-----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, DpScCqpqBX2JJqx2r+qqUrvBt6cbgBEwnKh22l9VKB0gzN4FTMKg2twW7NIBwxzV vLA3Jvhw0hyCDw3hUex0bw== 0000852254-98-000011.txt : 19981221 0000852254-98-000011.hdr.sgml : 19981221 ACCESSION NUMBER: 0000852254-98-000011 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981030 FILED AS OF DATE: 19981218 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: 98772069 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 Annual Report October 31, 1998 Foreign Equity Fund Dear Investor The fiscal year ended October 31, 1998, comprised two quite separate parts. In the first, world stock markets recovered well from the Asian crisis of late 1997, and by July many of them had reached new highs. From this point on, investor confidence was again challenged by problems in emerging markets, but this time the culprit was Russia. The collapse of the ruble, together with Russia's de facto default on its government bonds, precipitated a severe correction in both established and less developed global markets. Despite these traumas, investor confidence did not disappear entirely, and recent months witnessed a good recovery as your fund appreciated sharply in October alone. Performance Comparison Periods Ended 10/31/98 6 Months 12 Months - -------------------------------------------------------------------------------- Foreign Equity Fund - 6.27 7.65% MSCI EAFE Index - 4.88 9.95 During the past 6- and 12-month periods, the fund's returns were behind those of the Morgan Stanley Capital International Europe Australasia and Far East (MSCI EAFE) Index. This shortfall was mainly due to the weakness of Latin America where the fund held moderate positions that are not part of the index. Stock selection, which was biased toward growth companies rather than cyclical stocks, was also adverse. For most of the year, Europe provided the safest markets for the international investor as its economies made steady progress and European currencies strengthened against the U.S. dollar. Although these markets went through an uncomfortable period in late summer, the advent of the Economic and Monetary Union (EMU) in January 1999 is an important milestone in the history of European integration and presents opportunities for both corporations and investors. In contrast, Japan's economy continued to be disappointing and a recession seems to have widened its grip. Concern focused on the inability of the authorities to confront the country's banking crisis, and a stream of disappointing corporate earnings also damaged sentiment. Elsewhere in Asia, the erstwhile tiger economies turned down following the financial collapse a year ago, but authorities in Hong Kong were at least able to fight off the speculators and maintain the currency peg to the U.S. dollar. In Latin America, there was optimism during the summer that these economies would avoid the contagion that started in the Pacific and reemerged with Russia's financial collapse in July. After all, Latin America had courageously pursued a path of reform and it appeared as though stock markets there deserved more sympathetic treatment. However, sympathy is a sentiment in short supply when fear is in the saddle, and Latin American markets were eventually dragged into the turmoil. It looks as though Brazil, the key economy in the region, has so far survived the worst of the crisis, and the recently announced $41 billion support package sponsored by the International Monetary Fund (IMF) will at least buy the country more time. INVESTMENT REVIEW Europe In May 1998, a significant event occurred along the road to EMU. This was the point at which the European Monetary Institute (EMI) would decide which candidate countries had attained the economic convergence criteria of the Maastricht Treaty and would adopt the euro as their currency on January 1, 1999. At the time it was negotiated, the Maastricht Treaty laid down tough benchmarks for public finance, inflation, and interest rates. Skeptics doubted whether many countries would achieve these benchmarks, and it was a remarkable accomplishment that 11 of the 15 members of the European Union made the grade. Only Greece failed to meet the Maastricht criteria while the U.K., Sweden, and Denmark decided for different reasons not to join EMU in the first round. The EMI has now converted itself into the European Central Bank (ECB), which beginning in January 1999 will have sole responsibility for monetary policy over the 11 countries joining EMU-the so-called Euro Zone. Until the euro appears as a physical currency in 2002, the new ECB will ensure that all member currencies trade at fixed exchange rates with one another and with the euro. National notes and coins will be steadily withdrawn after the euro begins to circulate, and by mid-2002 it will be the only currency of the Euro Zone. Preparing for the Year 2000 The Year 2000 draws closer every day, and it holds special meaning beyond the arrival of a new millennium. The issue for investors is that many computer programs throughout the world use two digits instead of four to identify the year and may assume the next century starts with 1900. If these programs are not modified, they will not be able to correctly handle the century change when the year changes from "99" to "00" on January 1, 2000, and they will no longer be able to perform necessary functions. The Year 2000 issue affects all companies and organizations. T. Rowe Price has been taking steps to assure that its computer systems and processes are capable of functioning in the Year 2000. Detailed plans for remediation efforts have been developed and are currently being executed. Our Plan of Action We began to address these issues several years ago by requiring that all new systems process and store four-digit years. We plan to complete all reprogramming efforts for the major application systems, including business applications required to service our customers and processing infrastructure necessary to ensure the integrity of customer data