PAGE 1
Prospectus for the T. Rowe Price Spectrum Fund, Inc., dated May
1, 1996 should be inserted here.
<PAGE>
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T. Rowe Price
SPECTRUM FUNDS
PROSPECTUS & IRA PLAN DISCLOSURE STATEMENT AND CUSTODIAL AGREEMENT
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T. Rowe Price
Spectrum Fund, Inc.
May 1, 1996
Two broadly diversified funds composed of other T. Rowe Price funds, one
seeking a high level of current income consistent with moderate share price
fluctuation, and the other seeking long-term capital appreciation and growth
of income.
To help you achieve your financial goals, T. Rowe Price offers a wide range
of stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open an Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields and Prices Tele*Access[Registration Mark]
1-800-638-2587
1-410-625-7676
24 hours, 7 days
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
<PAGE>
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
PROSSPC 5/1/96
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T. Rowe Price
Spectrum Funds, Inc.
May 1, 1996
Prospectus
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Facts at a Glance
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Investment Goals
Spectrum Income Fund seeks a high level of current income consistent with
moderate share price fluctuation. Spectrum Growth Fund seeks long-term capital
appreciation and growth of income, with current income a secondary objective. As
with any mutual fund, there is no guarantee the funds will achieve their goals.
Strategy
Each fund diversifies its assets within set limits among seven underlying
Price funds. Allocation decisions reflect T. Rowe Price's outlook for the
economy, financial markets, and the relative valuations of the underlying funds.
Spectrum Income invests primarily in domestic bond funds and also in a foreign
bond fund, but may allocate up to 25% of assets to a stock fund.
Spectrum Growth invests primarily in domestic stock funds and also in a
foreign stock fund.
Risk/Reward
Spectrum Income Fund: The potential for investors to achieve high current
income with modest share price appreciation through diversification of assets.
Spectrum Growth Fund: The potential for investors to achieve long-term
capital appreciation and growth of income through diversification.
<PAGE>
Investors in both funds should be prepared for share price volatility and
the possibility of losing money. Under normal conditions, Spectrum Growth Fund
will carry a greater degree of risk than Spectrum Income Fund. Before investing,
you should carefully consider the risks explained in more detail in Investment
Policies and Practices.
Investor Profile
Spectrum Income Fund: Individuals seeking high current income through
diversification primarily among various bond funds.
Spectrum Growth Fund: Individuals seeking long-term capital appreciation
and growth of income through diversification among different stock funds.
Investors in both funds should be prepared to accept the possibility of
share price declines. Appropriate for both regular and tax-deferred accounts,
such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price
Associates, Inc. (T. Rowe Price) and its affiliates managed over $75 billion for
over three and a half million individual and institutional investor accounts as
of December 31, 1995.
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This prospectus contains information you should know before investing.
Please keep it for future reference. A Statement of Additional Information about
the fund, dated May 1, 1996, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
Contents
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1 About the Funds
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Transaction and Fund Expenses
Financial Highlights
Fund, Market, and Risk
Characteristics
2 About Your Account
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Pricing Shares and
Receiving Sale Proceeds
Distributions and Taxes
Transaction Procedures and
Special Requirements
3 More About the Funds
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Organization and Management
Understanding Performance
Information
Special Risks and Considerations
Description of Underlying
Price Funds
Spectrum Fund Investment Policies
Investment Policies and Practices
of Underlying Price Funds
4 Investing With T. Rowe Price
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Account Requirements and
Transaction Information
Opening a New Account
Purchasing Additional Shares
Exchanging and Redeeming
Shareholder Services
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-----------------------------
T. Rowe Price
SPECTRUM FUNDS
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1 About the Funds
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Transaction and Fund Expenses
<PAGE>
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Like all T. Rowe Price funds,
these funds are 100% no load.
These tables should help you understand the kinds of expenses you will bear
indirectly as a fund shareholder. The funds will indirectly bear their pro rata
share of the expenses of the underlying Price funds.
In Table 1 below, "Shareholder Transaction Expenses," shows that you pay no
sales charges. All the money you invest in a fund goes to work for you. Shown
below are all expenses and fees each fund incurred during its fiscal year. More
information about these expenses may be found below and under "Management Fees
of Underlying Price Funds" and in the Statement of Additional Information under
"Management Fee and Expenses."
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Income Fund Growth Fund
Shareholder Transaction
Expenses
Sales charge "load" on
purchases None None
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Sales charge "load" on
reinvested dividends None None
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Redemption fees None None
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Exchange fees None None
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Annual Fund Expenses
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Management Fee None None
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Marketing fees (12b-1) None None
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Total other expenses
(shareholder servicing,
custodial, auditing, etc.) None None
Total fund expenses None None
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Note: The fund charges a $5 fee for wire redemptions under $5,000, subject to
change without notice, and a $10 fee is charged for small accounts when
applicable (see "Small Account Fee" under "Transaction Procedures and Special
Requirements").
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Table 1
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<PAGE>
The funds will operate at a zero expense level (see Expenses for an
explanation of the Special Servicing Agreement under Organization and
Management). However, the funds will indirectly bear their pro rata share of
fees and expenses incurred by the underlying Price funds and the investment
returns of the funds will be net of the expenses of the underlying Price funds.
The following chart provides the expense ratios for each of the underlying Price
funds in which both funds will invest (based on information as of December 31,
1995). Where applicable, expense ratios are restated to reflect current fees.
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Spectrum Income Expense Spectrum Growth Expense
Fund Ratio Fund Ratio
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Prime Reserve 0.66% Prime Reserve 0.66%
Equity Income 0.83 Equity Income 0.83
Short-Term Bond 0.71 Growth & Income 0.84
International Bond 0.90 International Stock 0.89
GNMA 0.74 New Era 0.79
High Yield 0.85 New Horizons 0.90
New Income 0.76 Growth Stock 0.80
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Based on the foregoing, the range of the average weighted expense ratio for
the Income Fund is expected to be 0.75% to 0.83% and for the Growth Fund 0.78%
to 0.86%. A range is provided since the average assets of the income and growth
funds invested in each of the underlying Price funds will fluctuate. o
Hypothetical example: Using the midpoint of the above ranges, the following
example illustrates the expenses you would incur on a $1,000 investment,
assuming you invest $1,000, the fund returns 5% annually, expense ratios remain
as listed previously, and you close your account at the end of the time periods
shown. Your expenses would be:
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The table at right is just an
example; actual expenses can
be higher or lower than those
shown.
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Fund 1 year 3 years 5 years 10 years
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Income $8 $25 $44 $98
Growth $8 $26 $46 $101
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Table 2
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<PAGE>
Financial Highlights
The following table provides information about each fund's financial
history. It is based on a single share outstanding throughout each fiscal year.
The table is part of each fund's financial statements which are included in each
fund's annual report and incorporated by reference into the Statement of
Additional Information. This document is available to shareholders upon request.
The financial statements in the annual report have been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report covers the
periods shown.
<PAGE>
<TABLE>
<CAPTION>
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Investment Activities Distributions
--------------------------------------------------- ----------------------------------------
Net Asset Net Net Realized and Total from Net Net
Period Ended, Value, Beginning Investment Unrealized Gain Investment Investment Realized Total
December 31 of Period Income (Loss) on Investments Activities Income (Loss) Gain (Loss) Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Fund
1990(a) $10.00 $0.44 $(0.18) $0.26 $(0.44) $(0.05) $(0.49)
1991 9.77 0.82 1.03 1.85 (0.83) (0.06) (0.89)
1992 10.73 0.76 0.05 0.81 (0.76) (0.08) (0.84)
1993 10.70 0.69 0.60 1.29 (0.69) (0.19) (0.88)
1994 11.11 0.69 (0.90) (0.21) (0.69) (0.10) (0.79)
1995 10.11 0.72 1.16 1.88 (0.72) (0.03) (0.75)
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Growth Fund
1990(a) $10.00 $0.20 $(1.21) $(1.01) $(0.19) $(0.28) $(0.47)
1991 8.52 0.21 2.33 2.54 (0.21) (0.32) (0.53)
1992 10.53 0.20 0.56 0.76 (0.20) (0.55) (0.75)
1993 10.54 0.16 2.05 2.21 (0.16) (0.72) (0.88)
1994 11.87 0.17 (0.01) 0.16 (0.17) (0.73) (0.90)
1995 11.13 0.21 3.12 3.33 (0.21) (0.76) (0.97)
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<CAPTION>
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End of Period
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Net Asset Total Return Ratio of Ratio of Net Portfolio
Period Ended, Value, (Includes Reinvested Net Assets Expenses to Average Investment Income to Turnover
December 31 End of Period Dividends) ($ Thousands) Net Assets Average Net Assets Rate
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<S> <C> <C> <C> <C> <C> <C>
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Income Fund
1990(a) $ 9.77 2.7% $ 40,082 0.00%(b) 9.58%(b) 36.9%(b)
1991 10.73 19.6% 147,859 0.00% 8.03% 18.8%
1992 10.70 7.8% 376,435 0.00% 7.10% 14.2%
1993 11.11 12.4% 587,931 0.00% 6.19% 14.4%
1994 10.11 (1.9%) 624,940 0.00% 6.48% 23.1%
1995 11.24 19.4% 986,701 0.00% 6.43% 20.2%
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Growth Fund
1990(a) $ 8.52 (10.1)% $ 35,387 0.00%(b) 4.50%(b) 33.4%(b)
1991 10.53 29.9% 148,661 0.00% 2.77% 14.6%
1992 10.54 7.2% 355,134 0.00% 2.15% 7.9%
1993 11.87 21.0% 584,876 0.00% 1.57% 7.0%
1994 11.13 1.4% 879,366 0.00% 1.60% 20.7%
1995 13.49 30.0% 1,358,344 0.00% 1.81% 7.4%
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<FN>
(a) For the period June 29, 1990 (commencement of operations) to December 31, 1990.
