign Equity Fund Tax Information (Unaudited) for the Tax Year Ended 10/31/00 - -------------------------------------------------------------------------------- We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements. The fund's distributions to shareholders included: * $612,000 from short-term capital gains, * $253,109,000 from long-term capital gains, subject to the 20% rate gains category. The fund will pass through foreign source income of $32,105,000 and foreign taxes paid of $5,289,000. Foreign Equity Fund Annual Meeting Results The T. Rowe Price Foreign Equity Fund held an annual meeting on October 25, 2000, to approve a new investment management agreement, to amend the fund's fundamental policy to permit it to engage in securities lending, to elect directors, and to ratify the appointment of PricewaterhouseCoopers LLP as the fund's independent accountants. The results of voting were as follows, by number of shares: For approval of a new investment management agreement: Affirmative: 94,404,326.715 Against: 1,012,673.609 Abstain: 388,323.499 Total: 95,805,323.823 To amend the fund's fundamental policy to permit it to engage in securities lending: Affirmative: 90,509,297.951 Against: 3,646,676.049 Abstain: 367,750.824 Broker Non-votes: 1,281,598.999 Total: 95,805,323.823 For nominees to the Board of Directors of the Foreign Equity Fund: M. David Testa Affirmative: 94,431,263.605 Withhold: 1,374,060.218 Total: 95,805,323.823 Martin G. Wade Affirmative: 94,431,263.605 Withhold: 1,374,060.218 Total: 95,805,323.823 Anthony W. Deering Affirmative: 94,431,263.605 Withhold: 1,374,060.218 Total: 95,805,323.823 Donald W. Dick, Jr. Affirmative: 94,431,263.605 Withhold: 1,374,060.218 Total: 95,805,323.823 Paul M. Wythes Affirmative: 94,431,263.605 Withhold: 1,374,060.218 Total: 95,805,323.823 To ratify the appointment of PricewaterhouseCoopers LLP as independent accountants: Affirmative: 94,428,749.657 Against: 734,777.607 Abstain: 641,796.559 Total: 95,805,323.823 -----END PRIVACY-ENHANCED MESSAGE-----