and investments, by December 31, 1998, leaving a full 12 months for system testing. Because we exchange data electronically with customers and vendors, we are working with them to assess the adequacy of their own compliance efforts. Our goal is to ensure the continuation of the same level of service to all our mutual fund shareholders and clients after December 31, 1999. We are asking all vendors and companies we do business with for a Year 2000 compliance status, with the expectation that some organizations will not be able to modify their interface files prior to December 31, 1999. Our goal is to identify any noncompliant files so that we can implement alternative solutions. In addition, we are scheduling tests for critical vendors and companies that claim Year 2000 compliance to ensure that time-related data and calculations function properly as we move into the next century. Smooth Transition Planned We believe our programs and initiatives will provide a smooth transition into the next millennium. We are assessing all systems providing products or services to our retail mutual fund shareholders, retirement plan sponsors, and participants, and we are taking steps to modify them where necessary for the Year 2000. Our plan provides time to develop solutions for all noncompliant systems and data files from customers or vendors. The Securities Industry Association (SIA) is coordinating Year 2000 testing to assure that securities markets, clearing corporations, depositories, and third party service providers can send, receive, and process files and transactions accurately. In late July 1998, the SIA completed a beta test of Year 2000 readiness. The test was considered successful in terms of transactions completed and will serve as the basis for the SIA's industry-wide approach. During October 1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA and is ready for the industry-wide test that is scheduled for March and April 1999. For a more detailed discussion of our Year 2000 effort, as well as continuing updates on our progress, please check our Web site (www.troweprice.com). The advent of a single currency will bring greater transparency to the single market and real cost savings for business. For some time now there has been much merger and acquisition activity as corporations positioned themselves for this change. This was one factor fueling strong markets in Europe, but pension fund reform and the prospect of converting savers into investors have also helped sentiment. The arrival of the euro will not by itself have any impact on your fund's portfolio, but the longer-term benefits of EMU remain compelling and support a strategy where just over 64% of the fund's assets are in EU member states (73% in Europe overall) and 41% in countries going for full monetary union. The U.K. has the largest economy of the four EU member states not adopting the euro in January 1999. At the time of the original Maastricht negotiations, the U.K. secured an opt-out clause. With the U.K. not joining the rest of Europe, Prime Minister Tony Blair and his government are happy to continue with this wait-and-see policy. Hampered by strong sterling and relatively high interest rates, the U.K. manufacturing sector has been under pressure for some time, and signs of a slowdown recently appeared in the service sector too. Not surprisingly, the Bank of England loosened monetary policy with several interest rate cuts, but because most of Britain's trade is with Continental Europe, the authorities will want to ensure that sterling closely shadows the euro. Market Performance Six Months Local Local Currency U.S. Ended 10/31/98 Currency vs. U.S. Dollar Dollars Australia - 1.14 - 4.56 - 5.65 France - 8.17 8.29 - 0.55 Germany - 8.44 8.35 - 0.80 Hong Kong 9.60 -- 9.60 Italy - 11.13 8.16 - 3.88 Japan - 15.99 13.39 - 4.74 Mexico - 17.98 - 15.70 - 30.85 Netherlands - 15.78 8.18 - 8.89 Norway - 27.55 1.16 - 26.70 Singapore - 17.53 - 2.75 - 19.80 Sweden - 15.08 - 1.00 - 15.93 Switzerland - 10.68 10.76 - 1.07 United Kingdom - 7.76 0.16 - 7.61 Source: FAME Information Services, Inc., using MSCI indices. The U.K. stock market, where we committed nearly 20% of portfolio assets, behaved reasonably well during recent turbulence, with pharmaceutical giants such as Glaxo Wellcome and SmithKline Beecham exhibiting their defensive qualities. As on the Continent, companies have been positioning themselves for an ever more integrated Europe. A good example is Kingfisher, which revealed plans to swap its home improvement business for a stake in Castorama, the number one do-it-yourself retailer in France. British Petroleum surprised the market with its merger with Amoco in the U.S., and we recently added to Unilever, the multinational consumer goods company that continues to increase profits by restructuring, cutting costs, and improving asset utilization. Turning to the Continent, the most important news was Germany's election of Gerhard Schroeder as the new Chancellor, marking a political shift to the center-left. The core Euro Zone economies of Germany, France, and Italy are each showing similar characteristics of sluggish growth and stubbornly high unemployment. Their left-of-center governments are putting pressure on the ECB to adopt more stimulatory policies, but with considerable independence built into its constitution, the ECB's priority will be controlling inflation. All Continental markets fell sharply in August and early September, but declines were softened for U.S. investors by the strength of local currencies against the dollar. Our core positions such as publishers Wolters Kluwer (the Netherlands) and Reed International (U.K.) continued to show steady profit growth, and their stocks held up well. In France the drug company Sanofi and retailer Pinault-Printemps announced better-than-expected results, as did the pharmaceutical wholesaler and retailer Gehe, one of our largest positions in Germany. Although the portfolio is slightly underweighted in the financial sector, many leading