(b) Annualized.
</FN>
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Table 3
</TABLE>
<PAGE>
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Fund, Market, and Risk Characteristics: What to Expect
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Neither fund should represent
your complete investment
program, nor be used for
short-term trading purposes.
To help you decide whether the funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.
What are the funds' objectives?
The objective of Spectrum Income Fund is to provide a high level of current
income with moderate share price fluctuation. The objective of Spectrum Growth
Fund is to provide long-term capital appreciation and growth of income, with
current income a secondary objective.
What are the funds' investment programs?
Spectrum Income Fund will allocate its assets among a diversified group of
seven underlying T. Rowe Price funds that invest primarily in fixed income
securities. Spectrum Growth Fund will allocate its assets among a diversified
group of seven underlying T. Rowe Price funds that invest primarily in stocks.
Each fund will diversify within set limits based on T. Rowe Price's outlook
for the economy, financial markets, and relative market valuation of each
underlying fund. The amounts allocated to each underlying fund will vary within
the ranges specified below. The Spectrum Funds will not purchase shares of any
underlying fund that would result in the funds' ownership of more than 30% of an
underlying fund's outstanding voting shares.
=============================
For details about the funds'
investment programs and
practices, please see the
"Investment Policies and
Practices" section.
<PAGE>
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Spectrum Investment Spectrum Investment
Income Fund Range (% of Growth Fund Range (% of
Income Fund Growth Fund
assets) assets)
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Short-Term Bond 0-15% Prime Reserve 0-25%
GNMA 5-20% Equity Income 5-20%
International Bond 5-20% Growth & Income 5-20%
Equity Income 10-25% International Stock 5-20%
High Yield 10-25% New Era 10-25%
Prime Reserve 5-30% New Horizons 10-25%
New Income 15-30% Growth Stock 15-30%
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What are some of the funds' potential risks?
Each fund's share price will fluctuate with changing market conditions as
the share prices of the underlying funds rise or fall.
=============================
For Spectrum Income, a rise
in interest rates is an
important source of risk.
With Spectrum Income Fund, the risks are generally the same as with many
income funds:
* Interest rate or market risk: the decline in bond prices that accompanies
a rise in the overall level of interest rates.
* Credit risk: the chance that holdings of the underlying funds will have
their credit ratings downgraded or will default, potentially reducing the fund's
share price and income level. This risk is even greater with high-yield ("junk")
bonds, whose issuers are more vulnerable to business setbacks and to economic
changes, such as a recession, that may impair their ability to make timely
interest and principal payments.
* Prepayment risk: with mortgage-backed securities, there is a chance that,
when interest rates are falling, homeowners will accelerate principal payments
on mortgages, causing a loss to investors in mortgage securities that were
originally purchased at a price above par.
* Currency risk: The risk that weak foreign currencies versus the U.S.
dollar could result in losses for U.S. investors. Also, the fund's maximum 25%
exposure to the Equity Income Fund subjects that portion of assets to the risks
associated with stocks (see below).
<PAGE>
=============================
For Spectrum Growth, a
decline in stock prices is
an important source of risk.
With Spectrum Growth Fund, the major risk is the same inherent in all stock
funds. Since economic growth has been punctuated by declines, share prices of
even the best-managed, most profitable companies are subject to market risk.
Swings in investor psychology and significant trading by large institutions can
result in price declines. For this reason, equity investors should have a
long-term investment horizon and be willing to wait out bear markets.
A significant portion of the total assets of each fund may also be exposed
to the risks of foreign investing, including currency risk, as previously
defined. The economies, markets, and political structures of some countries in
which the underlying funds can invest do not compare favorably with the U.S. and
other mature economies in terms of wealth and stability. Therefore, investments
in these countries will be riskier and more subject to erratic and abrupt price
movements.
=============================
The funds' share prices will
fluctuate; when you sell your
shares, you may lose money.
What are some of the funds' potential rewards?
The funds offer a professionally managed allocation of assets among a broad
range of other Price funds. By investing in a variety of underlying funds, each
fund's performance could benefit from the diversified returns of many types of
securities.
For example, Spectrum Income invests in funds holding high-quality domestic
and foreign bonds, high-yield bonds, short- and long-term securities, and
dividend-paying stocks.
Spectrum Growth invests in funds holding domestic and foreign stocks,
small- and large-cap stocks, and growth and value stocks. Moreover, the
diversified nature of the funds' investments could cushion declines in falling
markets.
The theory of diversification holds that investors can reduce their overall
risk by spreading assets among a variety of investments. Each type of investment
follows a cycle of its own and responds differently to changes in the economy
and the marketplace. A decline in one investment can be balanced by returns in
other investments that are stable or rising. Therefore, a major benefit of these
funds is the potential for attractive long-term returns with reduced volatility.
<PAGE>
What are the characteristics of the underlying Price funds?
The major characteristics of the underlying T. Rowe Price funds are as
follows:
=============================
For a full description of the
underlying Price funds, please
see "Description of Underlying
Price Funds" in Section 3.
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Relative Fixed
Fixed Income Income Risk Objective/Program
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Prime Reserve Lowest Stable share price and liquidity while
generating current income
Short-Term Bond Low High income with minimal share price
fluctuation
GNMA Moderate High income consistent with maximum
credit protection and moderate share
price fluctuation
New Income Moderate High income with moderate share
price fluctuation
High Yield High High income and capital appreciation
through investments in high-yield
("junk") bonds
International Bond High High income and capital appreciation
through investments in high-quality
foreign bonds
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Relative
Equity Equity Risk Objective/Program
- --------------------------------------------------------------------------------
Equity Income Low Substantial dividend income and
capital appreciation
Growth & Income Low Capital appreciation and reasonable
dividend income
Growth Stock Moderate Capital appreciation and increasing
income through investments in
growth stocks
New Era Moderate Capital appreciation through investments
in natural resource stocks
International Stock Moderate Capital appreciation through investments
ments in stocks of established
foreign companies
New Horizons High Aggressive capital appreciation through
investments in small-company stocks
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<PAGE>
How can I decide if one or both of the funds is right for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you would like a one-stop approach to broad
diversification and can accept the possibility of moderate share price declines
in an effort to achieve relatively high income, Spectrum Income Fund could be an
appropriate part of your overall investment strategy. If you seek one-stop
diversification and can accept the possibility of greater share price declines
in an effort to achieve long-term capital appreciation, Spectrum Growth Fund
could be an appropriate part of your overall investment strategy.
For an IRA, retirement plan, or other long-term investment, the funds can
offer investment programs that seek to combine attractive returns with the
benefits of broad diversification.
Is there additional information about the funds to help me decide if they are
appropriate for me?
Be sure to review "Special Risks and Considerations," "Description of
Underlying Price Funds," "Investment Policies of the Spectrum Funds," and
"Investment Policies and Practices of Underlying Price Funds" in Section 3 for
further discussion of the funds' policies.
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2 About Your Account
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Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in a T. Rowe Price
fund.
=============================
The various ways you can buy,
sell, and exchange shares are
explained at the end of this
prospectus and on the New
Account Form. These procedures
may differ for institutional
and employer-sponsored
retirement accounts.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for each
fund is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, a fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
<PAGE>
How your purchase, sale, or exchange price is determined
If we receive your request in correct form before 4 p.m. ET, your
transaction will be priced at that day's NAV. If we receive it after 4 p.m., it
will be priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions and shares are priced and the time
until which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
=============================
When filling out the New
Account Form, you may wish
to give yourself the widest
range of options for
receiving proceeds from
a sale.