stocks suffered during the recent correction. In the Netherlands, ING and leading Swiss banks Credit Suisse and UBS fell sharply when they announced higher-than-expected exposure to Russia and other emerging markets. Far East Japan's economy moved into recession with the announcement that GDP for the quarter ended September 30 contracted 0.8% compared with the first fiscal quarter. Policymakers face two major issues. First, since private consumption is such a large component of GDP, they badly need to stimulate consumer spending. Traditionally, Japanese corporations have looked after their employees from cradle to grave, but these cherished values have been challenged with rising unemployment and widespread discussion on whether Japan can really provide for its growing number of retirees. Because of such uncertainties, consumer spending remains depressed despite historically low interest rates. The second issue is the country's banking crisis, which came to a head a year ago but has still not been confronted fully by the authorities. Many of Japan's banks are technically insolvent even though the full extent of their bad debts has not been fully disclosed. The government should probably close the weak banks and recapitalize the better ones, but continuing inaction has contributed to poor sentiment in the stock market. The Tankan survey of business confidence for September revealed that sentiment was worse than expected. This survey is a key leading indicator for future growth and capital expenditure, and it is worrisome that it showed no sign of improvement. Geographic Diversification pie chart Europe Japan Far East Latin America Other 73 16 5 4 2 There has been widespread dissatisfaction in Japan with the government's performance, and the disastrous showing of the ruling Liberal Democratic Party (LDP) in July's election was no surprise. Following this setback Prime Minister Hashimoto resigned, but it looked like business as usual when Keizo Obuchi, the most conservative of the three leading candidates, became LDP leader and Prime Minister. It remains to be seen whether he will implement the radical policies Japan needs. Perhaps the biggest surprise came from the currency market when the yen recovered sharply against the U.S. dollar in October. Many hedge fund operators had been borrowing yen to buy higher-yielding U.S. Treasuries. As the yen weakened, this strategy provided a currency gain, but as the yen recovered traders scrambled to cover their open positions, which accelerated its upward momentum. The Japanese market was weak during the past six months, but the strength of the yen moderated these declines for U.S. investors, as can be seen in the table on page 3. We biased our holdings toward international companies operating in the technology, consumer electronics, and business equipment fields such as Sony, Canon, and Matsushita. These stocks performed relatively well, particularly during periods when the yen was weak. Recently they have started to look somewhat overvalued, and since many of them are exporters their prospects will be hampered if the yen improves further. Therefore, we reduced positions in Canon and TDK and invested the proceeds in more-cyclical growth companies with strong cash flow. Our positions in the rest of Asia were very small and were dominated by the stock markets of Australia and Hong Kong. The Australian economy has shown moderate growth, a considerable achievement given the downturn in Asian countries that are now Australia's major trading partners. In the recent general election, Mr. Howard's liberal coalition just managed to retain power, which was well received by the stock market. The economy will benefit from gradual labor reform and further privatization of government assets. Our positions in Australia included media conglomerate News Corpor-ation, banking stocks such as Westpac Bank and National Australia Bank, and several utilities. Given the continued deflation in world commodity prices, we have avoided the natural resource sector. Industry Diversification - -------------------------------------------------------------------------------- Percent of Net Assets 10/31/98 Services 29.7% Consumer Goods 21.8 Finance 19.9 Capital Equipment 11.2 Energy 10.0 Materials 3.8 Multi-industry 2.0 Miscellaneous 0.1 Reserves 1.5 Net Assets 100.0% - -------------------------------------------------------------------------------- In Hong Kong, sentiment was dominated by a fierce battle to maintain the exchange rate peg between the Hong Kong and U.S. dollars in the face of intense speculation to break it. As the pressure on the Hong Kong currency mounted, the first tactic was a dramatic increase in interest rates that only served to provide speculators with an opportunity to sell stocks short in a falling market. Hong Kong's Financial Secretary broadened his defense by using Hong Kong's foreign exchange reserves to support the stock market-a courageous strategy considering the free market principles that have made an important contribution to Hong Kong's prosperity. Happily the strategy worked, the speculators retreated, and the currency peg held, but the price paid was significant damage to the economy itself, particularly the real estate market that is so sensitive to interest rates. Although we expect the broad economic picture in Hong Kong to remain difficult, its stock market houses some of the region's strongest and best-managed companies. Trading, transport, and real estate conglomerate Hutchison Whampoa remained a core holding and performed well during the past six months. We also had positions in infrastructure plays such as Hong Kong's HK Telecom and China's Huaneng Power International. At the end of October, your portfolio had negligible positions in other Pacific markets where the economies will take some time to recover from the financial collapse that began a year ago. Having said this, the stock markets in many of these emerging economies have recently stabilized following their disastrous falls during