How you can receive the proceeds from a sale
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail, or
to your bank account by ACH transfer or bank wire. Proceeds sent by ACH transfer
should be credited the second day after the sale. ACH (Automated Clearing House)
is an automated method of initiating payments from and receiving payments in
your financial institution account. ACH is a payment system supported by over
20,000 banks, savings banks, and credit unions, which electronically exchanges
the transactions primarily through the Federal Reserve Banks. Proceeds sent by
bank wire should be credited to your account the next business day.
=============================
If for some reason we cannot
accept your request to sell
shares, we will contact you.
Exception:
* Under certain circumstances and when deemed to be in the funds' best
interests, your proceeds may not be sent for up to five business days after
receiving your sale or exchange request. If you were exchanging into a bond or
money fund, your new investment would not begin to earn dividends until the
sixth business day.
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Useful Information on Distributions and Taxes
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<PAGE>
=============================
All net investment income and
realized capital gains are
distributed to shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding; that
is, you receive income dividends and capital gain distributions on a rising
number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your check
remains uncashed for six months, a fund reserves the right to reinvest your
distribution check in your account at the then current NAV and to reinvest all
subsequent distributions in shares of the fund.
Spectrum Income Fund dividends
* The fund declares income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous business
day.
* The fund pays dividends on the first business day of each month.
* Fund shares will earn dividends through the date of redemption; also,
shares redeemed on a Friday or prior to a holiday will continue to earn
dividends until the next business day. Generally, if you redeem all of your
shares at any time during the month, you will also receive all dividends earned
through the date of redemption in the same check. When you redeem only a portion
of your shares, all dividends accrued on those shares will be reinvested, or
paid in cash, on the next dividend payment date.
Spectrum Growth Fund dividends
* The fund declares and pays dividends (if any) annually.
* All or part of the fund's dividends will be eligible for the 70%
deduction for dividends received by corporations.
Capital gains (both funds)
* A capital gain or loss is the difference between the purchase and sale
price of a security.
* If a fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to shareholders
of record on a specified date that month.
<PAGE>
=============================
You will be sent timely
information for your tax
filing needs.
Tax Information
The fund furnishes average cost and capital gain (loss) information on most
share redemptions.
You need to be aware of the possible tax consequences when:
* The fund makes a distribution to your account.
* You sell fund shares, including an exchange from one fund to another.
Taxes on your fund redemptions. When you sell shares in any fund, you may
realize a gain or loss. An exchange from one fund to another is still a sale for
tax purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will also
be reported to the IRS. For accounts opened new or by exchange in 1983 or later,
we will provide you with the gain or loss of the shares you sold during the
year, based on the "average cost" method. This information is not reported to
the IRS, and you do not have to use it. You may calculate the cost basis using
other methods acceptable to the IRS, such as "specific identification."
To help you maintain accurate records, we send you a confirmation
immediately following each transaction (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year. Taxes on fund distributions. The following summary
does not apply to retirement accounts, such as IRAs, which are tax-deferred
until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distribution made to you. This information will also
be reported to the IRS. All distributions made by a fund are taxable to you for
the year in which they were paid. The only exception is that distributions
declared during the last three months of the year and paid in January are taxed
as though they were paid by December 31. You will be sent any additional
information you need to determine your taxes on fund distributions, such as the
portion of your dividend, if any, that may be exempt from state income taxes.
Short-term capital gains are taxable as ordinary income and long-term gains
are taxable at the applicable long-term gain rate. The gain is long- or
short-term depending on how long the fund held the securities, not how long you
held shares in the fund. If you realize a loss on the sale or exchange of fund
shares held six months or less, your short-term loss recognized is reclassified
to long-term to the extent of any long-term capital gain distribution received.
<PAGE>
Gains and losses from the sale of foreign currencies and the foreign
currency gain or loss resulting from the sale of a foreign debt security can
increase or decrease a fund's ordinary income dividend. Net foreign currency
losses may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce a fund's dividends, but will still be included in your
taxable income. However, you may be able to claim an offsetting credit or
deduction on your tax return for your portion of foreign taxes paid by a fund.
Tax effect of buying shares before a capital gain distribution. If you buy
shares shortly before or on the "record date"-the date that establishes you as
the person to receive the upcoming distribution-you will receive, in the form of
a taxable distribution, a portion of the money you just invested. Therefore, you
may wish to find out a fund's record date(s) before investing. Of course, a
fund's share price may, at any time, reflect undistributed capital gains or
unrealized appreciation. When these amounts are eventually distributed, they are
taxable.
Tax-Qualified Retirement Plans. Tax-qualified retirement plans generally
will not be subject to federal tax liability on either distributions from the
funds or redemption of shares of the funds. Rather, participants in such plans
will be taxed when they begin taking distributions from the plans.
================================================================================
Transaction Procedures and Special Requirements
================================================================================
Purchase Conditions
Nonpayment. If your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be canceled. You will be
responsible for any losses or expenses incurred by the fund or transfer agent,
and the fund can redeem shares you own in this or another identically registered
T. Rowe Price fund as reimbursement. The fund and its agents have the right to
reject or cancel any purchase, exchange, or redemption due to nonpayment. U.S.
dollars. All purchases must be paid for in U.S. dollars; checks must be drawn on
U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you just purchased and paid for by
check or ACH transfer, the fund will process your redemption but will generally
delay sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following receipt
unless the check or ACH transfer has not cleared. If, during the clearing
period, we receive a check drawn against your bond or money market account, it
will be returned marked "uncollected." (The 10-day hold does not apply to the
following: purchases paid for by bank wire; cashier's, certified, or treasurer's
checks; or automatic purchases through your paycheck.)
<PAGE>
Telephone, Tele*Access [Registration Mark], and PC*Access [Registration
Mark] transactions. These exchange and redemption services are established
automatically when you sign the New Account Form unless you check the box which
states that you do not want these services. Each fund uses reasonable procedures
(including shareholder identity verification) to confirm that instructions given
by telephone are genuine and is not liable for acting on these instructions. If
these procedures are not followed, it is the opinion of certain regulatory
agencies that a fund may be liable for any losses that may result from acting on
the instructions given. A confirmation is sent promptly after the telephone
transaction. All conversations are recorded.
Redemptions over $250,000. Large sales can adversely affect a portfolio
manager's ability to implement a fund's investment strategy by causing the
premature sale of securities that would otherwise be held. If, in any 90-day
period, you redeem (sell) more than $250,000, or your sale amounts to more than
1% of the fund's net assets, the fund has the right to delay sending your
proceeds for up to five business days after receiving your request, or to pay
the difference between the redemption amount and the lesser of the two
previously mentioned figures with securities from the fund.
=============================
T. Rowe Price may bar
excessive traders from
purchasing shares.
Excessive Trading
Frequent trades involving either substantial fund assets, or a substantial
portion of your account or accounts controlled by you, can disrupt management of
the fund and raise its expenses. We define "excessive trading" as exceeding one
purchase and sale involving the same fund within any 120-day period.
For example, you are in fund A. You can move substantial assets from fund A
to fund B, and, within the next 120 days, sell your shares in fund B to return
to fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds. Three types of
transactions are exempt from excessive trading guidelines: 1) trades solely
between money market funds; 2) redemptions that are not part of exchanges; and
3) systematic purchases or redemptions (see "Shareholder Services").
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your account
after giving you 60 days in which to increase your balance.
<PAGE>
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the funds' transfer agent,
will automatically be deducted from nonretirement accounts with balances falling
below a minimum level. The valuation of accounts and the deduction are expected
to take place during the last five business days of September. The fee will be
deducted from accounts with balances below $2,000, except for UGMA/UTMA
accounts, for which the limit is $500. The fee will be waived for any investor
whose aggregate T. Rowe Price mutual fund investments total $25,000 or more.
Accounts employing automatic investing (e.g., payroll deduction, automatic
purchase from a bank account, etc.) are also exempt from the charge. The fee
will not apply to IRAs and other retirement plan accounts. (A separate custodial
fee may apply to IRAs and other retirement plan accounts.)
=============================
A signature guarantee is
designed to protect you and
the T. Rowe Price funds from
fraud by verifying your
signature.
Signature Guarantees
You may need to have your signature guaranteed in certain situations, such as:
* Written requests 1) to redeem over $50,000, or 2) to wire redemption
proceeds.
* Remitting redemption proceeds to any person, address, or bank account not
on record.
* Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
* Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
================================================================================
3 More About the Funds
================================================================================
Organization and Management
================================================================================
<PAGE>
=============================
Shareholders benefit from
T. Rowe Price's 59 years of
investment management
experience.
How are the funds organized?
The T. Rowe Price Spectrum Fund, Inc. (Spectrum Fund) is a Maryland
corporation organized in 1987 and is registered with the Commission under the
1940 Act as a nondiversified, open-end investment company, commonly known as a
"mutual fund." Mutual funds pool money received from shareholders and invest it
to try to achieve specified objectives.
Currently, Spectrum Fund consists of two series, the Spectrum Income Fund
and the Spectrum Growth Fund, each of which represents a separate class of
shares and has different objectives and investment policies. The Spectrum Fund's
Charter provides that the Board of Directors may issue additional series of
shares and/or additional classes of shares for each series.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in
a fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
* Receive a proportional interest in the fund's income and capital gain
distributions.
* Cast one vote per share on certain fund matters, including the election
of fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and do not intend to do
so except when certain matters, such as a change in a fund's fundamental
policies, are to be decided. In addition, shareholders representing at least 10%
of all eligible votes may call a special meeting if they wish for the purpose of
voting on the removal of any fund director or trustee. If a meeting is held and
you cannot attend, you can vote by proxy. Before the meeting, the fund will send
you proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
=============================
All decisions regarding the
purchase and sale of fund
investments are made by
T. Rowe Price-specifically
by the funds' portfolio
managers.
Who runs the funds?
General Oversight. The funds are governed by a Board of Directors that
meets regularly to review the funds' investments, performance, expenses, and
other business affairs. The Board elects the funds' officers. The policy of the
funds is that a majority of Board members will be independent of T. Rowe Price
and that none of the independent directors will be directors of any underlying
Price fund. In exercising their responsibilities, the Board, among other things,
will refer to the Special Servicing Agreement and policies and guidelines
included in the Exemptive Order ("Order") issued by the Securities and Exchange
Commission in connection with the operation of the funds. The interested
directors and the officers of Spectrum Fund and T. Rowe Price also serve in
similar positions with most of the underlying Price funds. Thus, if the
interests of a fund and the underlying Price funds were ever to become
divergent, it is possible that a conflict of interest could arise and affect how
the interested directors and officers fulfill their fiduciary duties to that
fund and the underlying Price funds. The directors of Spectrum Fund believe they
have structured each fund to avoid these concerns. However, conceivably, a
situation could occur where proper action for the Growth Fund or Income Fund,
could be adverse to the interests of an underlying Price fund, or the reverse
could occur. If such a possibility arises, the directors and officers of the
affected funds and T. Rowe Price will carefully analyze the situation and take
all steps they believe reasonable to minimize and, where possible, eliminate the
potential conflict. Moreover, limitations on aggregate investments in the
underlying Price funds and other restrictions have been adopted by Spectrum Fund
to minimize this possibility, and close and continuous monitoring will be
exercised to avoid, insofar as possible, these concerns.
Spectrum Fund Portfolio Management. The funds have an Investment Advisory
Committee composed of the following members: Peter Van Dyke, Chairman, Stephen
W. Boesel, Edmund M. Notzon, James S. Riepe, Charles P. Smith, and M. David
Testa. The committee chairman has day-to-day responsibility for managing the
funds and works with the committee in developing and executing the funds'
investment programs. Mr. Van Dyke has been chairman of the committee since 1990.
He has been managing investments since joining T. Rowe Price in 1985.
Management of the Underlying Price Funds. T. Rowe Price serves as
investment manager to all of the underlying Price funds with the exception of
the T. Rowe Price International Stock Fund and the T. Rowe Price International
Bond Fund, and is responsible for selection and management of the underlying
Price funds' portfolio investments. T. Rowe Price serves as investment manager
to a variety of individual and institutional investors, including limited and
real estate partnerships and other mutual funds.
<PAGE>
Price-Fleming is responsible for selection and management of the portfolio
investments of the T. Rowe Price International Stock Fund and the T. Rowe Price
International Bond Fund and, subject to the authority of such funds' Board of
Directors, for their business affairs. As of December 31, 1995, Price-Fleming
managed approximately $22 billion of assets, substantially all of which were
invested in foreign securities. Price-Fleming's U.S. office is located at 100
East Pratt Street, Baltimore, Maryland 21202.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture
between T. Rowe Price and Robert Fleming Holdings Limited (Flemings). Flemings
is a diversified investment organization which participates in a global network
of regional investment offices in New York, London, Zurich, Geneva, Tokyo, Hong
Kong, Manila, Kuala Lumpur, Seoul, Taipei, Bombay, Jakarta, Singapore, Bangkok,
and Johannesburg.
Flemings was incorporated in 1974 in the United Kingdom as successor to the
business founded by Robert Fleming in 1873.
T. Rowe Price, Flemings, and Jardine Fleming are owners of Price-Fleming.
The common stock of Price-Fleming is 50% owned by a wholly owned subsidiary of
T. Rowe Price, 25% by Flemings, and 25% by Jardine Fleming Group Limited
(Jardine Fleming). (Half of Jardine Fleming is owned by Flemings and half by
Jardine Matheson Holdings Limited.)
T. Rowe Price has the right to elect a majority of the board of directors
of Price-Fleming, and Flemings has the right to elect the remaining directors,
one of whom will be nominated by Jardine Fleming.
Marketing. T. Rowe Price Investment Services, Inc., a wholly owned
subsidiary of T. Rowe Price, distributes (sells) shares of these and all other
T. Rowe Price funds.
Shareholder Services. T. Rowe Price Services, Inc., another wholly owned
subsidiary, acts as the funds' transfer and dividend disbursing agent and
provides shareholder and administrative services. Services for certain types of
retirement plans are provided by T. Rowe Price Retirement Plan Services, Inc.,
also a wholly owned subsidiary. The address for each is 100 East Pratt St.,
Baltimore, MD 21202.
How are fund expenses determined?
Each fund will operate at a zero expense ratio. However, each fund will
incur its pro rata share of the fees and expenses of the underlying Price funds
in which they invest. The payment of each fund's operational expenses is subject
to the Special Servicing Agreement described below as well as certain
undertakings made by T. Rowe Price, under its Investment Management Agreement
with each fund. Fund expenses include: shareholder servicing fees and expenses;
custodian and accounting fees and expenses; legal and auditing fees; expenses of
preparing and printing prospectuses and shareholder reports; registration fees
and expenses; proxy and annual meeting expenses, if any; and directors' fees and
expenses.
<PAGE>
=============================
Here is some information
regarding the Special
Servicing Agreement.
The Special Servicing Agreement (Agreement) is between and among Spectrum
Fund, the underlying Price funds, T. Rowe Price, and TRP Services. Under the
Agreement, TRP Services will act as Shareholder Servicing Agent for Spectrum
Fund and arrange for all other services necessary for the operation of Spectrum
Fund.
The Agreement provides that, if the Board of Directors or Trustees of any
underlying Price fund determines that such underlying fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
underlying Price fund from the operation of Spectrum Fund, the underlying Price
fund will bear those expenses in proportion to the average daily value of its
shares owned by Spectrum Fund, provided further that no underlying Price fund
will bear such expenses in excess of the estimated savings to it. Such savings
are expected to result primarily from the elimination of numerous separate
shareholder accounts which are or would have been invested directly in the
underlying Price funds and the resulting reduction in shareholder servicing
costs. Although such cost savings are not certain, the estimated savings to the
underlying Price funds generated by the operation of Spectrum Fund are expected
to be sufficient to offset most, if not all, of the expenses incurred by
Spectrum Fund.
Under the Investment Management Agreement with the funds, and the Special
Servicing Agreement, T. Rowe Price has agreed to bear any expenses of Spectrum
Fund which exceed the estimated savings to each of the underlying Price funds.
Thus, Spectrum Fund will operate at a zero expense ratio. Of course,
shareholders of Spectrum Fund will still indirectly bear their fair and
proportionate share of the cost of operating the underlying Price funds owned by
Spectrum Fund.
The Management Fee. T. Rowe Price will act as the investment manager for
the Income Fund and the Growth Fund, but will not be paid a management fee for
performing such services. However, T. Rowe Price and Price-Fleming receive
management fees from managing the underlying Price funds in which the funds
invest.
The determination of how each fund's assets will be invested in the
underlying Price funds will be made by T. Rowe Price pursuant to the investment
objectives and policies of each fund set forth in this prospectus and procedures
and guidelines established by the Board of Directors for the Spectrum Fund. The
Directors for Spectrum Fund will periodically monitor the allocations made and
the basis upon which such allocations were made or maintained. Each fund, as a
shareholder in any underlying Price fund, will indirectly bear its proportionate
share of any investment management fees and other expenses paid by the
underlying Price funds.