the early summer. We are not yet tempted to return to these markets but continue to monitor the situation carefully. Latin America The stock markets of Latin America were weak for most of the year and continued to show extreme volatility. Brazil suffered huge outflows of foreign exchange reserves in both August and September, and the exchange rate of the real against the U.S. dollar was maintained only by a massive increase in interest rates. By the middle of September, a vicious circle of higher interest rates, failing confidence, and increased capital outflows threatened to spiral into a major market rout, but an indication that there would be a $41 billion support package sponsored by the IMF helped stabilize the capital markets. President Cardoso seems to have persuaded the electorate that he has sufficient experience and skill to deal with the financial crisis and was reelected with a comfortable majority. However, the major weakness of the Brazilian economy is the persistently high fiscal deficit. Now that Brazil's financial crisis has receded and elections are over, the markets will be looking for significant action on the deficit rather than statements of good intent. In contrast with Brazil, Argentina demonstrated its commitment to fiscal discipline by cutting spending by more than $1.3 billion to achieve the fiscal deficit target of 1% of GDP agreed to with the IMF. Argentina was one of the region's better-performing stock markets over the six months, and increasing evidence of its economic self-discipline was a contributing factor. In Mexico, the economy held up remarkably well despite rising interest rates and a weak peso. Its stock market was also battered during the emerging market crisis, but its closer ties to the U.S. will afford some protection. Key holdings include telecommunications giants Telebras in Brazil and Telmex in Mexico. Both companies have great potential as rising prosperity increases fixed line telephone penetration in these highly populated countries and powers the growth of cellular technology. Investment Policy and Outlook The fiscal year under review was frustrating for inter-national investors. It started well, and by midsummer many markets reached new highs, but the turbulence of August and early September was very disappointing. Despite the soundness of the U.S. economy, even Wall Street was caught up in this worldwide correction. Now that stock markets have settled down, it is worth taking a cold hard look at how world economies might develop from here. The starting point should be Europe, which accounts for just over 70% of the portfolio. In only a few weeks, the euro will arrive and 11 European countries will make a major commitment to economic integration when they adopt full monetary union. This by itself will be a significant achievement, but the price has been lower economic growth than would otherwise have been the case. The prize for their endeavors, how-ever, will be a single currency market where the potential is underpinned by sound public finance, lower inflation, and a current account surplus. This will provide a strong platform for future growth and is in sharp contrast to economies of the Pacific that are still struggling. Also, many observers now feel the euro will be a strong currency against the dollar, and if more international trade is denominated in the euro, central banks throughout the world will increasingly regard it as a key currency for their foreign exchange reserves. Companies in which we invest are already exploiting the opportunities of closer integration in Europe, and management increasingly recognizes the importance of shareholder value. For all these reasons, it makes sense that Europe should dominate our international portfolio. It is perhaps more difficult to make a compelling case for other overseas markets, but there is still plenty of opportunity. Despite continuing problems in Japan, its stock market is too large to ignore entirely and is showing signs of stabilizing after a long decline. As we mentioned before, Tokyo remains the home of world-class corporations, many of which form the heart of our Japanese portfolio. These holdings have served us well, and it is time to begin considering some more domestically oriented blue chips. However, although we can find Japanese companies we like, there is still too much economic uncertainty for us to make a major push back into this market. Turning to emerging markets, the economic turmoil that overwhelmed the smaller Asian economies a year ago has yet to work itself out, and our positions in Asia outside of Japan remain very low. In contrast to some of the smaller Asian economies, governments of key Latin American countries are committed to reform and have shown admirable economic discipline during difficult times. We believe they are well positioned for the future and any international portfolio, including ours, should have a commitment to this part of the world. Thus, the fund's geographical allocation seems appropriate, and our commitment to growth companies priced at reasonable valuations will be helpful, in our view, if we encounter a period of slower economic growth. We believe this strategy makes sense for the current environment and will prove rewarding in the future. Respectfully submitted, Martin G. Wade President November 23, 1998 Portfolio Highlights Twenty-Five Largest Holdings Percent of Net Assets Company Country 10/31/98 - -------------------------------------------------------------------------------- National Westminster United Kingdom 2.6% Wolters Kluwer Netherlands 2.3 SmithKline Beecham United Kingdom 2.3 Nestle Switzerland 2.1 Glaxo Wellcome United Kingdom 1.8 Diageo United Kingdom 1.6 Vivendi France 1.6 Royal Dutch Petroleum Netherlands 1.6 Novartis Switzerland 1.5 ING Groep Netherlands 1.4 Kingfisher United Kingdom 1.4 Shell Transport and Trading United Kingdom 1.3 Telecom Italia Italy 1.2 Roche Holdings Switzerland 1.1 Reed International United Kingdom 1.1 Unilever Netherlands 1.0 Total France 1.0 KBC Bancassurance Holding Belgium 1.0 UBS Switzerland 1.0 Telebras Brazil 1.0 Gehe Germany 1.0 SAP Germany 1.0 Pinault Printemps Redoute France 1.0 Bayerische Vereinsbank Germany 0.9 Telefonica de Espana Spain 0.9 - -------------------------------------------------------------------------------- Total 34.7% - -------------------------------------------------------------------------------- Security Classification Percent Market of Net Cost Value 10/31/98 Assets (000) (000) - -------------------------------------------------------------------------------- Common Stocks and Warrants 95.7% $2,555,089 $3,068,412 Preferred Stocks 2.8 102,451 86,209 Short-Term Investments 3.0 97,373 97,373 Total Investments 101.5 2,754,913 3,251,994 Other Assets Less Liabilities - 1.5 - 48,310 - 48,310 - -------------------------------------------------------------------------------- Net Assets 100.0% $2,706,603 $3,203,684 - -------------------------------------------------------------------------------- Summary of Investments and Cash October 31, 1998 Percent of Equities Cash Total MSCI EAFE - -------------------------------------------------------------------------------- Europe Austria -- -- -- 0.4% Belgium 1.9% -- 1.9% 1.9 Czech Republic 0.0 -- 0.0 -- Denmark 0.4 -- 0.4 0.9 Finland 0.6 -- 0.6 1.2 France 10.6 -- 10.6 9.5 Germany 7.6 -- 7.6 10.5 Ireland 0.0 -- 0.0 0.5 Italy 5.4 -- 5.4 4.8 Netherlands 11.4 -- 11.4 5.4 Norway 1.5 -- 1.5 0.5 Portugal 0.5 -- 0.5 0.7 Russia 0.1 -- 0.1 -- Spain 3.0 -- 3.0 3.4 Sweden 3.4 -- 3.4 2.8 Switzerland 7.2 -- 7.2 8.3 United Kingdom 19.4 -- 19.4 22.0 ------------------------------------------------------------------------------ Total Europe 73.0% -- 73.0% 72.8% - -------------------------------------------------------------------------------- Pacific Basin Australia 2.7% -- 2.7% 2.7% China 0.2 -- 0.2 -- Hong Kong 1.4 -- 1.4 2.4 India 0.2 -- 0.2 -- Japan 15.9 -- 15.9 21.5 New Zealand 0.2 -- 0.2 0.2 Singapore 0.2 -- 0.2 0.7 South Korea 0.1 -- 0.1 -- ------------------------------------------------------------------------------ Total Pacific Basin 20.9% -- 20.9% 27.5% - -------------------------------------------------------------------------------- Americas Argentina 0.8% -- 0.8% -- Brazil 2.0 -- 2.0 -- Canada 0.2 -- 0.2 -- Chile 0.1 -- 0.1 -- Mexico 1.5 -- 1.5 -- Panama 0.0 -- 0.0 -- Peru 0.0 -- 0.0 -- United States -- 3.0% 3.0 -- ------------------------------------------------------------------------------ Total Americas 4.6% 3.0% 7.6% -- - -------------------------------------------------------------------------------- Other Assets Less Liabilities -- - 1.5 - 1.5 -- ------------------------------------------------------------------------------ TOTAL 98.5% 1.5% 100.0% 100.0%* - -------------------------------------------------------------------------------- * Total may not add to 100.0% due to rounding. Foreign Equity Fund 10/31/98 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 Foreign Lipper Equity MSCI International Fund EAFE Funds Average 9/7/89 10,000 10,000 10,000 10/89 9,660 10,039 9,920 10/90 10,099 8,779 9,921 10/91 11,088 9,421 10,759 10/92 10,728 8,205 10,263 10/93 14,412 11,314 13,749 10/94 16,135 12,488 15,350 10/95 16,238 12,480 15,380 10/96 18,589 13,827 17,204 10/97 20,132 14,508 19,347 10/98 21,673 15,951 20,229 Total Return Performance xx Calendar Periods Ended 1 3 Year- 1 3 5 Since 10/31/98 Month Months to-Date Year Years* Years* 9/7/89* - -------------------------------------------------------------------------------- Foreign Equity Fund 9.24% - 7.14 7.31% 7.65% 10.10% 8.50% 8.82% S&P 500 Index 8.13 - 1.57 14.63 21.99 25.99 21.31 16.43 MSCI EAFE Index 10.45 - 6.15 10.07 9.95 8.53 7.11 5.23** Lipper International Funds Average 7.42 - 11.20 4.11 4.07 8.09 7.02 7.69 FT-A Euro Pacific Index 10.65 - 5.59 9.21 7.92 7.26 6.24 4.59** * 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. ** From 8/31/89. 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 10/31/98 10/31/97 10/31/96 10/31/95 10/31/94 NET ASSET VALUE Beginning of period $ 16.51 $ 15.62 $ 13.99 $ 14.59 $ 13.32 Investment activities Net investment income 0.28 0.21 0.21 0.18 0.09 Net realized and unrealized gain (loss) 0.93 1.07 1.78 (0.14) 1.48 Total from investment activities 1.21 1.28 1.99 0.04 1.57 Distributions Net investment income (0.21) (0.22) (0.18) (0.12) (0.09) Net realized gain (0.48) (0.17) (0.18) (0.52) (0.21) Total distributions (0.69) (0.39) (0.36) (0.64) (0.30) NET ASSET VALUE End of period $ 17.03 $ 16.51 $ 15.62 $ 13.99 $ 14.59 ---------------------------------------------------- Ratios/Supplemental Data Total return* 7.65% 8.30% 14.48% 0.64% 11.96% Ratio of expenses to average net assets 0.74% 0.75% 0.76% 0.80% 0.82% Ratio of net investment income to average net assets 1.58% 1.40% 1.67% 1.69% 1.26% Portfolio turnover rate 18.6% 15.9% 13.8% 18.8% 22.0% Net assets, end of period (in millions) $ 3,204 $ 3,160 $ 2,322 $ 1,560 $ 1,058 * 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. Statement of Net Assets Foreign Equity Fund October 31, 1998 Shares/Par Value - -------------------------------------------------------------------------------- In thousands ARGENTINA 0.8% Common Stocks 0.8% Banco de Galicia Buenos Aires (Class B) ADR (USD) 110,440 $ 1,884 Banco Frances del Rio de la Plata (Class B) ADR (USD) 109,808 2,292 Perez Companc (Class B) 783,762 3,873 Telefonica de Argentina Stet (Class B) ADR (USD) 189,624 6,270 YPF Sociedad Anonima (Class D) ADR (USD) 434,689 12,579 Total Argentina (Cost $25,547) 26,898 AUSTRALIA 2.7% Common Stocks 2.4% AMP Limited * 281,000 3,345 Australian Gas Light 672,473 4,840 Brambles Industries 238,000 5,223 Broken Hill Proprietary 463,087 3,939 Colonial Limited 1,354,235 4,440 Commonwealth Bank of Australia 600,276 7,468 Fosters Brewing Group 826,000 2,030 Goodman Fielder 2,320,000 3,066 John Fairfax Holdings 1,777,000 3,112 Lend Lease 156,857 3,463 National Australia Bank 264,768 3,511 News Corporation 1,008,618 6,895 Publishing & Broadcasting 799,124 3,174 Tabcorp Holdings 770,000 5,126 