<PAGE>
Each underlying Price fund pays T. Rowe Price (or Price-Fleming) an
investment management fee consisting of two parts: an "individual fund fee"
(discussed below) and a "group fee." The group fee, which reflects the benefits
each underlying fund derives from sharing the resources of the T. Rowe Price
investment management complex, is calculated daily based on the combined net
assets of all T. Rowe Price funds (except Equity Index and the Spectrum Funds
and any institutional or private label mutual funds). The group fee schedule
(shown below) is graduated, declining as the asset total rises, so shareholders
benefit from the overall growth in mutual fund assets.
0.480% First $1 billion 0.370% Next $1 billion 0.330% Next $10 billion
0.450% Next $1 billion 0.360% Next $2 billion 0.320% Next $10 billion
0.420% Next $1 billion 0.350% Next $2 billion 0.310% Next $16 billion
0.390% Next $1 billion 0.340% Next $5 billion 0.305% Thereafter
The underlying Price fund's portion of the group fee is determined by the
ratio of its daily net assets to the daily net assets of all the Price funds
described above. Based on the combined Price funds' assets of approximately
$48.6 billion at December 31, 1995, the group fee was 0.34%.
The individual fund fees and total management fees of the underlying Price
funds are as follows:
Individual
Fee as a Total
% of Fund Management
Fund Net Assets Fee Paid
- --------------------------------------------------------------------------------
International Bond 0.35% 0.69%
International Stock 0.35 0.69
New Horizons 0.35 0.69
High Yield 0.30 0.64
Equity Income 0.25 0.59
Growth Stock 0.25 0.59
New Era 0.25 0.59
GNMA 0.15 0.49
Growth & Income 0.25 0.59
New Income 0.15 0.49
Short-Term Bond 0.10 0.44
Prime Reserve 0.05 0.39
================================================================================
The total combined management fee for each of the underlying Price funds
was an annual rate as shown above.
<PAGE>
================================================================================
Understanding Performance Information
================================================================================
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive from
us, in our newsletter, The Price Report, in Insights articles, in T. Rowe Price
advertisements, and in the media.
=============================
Total return is the most
widely used performance
measure. Detailed performance
information is included in
the funds' annual and
semiannual shareholder
reports and in the quarterly
Performance Update, which are
all available without charge.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the period
were reinvested in additional shares. Including reinvested distributions means
that total return numbers include the effect of compounding, i.e., you receive
income and capital gain distributions on a rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period.
A cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual, cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
<PAGE>
Yield (Income Fund)
The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid to
shareholders for a given period, annualized, and divided by the average price
during the given period. For example, a fund providing $5 of annual income per
share and a price of $50 has a current yield of 10%. Yields can be calculated
for any time period. The advertised or "SEC" yield is found by determining the
net income per share (as defined by the SEC) earned by the fund during a 30-day
base period and dividing this amount by the per share price on the last day of
the base period. The SEC yield may differ from the dividend yield.
================================================================================
Special Risks and Considerations
================================================================================
Prospective investors should consider the following factors:
* The investments of each fund are concentrated in the underlying Price
funds, so each fund's investment performance is directly related to the
investment performance of these underlying Price funds.
* As a matter of fundamental policy, the funds must allocate their
investments among the underlying Price funds within certain ranges. As a result,
they do not have the same flexibility to invest as a mutual fund without such
constraints.
* As an operating policy, each fund will not redeem more than 1% of any
underlying Price fund's assets during any period of less than 15 days, except
when necessary to meet the fund's shareholder redemption requests. As a result,
the funds may not be able to reallocate assets among the underlying Price funds
as efficiently and rapidly as would be the case in the absence of this
constraint.
* In addition to their principal investments, certain underlying Price
funds may: invest a portion of their assets in foreign securities; enter into
forward currency transactions; lend their portfolio securities; enter into stock
index, interest rate, and currency futures contracts, and options on such
contracts; engage in options transactions; make short sales; purchase zero
coupon bonds and payment-in-kind bonds; and engage in various other investment
practices.
* The officers, interested directors, and T. Rowe Price, the investment
manager of Spectrum Funds, presently serve as officers, interested directors,
and investment manager of most of the underlying Price funds. Therefore,
conflicts may arise as these persons fulfill their fiduciary responsibilities to
Spectrum Funds and the underlying Price funds.
<PAGE>
* Spectrum Income Fund must invest at least 10% and can invest as much as
25% of its assets in the T. Rowe Price High Yield Fund. As a result, the Income
Fund will be subject to some of the risks resulting from high-yield investing.
* Each of the funds may invest in underlying Price funds which invest in
medium-grade bonds. If these bonds are downgraded, the funds will consider
whether to increase or decrease their investment in the affected underlying
Price fund.
* Spectrum Income Fund may invest in underlying Price funds which
concentrate their assets in certain industries. Under certain unusual
circumstances, this could result in the Income Fund being indirectly
concentrated in these industries. If this were to occur, the Income Fund would
consider whether to maintain or change its investments in such underlying Price
funds.
* Spectrum Income Fund must invest at least 5% and can invest as much as
20% of its assets in the International Bond Fund, which invests primarily in
foreign fixed income securities; the Spectrum Growth Fund must invest at least
5% and can invest as much as 20% of its assets in the International Stock Fund,
which invests primarily in foreign equity securities. These investments will
subject the funds to risks associated with investing in foreign securities.
Description of Underlying Price Funds
The following is a brief description of the principal investment programs
of the underlying Price funds. Additional investment practices are described
under "Special Risks and Considerations," the Statement of Additional
Information, and the prospectuses for each of the underlying Price funds.
Underlying Price Funds of Both the Spectrum Income and Growth Funds
* T. Rowe Price Prime Reserve Fund is a money market fund which is managed
to maintain a stable share price of $1.00. This policy has been maintained since
its inception; however, the $1.00 price is neither insured by the U.S.
government, nor is its yield fixed. The fund invests at least 95% of its total
assets in prime money market instruments, that is, securities receiving the
highest credit rating. The dollar-weighted average maturity of the fund will not
exceed 90 days. Since the fund is managed to maintain a constant share price,
its total return should be composed entirely of income.
* T. Rowe Price Equity Income Fund's objective is to provide substantial
dividend income as well as long-term capital appreciation through investments in
common stocks of established companies. Under normal circumstances, the fund
will invest at least 65% of total assets in the common stocks of established
companies paying above-average dividends. These companies are expected to have
favorable prospects for dividend growth and capital appreciation, according to
T. Rowe Price.
<PAGE>
Spectrum Income Fund. Each of the underlying Price funds in the Income Fund
seeks the highest level of income consistent with its individual investment
program.
* T. Rowe Price Short-Term Bond Fund's objective is to provide a high level
of income consistent with minimum fluctuation in principal value and liquidity.
The fund will invest in a diversified portfolio of short- and intermediate-term
corporate, government, and mortgage debt securities. Under normal circumstances,
at least 65% of total assets will be invested in short-term bonds. The fund's
dollar-weighted average effective maturity will not exceed three years.
Securities purchased by the fund will be rated within the four highest credit
categories.
* T. Rowe Price GNMA Fund's objective is to provide a high level of current
income consistent with maximum credit protection and moderate price fluctuation
by investing exclusively in securities backed by the full faith and credit of
the U.S. government and instruments involving these securities. The fund invests
primarily in mortgage-backed securities issued and guaranteed by the Government
National Mortgage Association (GNMA). The GNMA guarantee does not apply in any
way to the price of GNMA securities or the fund, both of which will fluctuate
with market conditions.
Mortgage-Backed Securities. Mortgage lenders pool individual home mortgages
with similar characteristics to back a certificate or bond, which is then sold
to investors. Interest and principal payments generated by the underlying
mortgages are passed through to the investor. There is a risk of homeowner
prepayment; that is, when interest rates are falling, homeowners may accelerate
principal payments on the mortgages that underlie the GNMA securities.
Prepayments cause a loss to investors, such as this fund, on mortgages that were
originally purchased at a premium (price above par).
* T. Rowe Price International Bond Fund's objective is to provide high
current income and capital appreciation by investing in high-quality,
nondollar-denominated government and corporate bonds outside the U.S. The fund
also seeks to moderate price fluctuation by actively managing its maturity
structure and currency exposure. The fund will invest at least 65% of its assets
in high-quality bonds, but may invest up to 20% of assets in
below-investment-grade, high-risk bonds, including bonds in default or those
with the lowest rating.