Telstra, Installment Receipts, 11/17/98 2,296,458 9,121 Westpac Bank 1,024,781 6,237 Woodside Petroleum 569,000 3,009 77,999 Preferred Stocks 0.3% News Corporation 896,815 5,396 Star City Holdings 3,199,600 2,181 7,577 Total Australia (Cost $76,863) 85,576 BELGIUM 1.9% Common Stocks 1.9% Dexia 24,759 $ 4,019 Fortis 55,202 15,855 KBC Bancassurance Holding 464,120 32,376 Societe Europeenne des Satellites (Class A)* 19,300 3,218 UCB 1,039 6,064 Total Belgium (Cost $30,699) 61,532 BRAZIL 2.0% Common Stocks 0.1% Pao de Acucar ADR (USD) 111,340 1,795 Telecomunicacoes de Sao Paulo * 967,420 105 Unibanco GDR (USD) 119,458 2,091 3,991 Preferred Stocks 1.9% Banco Bradesco 465,618,322 2,654 Banco Itau 4,882,000 2,374 Brahma 5,531,989 2,597 Cia Cimento Portland Itau 4,882,700 655 Cia Energetica Minas Gerais 104,208,392 2,027 Cia Energetica Minas Gerais ADR (144a) (USD) 20,228 389 Cia Energetica Minas Gerais ADR, Cv. (USD) 28,559 550 Cia Energetica Minas Gerais ADR, Sponsored Nonvoting (USD) 126,727 2,439 Encorpar 3,724,770 5 Pao de Acucar GDR (USD) 6,600 106 Petrol Brasileiros 56,381,021 7,089 Telebras ADR (USD) 415,442 31,548 Telecomunicacoes de Sao Paulo 33,358,233 5,593 Telecomunicacoes de Sao Paulo Celular (Class B)* 31,817,420 1,574 59,600 Total Brazil (Cost $82,540) 63,591 CANADA 0.2% Common Stocks 0.2% Alcan Aluminum 172,380 $ 4,329 Royal Bank of Canada 61,480 2,833 Total Canada (Cost $5,919) 7,162 CHILE 0.1% Common Stocks 0.1% Chilectra ADR (144a) (USD) 82,522 1,599 Compania Cervecerias Unidas ADR (USD) 43,830 789 Santa Isabel ADR (USD) 16,681 97 Total Chile (Cost $2,963) 2,485 CHINA 0.2% Common Stocks 0.2% Huaneng Power International ADR (USD) * 413,700 5,688 Total China (Cost $8,310) 5,688 CZECH REPUBLIC 0.0% Common Stocks 0.0% SPT Telecom 87,810 1,329 Total Czech Republic (Cost $834) 1,329 DENMARK 0.4% Common Stocks 0.4% Den Danske Bank 49,280 6,690 Tele Danmark 13,050 1,421 Unidanmark (Class A) 40,121 3,058 Total Denmark (Cost $5,759) 11,169 FINLAND 0.6% Common Stocks 0.6% Nokia (Class A) 206,140 18,781 Total Finland (Cost $3,971) 18,781 FRANCE 10.6% Common Stocks 10.6% AXA 202,951 22,940 Alcatel Alsthom 115,601 12,879 Canal Plus 12,340 2,994 Carrefour 21,335 14,162 Cie de St. Gobain 93,096 $ 13,774 Credit Commercial de France 130,863 9,191 Danone 47,870 12,657 Dexia France 16,696 2,461 Dexia France, Bearer 19,298 2,845 Dexia France, Registered 1999+ 20,520 3,025 Elf Aquitaine 99,530 11,519 GTM Entrepose 25,080 2,718 L'Oreal 12,405 7,089 Lafarge 53,841 5,504 Lapeyre 58,000 5,115 Legrand 25,609 6,527 Pathe 16,728 3,195 Pinault Printemps Redoute 184,075 30,812 Primagaz 6,680 601 Sanofi 152,790 23,925 Schneider 258,216 15,328 Societe Generale 70,212 9,288 Sodexho Alliance 128,275 24,912 Television Francaise 71,916 11,883 Total (Class B) 283,711 32,733 Vivendi 218,972 50,014 Total France (Cost $229,313) 338,091 GERMANY 7.6% Common Stocks and Warrants 7.0% Allianz 55,440 19,010 Bayer 295,414 12,002 Bayerische Vereinsbank 367,905 29,206 Buderus 5,392 2,243 Deutsche Bank 277,784 17,272 Deutsche Telekom 468,655 12,765 Dresdner Bank 383,327 14,926 Dresdner Bank Warrants, 4/30/02 * 193,719 2,736 Gehe 412,714 31,019 Hoechst 94,660 3,954 Hornbach Baumarkt 14,770 642 Mannesmann 249,080 24,510 Rhoen Klinikum 52,994 5,279 SAP 45,760 19,199 Siemens 107,641 6,472 Veba 347,056 19,380 Volkswagen 64,550 4,851 225,466 Preferred Stocks 0.6% Fielmann 27,225 $ 1,224 Fresenius 16,900 2,898 Hornbach Holdings 42,180 3,178 SAP 24,082 11,732 19,032 Total Germany (Cost $193,229) 244,498 HONG KONG 1.4% Common Stocks 1.4% CLP Holdings 1,050,000 5,952 Cheung Kong Holdings 328,000 2,244 Hang Seng Bank 374,000 3,235 Henderson Land Development 1,292,000 6,372 Hong Kong Telecommunications 2,653,200 5,310 Hutchison Whampoa 2,927,000 20,975 Sun Hung Kai Properties 318,000 2,207 Total Hong Kong (Cost $42,124) 46,295 INDIA 0.2% Common Stocks 0.2% Mahanagar Telephone GDR (USD) 309,000 3,391 State Bank of India GDR (USD) 302,700 2,445 Total India (Cost $7,978) 5,836 IRELAND 0.0% Common Stocks 0.0% CBT Group ADR (USD) * 120,659 1,440 Total Ireland (Cost $6,172) 1,440 ITALY 5.4% Common Stocks 5.4% Assicurazioni Generali 386,560 13,840 Banca Commerciale Italiana 670,000 4,140 Banca di Roma 6,485,000 11,312 Credito Italiano 3,696,429 19,840 ENI 3,327,232 19,786 Gucci Group (USD) 97,641 3,723 IMI 1,057,757 16,258 Industrie Natuzzi ADR (USD) 132,084 2,402 Istituto Nazionale delle Assicurazioni 2,524,000 $ 6,951 Italgas 730,325 3,343 Mediolanum 330,119 8,215 Rinascente 316,500 3,050 Telecom Italia 5,148,930 37,214 Telecom Italia Mobile 4,079,866 23,677 Total Italy (Cost $120,716) 173,751 JAPAN 15.9% Common Stocks 15.9% Advantest 57,000 3,594 Alps Electric 314,000 4,320 Amada 776,000 4,639 Canon 1,255,000 23,737 Citizen Watch 448,000 2,475 DDI 1,574 4,590 Daifuku 126,000 532 Daiichi Pharmaceutical 640,000 10,678 DaiNippon Screen Manufacturing 692,000 1,514 Daiwa House 794,000 8,956 Denso 1,417,000 26,680 East Japan Railway 2,227 13,200 Fanuc 171,300 5,143 Fujitsu 311,000 3,308 Hitachi 1,563,000 7,950 Honda Motor 99,000 2,972 Inax 331,000 1,638 Ito-Yokado 319,000 18,607 Kao 676,000 13,685 Kokuyo 387,000 5,145 Komatsu 823,000 4,448 Komori 335,000 6,149 Kuraray 916,000 9,767 Kyocera 335,000 14,799 Makita 584,000 6,172 Marui 960,000 16,716 Matsushita Electric Industrial 1,421,000 20,855 Mitsubishi 950,000 5,028 Mitsubishi Heavy Industries 4,176,000 16,119 Mitsui Fudosan 2,063,000 13,697 Murata Manufacturing 420,000 14,159 NEC 2,255,000 16,693 NTT Mobile Communication Network 159 $ 5,742 Nippon Telegraph & Telephone 1,130 8,840 Nomura Securities 1,417,000 10,696 Pioneer Electronic 273,000 4,496 Sangetsu 111,000 1,371 Sankyo 969,000 21,860 Sekisui Chemical 1,236,000 6,732 Sekisui House 778,000 7,748 Seven-Eleven Japan 111,000 8,436 Shin-Etsu Chemical 787,000 15,662 Shiseido 520,000 5,692 Sony 349,800 22,204 Sumitomo 1,585,000 7,586 Sumitomo Electric Industries 2,060,000 22,795 Sumitomo Forestry 435,000 2,959 TDK 313,000 20,620 Tokio Marine & Fire Insurance 419,000 4,762 Tokyo Electronics 181,000 