Although the fund expects to maintain an intermediate to long weighted
average maturity, it has no maturity restrictions on the overall portfolio or on
individual securities. Normally, the fund does not hedge its foreign currency
exposure back to the dollar, nor involve more than 50% of total assets in cross
hedging transactions. Therefore, changes in foreign interest rates and currency
exchange rates are likely to have a significant impact on total return and the
market value of portfolio securities.
<PAGE>
* T. Rowe Price High Yield Fund has high current income and, secondarily,
capital appreciation as its objective. Under normal conditions, the fund expects
to invest at least 80% of its total assets in a widely diversified portfolio of
high-yield bonds (so-called "junk" bonds) and income-producing convertible
securities and preferred stocks. The fund's longer average maturity (expected to
be in the 8- to 12-year range) makes its price more sensitive to broad changes
in interest rate movements than shorter-term bond funds. The portfolio manager
buys defaulted bonds only if significant potential for capital appreciation is
expected.
Special Risks of High-Yield Investing. This fund is expected to have
greater price swings than are associated with most bond funds emphasizing
high-quality investments. The total return and yield of lower-quality
(high-yield/high-risk) bonds, commonly referred to as "junk" bonds, can be
expected to fluctuate more than the total return and yield of higher-quality
bonds. Junk bonds are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Successful
investment in low- and lower-medium-quality bonds involves greater investment
risk and is highly dependent on T. Rowe Price's credit analysis. A real or
perceived economic downturn or higher rates could cause a decline in high-yield
bond prices because such events could lessen the ability of issuers to make
principal and interest payments. In addition, the entire junk bond market can
experience sudden and sharp price swings due to a variety of factors.
=============================
For more information about an
underlying Price fund, call:
1-800-638-5660
1-410-547-2308
The High Yield Fund imposes a redemption fee of 1% on all redemptions
(including exchanges) of shares held in the fund for less than one year. The
redemption fee is paid to the High Yield Fund. Spectrum Fund is subject to this
fee if it redeems shares held in the High Yield Fund for less than one year.
* T. Rowe Price New Income Fund's objective is to provide the highest level
of income over time consistent with the preservation of capital through
investment primarily in marketable debt securities. At least 80% of total assets
will be invested in income-producing, investment-grade instruments, including
(but not limited to) U.S. government and agency obligations, mortgage-backed
securities, corporate debt securities, asset-backed securities, bank
obligations, CMOs, commercial paper, foreign securities, and others. There are
no maturity restrictions on securities purchased by the fund, but the fund's
dollar-weighted average maturity is generally expected to be between 4 and 15
years.
<PAGE>
- --------------------------------------------------------------------------------
Summary of Programs
- --------------------------------------------------------------------------------
Share
price Expected
Credit fluctuation average
Fund quality Yield (NAV) maturity
- --------------------------------------------------------------------------------
Prime Reserve 2 highest Lowest Maintain No more
possible $1.00 (not than 90 days
guaranteed)
- --------------------------------------------------------------------------------
Short-Term Bond 4 highest Moderate Moderate Not greater
than 3 years
- --------------------------------------------------------------------------------
GNMA Highest Moderate Moderate Varies,
possible 3-10 years
- --------------------------------------------------------------------------------
New Income 4 highest High High No restriction
- --------------------------------------------------------------------------------
International Primarily 4 High High Intermediate
Bond highest (up to long
to 20% below
4 highest)
- --------------------------------------------------------------------------------
High Yield BB or lower Highest Highest Normally
8-12 years
- --------------------------------------------------------------------------------
Table 4
Spectrum Growth Fund. Each of the underlying Price funds in the Spectrum
Growth Fund seeks long-term growth of capital as its primary objective.
* T. Rowe Price Growth & Income Fund's objective is to provide long-term
capital growth, a reasonable level of current income, and increasing future
income through investments primarily in dividend-paying stocks. The fund can
focus on companies whose earnings are expected by T. Rowe Price to grow at an
above-average rate and can support a growing dividend payment as well as stocks
that do not pay dividends currently but offer prospects of appreciation and
future income.
* T. Rowe Price International Stock Fund's objective is to seek long-term
growth of capital through investments primarily in common stocks of established,
non-U.S. companies. The fund expects to invest substantially all of its assets
outside the U.S. and to diversify broadly among countries throughout the world
in developed, newly industrialized, and emerging economies.
<PAGE>
* T. Rowe Price New Era Fund's objective is to provide long-term capital
appreciation by investing primarily in common stocks of companies that own or
develop natural resources and other basic commodities, and in the stocks of
selected nonresource growth companies. The fund's primary focus will be on the
common stocks of companies whose earnings and tangible assets are expected to
grow faster than inflation. The fund will also invest in selected nonresource
growth companies with strong potential for earnings growth.
* T. Rowe Price New Horizons Fund's objective is to provide long-term
growth of capital by investing primarily in common stocks of small, rapidly
growing companies. The fund will invest primarily in a diversified group of
small, emerging growth companies. It will seek to invest early in the corporate
life cycle, before a company becomes widely recognized by the investment
community. The fund may also invest in companies that offer the possibility of
accelerating earnings growth because of rejuvenated management, new products, or
structural changes in the economy.
* T. Rowe Price Growth Stock Fund's objective is to provide long-term
growth of capital and, secondarily, increasing dividend income by investing
primarily in common stocks of well-established growth companies. The fund will
invest primarily (at least 65% of total assets) in the common stocks of a
diversified group of growth companies. Though it is not required, the companies
in which the fund invests normally pay dividends, which are generally expected
to rise in future years as earnings increase.
================================================================================
Investment Policies of the Spectrum Funds
================================================================================
Each fund's investment policies and practices are subject to further
restrictions and risks which are described in the Statement of Additional
Information. The funds will not make a material change in their investment
objectives or their fundamental policies without obtaining shareholder approval.
The funds' investment programs, unless otherwise specified, are not fundamental
policies and may be changed without shareholder approval. Shareholders will be
notified of any material change in such investment programs.
=============================
Cash reserves provide
flexibility and serve as a
short-term defense during
periods of unusual market
volatility.
Cash Position. While the Income Fund will remain primarily invested in
bonds and the Growth Fund in stocks, each fund can hold a certain portion of its
assets in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements in the two highest rating categories, maturing in one year
or less. For temporary, defensive purposes, a fund may invest without limitation
in such securities. Each fund may invest its cash reserves in the Prime Reserve
Fund. A reserve position provides flexibility in meeting redemptions, expenses,
and the timing of new investments, and serves as a short-term defense during
periods of unusual volatility.
<PAGE>
Diversification. Spectrum Fund is a "nondiversified" investment company for
purposes of the 1940 Act because it invests in the securities of a limited
number of mutual funds. However, the underlying Price funds themselves are
diversified investment companies (with the exception of the T. Rowe Price
International Bond Fund). Spectrum Fund intends to qualify as a diversified
investment company for the purposes of Subchapter M of the Internal Revenue
Code.
Fundamental Investment Policies. As a matter of fundamental policy, each
fund will not: (i) invest more than 25% of its respective total assets in any
one industry, except for investment companies which are members of the T. Rowe
Price family of funds; (ii) borrow money except temporarily to facilitate
redemption requests in amounts not exceeding 30% of each fund's total assets
valued at market; (iii) in any manner transfer as collateral for indebtedness
any securities owned by each fund except in connection with permissible
borrowings, which in no event will exceed 30% of each fund's total assets valued
at market; (iv) change the selection of the underlying Price funds in which it
can invest; or (v) change the percentage ranges of each fund which may be
allocated to the underlying Price funds.
Other Investment Restrictions. As a matter of operating policy, each fund
will not, among other things: (i) purchase additional securities when money
borrowed exceeds 5% of the fund's total assets; (ii) invest more than 10% of its
net assets in illiquid securities, provided that each fund will not invest more
than 5% of its net assets in restricted securities (other than securities
eligible for resale under Rule 144A of the Securities Act of 1933); and (iii)
redeem securities from any underlying Price fund at a rate in excess of 1% of
the underlying Price fund's assets in any period of less than 15 days, except
where necessary to meet shareholder redemption requests.
The funds may not purchase shares of any underlying Price fund if, as a
result of such purchase, they would own more than 30% of the outstanding voting
securities of the underlying Price fund. This is an operating policy and may be
changed by the Board of Directors. The ability to invest this amount in the
underlying Price funds could subject the funds to greater risk due to the
resulting concentration. However, each of the underlying Price funds invests in
a broad portfolio, which would tend to mitigate this risk to some degree.
If a fund reaches a percentage investment limit with any underlying Price
fund, the Directors will have to determine whether to increase the limit, stop
sales of shares of that fund, or take other suitable steps.