5,884 Tokyo Steel Manufacturing 383,200 1,742 Toppan Printing 775,000 7,944 Uny 409,000 6,666 Yurtec 126,000 654 Total Japan (Cost $649,453) 509,056 MEXICO 1.5% Common Stocks 1.5% Cemex, Participating Certificates (Represents 1 Class C share) 18,385 44 Cemex (Class B) 612,840 1,704 Cemex ADR (Represents 2 Participating Certificates) (USD) 482,160 2,230 Cemex ADS (Represents 2 Participating Certificates) (144a) (USD) 410,812 1,900 Cifra (Class V) ADR (USD) * 44,164 599 Femsa UBD (Represents 1 Class B 2 Series D (Class B) and 2 Series D (Class L) (shares) * 1,347,720 3,473 Gruma (Class B) 631,428 1,499 Gruma (Class B) ADS (144a) (USD) * 153,296 1,533 Grupo Financiero Bancomer (Class L) 8,266 1 Grupo Industrial Maseca (Class B) 1,664,467 $ 1,350 Grupo Modelo (Class C) 1,783,456 3,758 Grupo Televisa GDR (USD) * 153,422 4,162 Kimberly-Clark de Mexico (Class A) 1,182,310 3,427 Panamerican Beverages (Class A) (USD) 226,428 4,585 Telefonos de Mexico (Class L) ADR (USD) 332,614 17,566 TV Azteca ADR (USD) 194,300 1,700 Total Mexico (Cost $62,301) 49,531 NETHERLANDS 11.4% Common Stocks 11.4% ABN Amro 724,388 13,569 ASM Lithography 389,200 9,874 Ahold 679,887 22,597 Akzo Nobel 84,392 3,279 CSM 278,499 13,713 Elsevier 1,748,822 24,616 Fortis Amev 343,827 22,321 ING Groep 938,235 45,394 Koninklijke KPN 96,125 3,735 Numico 286,740 11,280 Philips Electronics 184,670 9,824 Polygram 329,789 19,433 Royal Dutch Petroleum 1,016,398 49,067 STMicroelectronics (FRF) * 101,150 6,190 TNT Post Groep 96,125 2,572 Unilever 446,314 33,107 Wolters Kluwer 377,111 73,063 Total Netherlands (Cost $279,633) 363,634 NEW ZEALAND 0.2% Common Stocks 0.2% Telecom Corporation of New Zealand 976,372 4,007 Telecom Corporation of New Zealand, Installment Receipts, 3/31/99 505,000 984 Total New Zealand (Cost $5,670) 4,991 NORWAY 1.5% Common Stocks 1.5% Bergesen (Class A) 46,430 $ 643 Norsk Hydro 514,282 22,350 Orkla (Class A) 1,339,400 22,646 Saga Petroleum 85,950 1,091 Total Norway (Cost $43,315) 46,730 PANAMA 0.0% Common Stocks 0.0% Banco Latinoamericano de Exportaciones (Class E) (USD) 24,726 536 Total Panama (Cost $1,217) 536 PERU 0.0% Common Stocks 0.0% Credicorp (USD) 35,987 243 Telefonica del Peru (Class B) 316,910 413 Total Peru (Cost $1,257) 656 PORTUGAL 0.5% Common Stocks 0.5% Jeronimo Martins 353,261 15,302 Total Portugal (Cost $4,666) 15,302 RUSSIA 0.1% Common Stocks 0.1% Lukoil ADR (USD) 22,490 366 Rao Gazprom ADS (USD) * 142,100 1,325 Total Russia (Cost $4,078) 1,691 SINGAPORE 0.2% Common Stocks 0.2% Singapore Press 366,039 3,171 Singapore Telecommunications 1,663,000 2,872 Total Singapore (Cost $8,839) 6,043 SOUTH KOREA 0.1% Common Stocks 0.1% Samsung Electronics 63,926 2,616 Total South Korea (Cost $6,444) 2,616 SPAIN 3.0% Common Stocks 3.0% Argentaria Banca de Espana 336,840 $ 7,329 Banco Bilbao Vizcaya 400,950 5,408 Banco Santander 836,422 15,320 Banco Santander, New * 16,728 304 Empresa Nacional de Electricidad 524,068 13,208 Gas Natural 103,616 8,923 Iberdrola 596,256 9,630 Repsol 135,510 6,802 Telefonica de Espana 645,899 29,163 Total Spain (Cost $55,172) 96,087 SWEDEN 3.4% Common Stocks 3.4% ABB (Class A) 617,890 6,530 Astra (Class B) 1,586,605 24,899 Atlas Copco (Class B) 368,282 8,563 Electrolux (Class B) 978,635 14,731 Esselte (Class B) 91,130 1,331 Granges 81,378 1,063 Hennes and Mauritz (Class B) 392,615 27,663 Nordbanken Holding 2,835,248 16,998 Sandvik (Class A) 70,120 1,442 Sandvik (Class B) 308,980 6,353 Scribona (Class B) 31,260 108 Sifo Group (Class B) * 49,060 189 Total Sweden (Cost $77,181) 109,870 SWITZERLAND 7.2% Common Stocks 7.2% ABB 10,930 13,081 Adecco 45,643 18,186 Credit Suisse Group 90,725 13,940 Nestle 31,483 66,901 Novartis 25,713 46,292 Roche Holdings, Participating Certificates 3,074 35,837 Swisscom * 15,059 5,100 UBS * 117,617 32,240 Total Switzerland (Cost $166,320) 231,577 UNITED KINGDOM 19.4% Common Stocks 19.4% Abbey National 996,440 $ 19,312 Asda Group 3,790,530 10,082 BG 1,087,352 7,134 British Petroleum 1,008,802 14,976 Cable & Wireless 2,329,200 26,217 Cadbury Schweppes 1,617,578 24,772 Caradon 2,708,215 5,666 Centrica * 901,200 1,750 Compass Group 1,542,000 15,650 David S. Smith 1,456,500 3,047 Diageo 4,632,808 50,400 Electrocomponents 847,000 5,585 Fairview Holdings * 168,825 229 GKN 378,000 4,553 Glaxo Wellcome 1,816,650 56,311 Heywood Williams Group 249,576 794 Hillsdown Holdings 337,650 478 John Laing (Class A) 594,300 2,984 Kingfisher 4,963,954 43,850 Ladbroke Group 1,611,000 5,851 National Westminster Bank 4,825,173 81,082 Rank Group 843,000 3,527 Reed International 4,114,140 34,808 Rio Tinto 1,216,960 14,767 Rolls Royce 811,851 2,996 Safeway 2,136,200 10,726 Shell Transport & Trading 6,696,000 40,414 SmithKline Beecham 5,862,230 72,974 Tesco 5,699,709 15,645 Tomkins 4,907,080 22,709 Unilever 342,000 3,434 United News & Media 1,758,620 19,456 Total United Kingdom (Cost $449,057) 622,179 SHORT-TERM INVESTMENTS 3.0% Money Market Funds 3.0% Reserve Investment Fund, 5.41% # 97,372,688 $ 97,373 Total Short-term Investments (Cost $97,373) 97,373 Total Investments in Securities 101.5% of Net Assets (Cost $2,754,913) $3,251,994 Other Assets Less Liabilities (48,310) NET ASSETS $3,203,684 ---------- Net Assets Consist of: Accumulated net investment income - net of distributions $ 52,433 Accumulated net realized gain/loss - net of distributions 2,614 Net unrealized gain (loss) 497,421 Paid-in-capital applicable to 188,138,905 shares of $0.01 par value capital stock out- standing; 1,000,000,000 shares authorized 2,651,216 NET ASSETS $3,203,684 ---------- NET ASSET VALUE PER SHARE $ 17.03 ---------- * Non-income producing # Seven-day yield + Securities contain some restrictions as to public resale-total of such securities at year-end amounts to 0.1% of net assets. 