Portfolio Turnover. Each fund's portfolio turnover is expected to be low.
The funds will purchase or sell securities to: (i) accommodate purchases and
sales of each fund's shares; (ii) change the percentages of each fund's assets
invested in each of the underlying Price funds in response to market conditions;
and (iii) maintain or modify the allocation of each fund's assets among the
underlying Price funds within the percentage limits described earlier. The
following chart sets forth each fund's portfolio turnover rates for the years
ended December 31, 1995, December 31, 1994, and December 31, 1993.
<PAGE>
1995 1994 1993
- --------------------------------------------------------------------------------
Income Fund 20.2% 23.1% 14.4%
Growth Fund 7.4 20.7 7.0
================================================================================
================================================================================
Investment Policies and Practices of Underlying Price Funds
================================================================================
=============================
Fund managers have
considerable leeway in
choosing investment
strategies and selecting
securities they believe will
help the funds achieve their
objectives.
In pursuing their investment objectives and programs, each of the
underlying Price funds is permitted to engage in a wide range of investment
policies. Certain of these policies are described in the following paragraphs
and further information about the underlying Price funds is contained in the
Statement of Additional Information as well as the prospectuses of such funds.
Because each fund invests in the underlying Price funds, shareholders of each
fund will be affected by these investment policies in direct proportion to the
amount of assets each fund allocates to the underlying funds pursuing such
policies. Lending of Portfolio Securities. Like other mutual funds, the
underlying Price funds may lend securities to broker-dealers, other
institutions, or other persons to earn additional income. The principal risk is
the potential insolvency of the broker-dealer or other borrower. In this event,
the underlying Price funds could experience delays in recovering its securities
and possibly capital losses.
Foreign Securities. The funds will each invest in certain underlying Price
funds that invest all or a portion of their assets in foreign securities. These
investments in foreign securities, include nondollar-denominated securities
traded outside of the U.S. and dollar-denominated securities of foreign issuers.
Such investments increase a portfolio's diversification and may enhance return,
but they also involve some special risks such as exposure to potentially adverse
local political and economic developments; nationalization and exchange
controls; potentially lower liquidity and higher volatility; possible problems
arising from accounting, disclosure, settlement, and regulatory practices that
differ from U.S. standards; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value). To the extent the underlying Price funds invest in developing countries,
these risks are increased.
<PAGE>
Managing Foreign Currency Risk. Foreign securities in which the underlying
Price funds invest are subject to currency risk, that is, the risk that the U.S.
dollar value of these securities may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations.
Investors in foreign securities may "hedge" their exposure to potentially
unfavorable currency changes by purchasing a contract to exchange one currency
for another on some future date at a specified exchange rate. In certain
circumstances, a "proxy currency" may be substituted for the currency in which
the investment is denominated, a strategy known as "proxy hedging." An
underlying fund may also use these contracts to create a synthetic bond-issued
by a U.S. company, for example, but with the dollar component transformed into a
foreign currency. Although the underlying funds will engage in foreign currency
transactions primarily to protect the fund's foreign securities from adverse
currency movements relative to the dollar, they involve the risk that
anticipated currency movements will not occur and the fund's total return could
be reduced.
=============================
Futures are used to manage
risk; options give the
investor the option to buy
or sell an asset at a
predetermined price in the
future.
Futures and Options. Futures (a type of potentially high-risk derivative)
are often used to manage or hedge risk, because they enable the investor to buy
or sell an asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future. The
funds may buy and sell futures and options contracts for a number of reasons,
including: to manage their exposure to changes in interest rates, securities
prices, and foreign currencies; to efficiently adjust their overall exposure to
certain markets; to attempt to enhance income; to protect the value of portfolio
securities; and to adjust the portfolios' duration.
The funds may purchase, sell, or write call and put options on securities,
financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the funds' total return;
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
<PAGE>
================================================================================
4 Investing With T. Rowe Price
- --------------------------------------------------------------------------------
Account Requirements and Transaction Information
- --------------------------------------------------------------------------------
- ------------------------------
Always verify your
transactions by carefully
reviewing the confirmation we
send you. Please report any
discrepancies to Shareholder
Services promptly.
==============================
<PAGE>
Tax Identification Number
We must have your correct Social Security or corporate tax identification
number on a signed New Account Form or W-9 Form. Otherwise, federal law requires
the funds to withhold a percentage (currently 31%) of your dividends, capital
gain distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Unless you request otherwise, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same ZIP
code and to shareholders who have requested that their account be combined with
someone else's for financial reporting.
- ------------------------------
T. Rowe Price Trust Company
1-800-492-7670
1-410-625-6585
==============================
Employer-Sponsored Retirement Plans and Institutional Accounts
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
Opening a New Account: $2,500 minimum initial investment; $1,000 for retirement
or gifts or transfers to minors (UGMA/UTMA) accounts
- --------------------------------------------------------------------------------
<PAGE>
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account
just like your existing accounts so you can exchange among them easily. (The
name and account type would have to be identical.)
- ------------------------------
Regular Mail T. Rowe Price
Account Services P.O. Box
17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered,
or Certified Mail T. Rowe
Price Account Services 10090
Red Run Blvd. Owings Mills, MD
21117
==============================
By Mail
Please make your
check payable to T. Rowe Price Funds (otherwise it will be returned) and send
your check together with the New Account Form to the address at left. We do not
accept third party checks, except for IRA Rollover checks that are properly
endorsed, to open new accounts.
By Wire
* Call Investor Services for an account number and give the following wire
address to your bank:
Morgan Guaranty Trust Co. of New York
ABA# 021000238
T. Rowe Price [fund name]
AC-00153938
account name(s) and account number.
* Complete a New Account Form and mail it to one of the appropriate addresses
listed on the previous page.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
<PAGE>
Call Shareholder Services or use Tele*Access or PC*Access (see "Automated
Services" under "Shareholder Services"). The new account will have the same
registration as the account from which you are exchanging. Services for the new
account may be carried over by telephone request if preauthorized on the
existing account. (See explanation of "Excessive Trading" under "Transaction
Procedures.")
In Person
Drop off your New Account Form at any of the locations listed on the cover
and obtain a receipt.
Purchasing Additional Shares: $100 minimum purchase; $50 minimum for retirement
plans and Automatic Asset Builder
- --------------------------------------------------------------------------------
By ACH Transfer
Use Tele*Access or PC*Access, or call Investor Services, if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in "Opening a New
Account."
- ------------------------------
Regular Mail
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD
21289-1500
(For mailgrams, express,
registered, or certified mail,
see previous section.)
==============================
By Mail
* Make your check payable to T. Rowe Price Funds (otherwise it may be returned).
* Mail the check to us at the address shown at left with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
* Remember to provide your account number and the fund name on your check. By
Automatic Asset Builder Fill out the Automatic Asset Builder section on the
New Account or Shareholder Services Form.
<PAGE>
Exchanging and Redeeming Shares
- ------------------------------------------------------------------------------
By Phone
Call Shareholder Services. If you find our phones busy during unusually
volatile markets, please consider placing your order by PC*Access, Tele*Access
(if you have previously authorized telephone services), mailgram, or express
mail. For exchange policies, please see "Transaction Procedures and Special
Requirements--Excessive Trading."
Redemption proceeds can be mailed to your account address, sent by ACH
transfer, or wired to your bank (provided your bank information is already on
file). For charges, see "Electronic Transfers--By Wire" under "Shareholder
Services."
- ------------------------------
For mailgram, express,
registered, or certified mail,
see addresses under "Opening a
New Account.
==============================
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the funds you are exchanging into. Please mail to the
appropriate address below or as indicated at left.
T. Rowe Price requires the signatures of all owners exactly as registered,
and possibly a signature guarantee (see "Transaction Procedures and Special
Requirements--Signature Guarantees").
Regular Mail
For nonretirement and For employer-sponsored
IRA accounts: retirement accounts:
T. Rowe Price Account Services T. Rowe Price Trust Company
P.O. Box 89000 P.O. Box 89000
Baltimore, MD 21289-0220 Baltimore, MD 21289-0300
Redemptions from employer-sponsored retirement accounts, must be in
writing; please call Shareholder Services to obtain an IRA Distribution Request
Form or an IRA Shareholder Services Form to authorize the telephone redemption
service.
<PAGE>
Rights Reserved by the Fund
The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; to cancel or
rescind any purchase or exchange (for example, if an account has been restricted
due to excessive trading or fraud) upon notice to the shareholder within five
business days of the trade or if the written confirmation has not been received
by the shareholder, whichever is sooner; to freeze any account and temporarily
suspend services on the account when notice has been received of a dispute
between the registered or beneficial account owners or there is reason to
believe a fraudulent transaction may occur; to otherwise modify the conditions
of purchase and any services at any time; or to act on instructions believed to
be genuine.