144a Security was purchased pursuant to Rule 144a under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers-total of such securities at year-end amounts to 0.2% of net assets. ADR American depository receipt ADS American depository share FRF French franc GDR Global depository receipt GDS Global depository share USD U.S. dollar The accompanying notes are an integral part of these financial statements. Statement of Operations Foreign Equity Fund In thousands Year Ended 10/31/98 Investment Income Income Dividend (net of foreign taxes of $9,677) $ 71,791 Interest 6,648 Total income 78,439 Expenses Investment management 23,624 Custody and accounting 1,131 Registration 123 Shareholder servicing 34 Legal and audit 25 Directors 10 Prospectus and shareholder reports 7 Miscellaneous 21 Total expenses 24,975 Net investment income 53,464 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 16,360 Foreign currency transactions (2,435) Net realized gain (loss) 13,925 Change in net unrealized gain or loss Securities 169,262 Other assets and liabilities denominated in foreign currencies 277 Change in net unrealized gain or loss 169,539 Net realized and unrealized gain (loss) 183,464 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 236,928 --------- The accompanying notes are an integral part of these financial statements. Statement of Changes in Net Assets Foreign Equity Fund In thousands Year Ended 10/31/98 10/31/97 Increase (Decrease) in Net Assets Operations Net investment income $53,464 $40,579 Net realized gain (loss) 13,925 87,538 Change in net unrealized gain or loss 169,539 53,367 Increase (decrease) in net assets from operations 236,928 181,484 Distributions to shareholders Net investment income (40,559) (33,766) Net realized gain (92,704) (26,079) Decrease in net assets from distributions (133,263) (59,845) Capital share transactions* Shares sold 688,390 1,016,742 Distributions reinvested 102,189 43,555 Shares redeemed (850,415) (344,550) Increase (decrease) in net assets from capital share transactions (59,836) 715,747 Net Assets Increase (decrease) during period 43,829 837,386 Beginning of period 3,159,855 2,322,469 End of period $3,203,684 $3,159,855 ------------------------ *Share information Shares sold 40,154 60,358 Distributions reinvested 6,463 2,750 Shares redeemed (49,853) (20,421) Increase (decrease) in shares outstanding (3,236) 42,687 The accompanying notes are an integral part of these financial statements. Notes to Financial Statements Foreign Equity Fund October 31, 1998 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 currently established by the corporation and commenced operations on September 7, 1989. The accompanying financial statements are prepared in accordance with generally accepted accounting principles for the investment company industry; these principles may require the use of estimates by fund management. Valuation Equity securities are valued at the last quoted sales price at the time the valuations are made. A security which is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. For 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. Currency Translation Assets and liabilities are translated into U.S. dollars at the prevailing exchange rate at the end of the reporting period. 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 those determined in accordance with generally accepted accounting principles. NOTE 2 - INVESTMENT TRANSACTIONS Purchases and sales of portfolio securities, other than short-term securities, aggregated $599,315,000 and $648,149,000, respectively, for the year ended October 31, 1998. 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. At October 31, 1998, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $2,754,913,000. Net unrealized gain aggregated $497,081,000 at period end, of which $766,172,000 related to appreciated investments and $269,091,000 to depreciated investments. NOTE 4 - RELATED PARTY TRANSACTIONS The fund is managed by Rowe Price-Fleming International, Inc. (the manager), which is owned by T. Rowe Price Associates, Inc. (Price Associates), Robert Fleming Holdings Limited, and Jardine Fleming Holdings Limited under a joint venture agreement. The investment management agreement between the fund and the manager provides for an annual investment management fee, of which $1,829,000 was payable at October 31, 1998. 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. (TRPS) 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 $136,000 for the year ended October 31, 1998, 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 T. Rowe Price Associates, Inc. The Reserve and Government Reserve Funds are offered as cash management options only to mutual funds and other accounts managed by T. Rowe Price and its affiliates 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, 1998, totaled $6,547,000 and are reflected as interest income in the accompanying Statement of Operations. During the year ended October 31, 1998, the fund, in the ordinary course of business, placed security purchase and sale orders aggregating $99,098,000 with certain affiliates of the manager and paid commissions of $208,000 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 net assets 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 constituting Institutional International Funds, Inc., hereafter referred to as the "Fund") at October 31, 1998, 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 generally accepted accounting principles. 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 generally accepted auditing standards 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, 1998 by correspondence with the custodian provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Baltimore, Maryland November 18, 1998 Tax Information (Unaudited) for the Tax Year Ended 10/31/98 - -------------------------------------------------------------------------------- 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: - -- $1,931,000 from short-term capital gains, - -- $90,773,000 from long-term capital gains; of which $66,437,000 was subject to the 20% rate gains category and $24,336,000 to the 28% rate gains category. The fund will pass through foreign source income of $62,347,000 and foreign taxes paid of $9,677,000. -----END PRIVACY-ENHANCED MESSAGE-----