Shareholder Services
- --------------------------------------------------------------------------------
- ------------------------------
Shareholder Services
1-800-225-5132
1-410-625-6500
==============================
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide
with our Welcome Kit.
Note: Corporate and other entity accounts require an original or certified
resolution to establish services and to redeem by mail. For more information,
call Investor Services.
- ------------------------------
Investor Services
1-800-638-5660
1-410-547-2308
==============================
Retirement Plans
We offer a wide range of plans for individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call Investor
Services. For information on all other retirement plans, please call our Trust
Company at 1-800-492-7670.
<PAGE>
Exchange Service
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the funds are registered.) Some of
the T. Rowe Price funds may impose a redemption fee of .50% to 2%, payable to
such funds, on shares held for less than one year, or in some funds, six months.
Automated Services
- ------------------------------
Tele*Access
1-800-638-2587
1-410-625-7676"
==============================
Tele*Access. 24-hour service via toll-free number provides information on
fund yields and prices, dividends, account balances, and your latest
transaction, as well as the ability to request prospectuses, account and tax
forms, duplicate statements, checks, and to initiate purchase, redemption, and
exchange orders in your accounts (see "Electronic Transfers" below).
PC*Access. 24-hour service via dial-up modem
provides the same information as Tele*Access, but on a personal computer. Please
call Investor Services for an information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers By ACH.
With no charges to pay, you can initiate
a purchase or redemption for as little as $100 or as much as $100,000 between
your bank account and fund account using the ACH network. Enter instructions via
Tele*Access, PC*Access, or call Shareholder Services.
By Wire. Electronic
transfers can also be conducted via bank wire. There is currently a $5 fee for
wire redemptions under $5,000, and your bank may charge for incoming or outgoing
wire transfers regardless of size.
Checkwriting (Not available for equity funds, or the High Yield or Emerging
Markets Bond Funds)
You may write an unlimited number of free checks on any money market fund,
and most bond funds, with a minimum of $500 per check. Keep in mind, however,
that a check results in a redemption; a check written on a bond fund will create
a taxable event which you and we must report to the IRS.
Automatic Investing ($50 minimum)
You can invest
automatically in several different ways, including:
* Automatic Asset Builder. You instruct us to move $50 or more once a month or
less often from your bank account, or you can instruct your employer to send
all or a portion of your paycheck to the fund or funds you designate.
<PAGE>
Note: If you are moving money from your bank account, and if the date you
select for your transaction falls on a Sunday or a Monday which is a holiday,
your order will be priced on the second business day following this date.
* Automatic Exchange. You can set up systematic investments from one fund
account into another, such as from a money fund into a stock fund.
- ------------------------------
Discount Brokerage is a
division of T. Rowe Price
Investment Services, Inc.
==============================
Discount Brokerage
You can trade stocks, bonds, options, precious metals, and other securities
at a savings over regular commission rates. Call Investor Services for
information.
Note: If you buy or sell T. Rowe Price funds through anyone other than T.
Rowe Price, such as broker-dealers or banks, you may be charged transaction or
service fees by those institutions. No such fees are charged by T. Rowe Price
Investment Services or the fund for transactions conducted directly with the
fund.
================================================================================
T. Rowe Price Funds
Individual Retirement Account
Disclosure Statement
================================================================================
This Disclosure Statement is provided to each person who establishes an
Individual Retirement Account ("IRA"). Please read it and the Custodial
Agreement carefully as well as the prospectuses for any of the T. Rowe Price
Funds you select for your IRA investment.
Revocation
You must receive this Disclosure Statement and Custodial Agreement seven
days prior to opening your IRA. Your Application cannot be accepted, nor can
your account be opened, until you have had these documents for seven days. You
may not revoke your Application for a T. Rowe Price IRA after it has been
received and accepted by the Custodian.
Definition of Individual Retirement Account
An IRA is a trust created in the United States for the exclusive benefit of
an individual (or his beneficiaries). Generally, you defer federal income taxes
on the earnings in your account and you may be able to defer income taxes on the
amount you invest. State income tax treatment of an IRA varies.
<PAGE>
Eligibility
All individuals who receive compensation may contribute to an IRA before
the year in which they reach age 701/2. If you or your spouse is an active
participant in an employer-sponsored retirement plan, you will be eligible to
make tax-deductible contributions only under limited conditions. If you are not
eligible to make deductible contributions, you may be able to make nondeductible
contributions.
Contributions
Your contributions must be in cash or a cash equivalent (for example, a
check). Except for rollovers, the maximum amount that you may contribute to all
IRAs for a calendar year is $2,000, but you can contribute less if you choose.
However, if your compensation for a year is less than $2,000, your contribution
is limited to the total amount of that compensation. If your spouse's earned
income is less than $250 during the year, your spouse may elect to be treated as
having no compensation and you may make a contribution to a separate spousal IRA
on your spouse's behalf. You need not make equal contributions to the two IRAs;
however, you may not contribute more than $2,000 to either IRA for any year and
the total contribution for both IRAs cannot exceed $2,250.
There are two different types of contributions: deductible contributions
and nondeductible contributions. Depending on your personal situation, your
contribution may be entirely deductible, entirely nondeductible or a portion of
both. The Internal Revenue Code ("Code") requires you to determine and report to
the IRS which portion of your contribution is deductible and/or nondeductible.
This information is needed to determine the taxable portion of any distributions
you receive. You are not required to inform the IRA Custodian what portion of
your contribution is deductible, and the Custodian is not obligated to check
whether you are correct.
Penalties apply if you overstate the amount of your deductible and/or
nondeductible contributions. If your deductible IRA contribution is limited
because you are an active participant in a qualified employer-sponsored plan and
your modified adjusted gross income exceeds a certain level, you may make a
nondeductible contribution which, when added to your maximum deductible
contribution, can be no more than your total annual limit on contributions (in
most cases, $2000). No contributions (except rollover contributions) may be made
to your IRA account for the year in which you reach age 701/2 or any following
year.
Rollover
IRA to IRA. You may roll over a distribution from one IRA to another IRA.
The amount may be all or part of the IRA. You must complete the transaction
within 60 days after you receive the distribution. You may make only one
rollover from an IRA in any 12-month period. There is no limit on the number of
rollovers you may make to an IRA in any period. There is also no limit on the
amount you may roll over from one IRA to another IRA.
<PAGE>
Qualified Plan to IRA. You may roll over all or part of an eligible
rollover distribution from a qualified employer plan to an IRA. Before you
receive the plan distribution, the plan should be able to tell you if all or
part of your plan distribution will qualify as an eligible rollover
distribution. The rollover may be accomplished by a "direct rollover;" that is,
the plan sends the distribution directly to the IRA. "Indirect" rollovers must
be completed within 60 days after you receive the distribution.
Transfer
You may authorize an IRA custodian to transfer cash (or securities)
directly from one IRA to another. As long as you do not directly receive a
distribution, you may transfer the funds between IRAs as often as you wish. If
you are transferring IRA assets to T. Rowe Price, call to request the proper
forms.
Limitation Regarding When Contributions Can Be Made Regular contributions
to an IRA, whether deductible or nondeductible, must be made no later than the
date required for filing your tax return for that year without any extension
(usually April 15).
All contributions must be made in cash. You may not make contributions of
property such as stock or real estate. In limited circumstances, you may be able
to transfer current property held in an IRA or employer-sponsored retirement
plan. Call us for specific details regarding the T. Rowe Price Discount
Brokerage IRA.
IRA Prohibitions
The following transactions are prohibited in your IRA:
1. No part of your IRA assets may be invested in life insurance or
commingled with other property except in a common trust or investment fund. In
addition, no part of your IRA assets may be invested in collectibles within the
meaning of section 408(m) of the Code, except for certain U.S. minted gold and
silver coins.
2. Transactions between you (or your beneficiary) and the assets held in
your IRA are not allowed. The specific prohibited transactions are described in
the Code (for example, borrowing from the account).
3. You may not pledge or use any portion of your IRA as security for a
loan.
If any one of these transactions occurs, part or all of your account will
lose its tax-deferred status and will be treated as having been distributed to
you.
<PAGE>
Distributions
Timing of Distributions. You can withdraw funds from your IRA at any time;
however, all taxable amounts withdrawn may be subject to an additional 10%
penalty. The most common types of distributions which can be made without
incurring the penalty include distributions:
a. after age 591/2,
b. upon death,
c. upon permanent disability,
d. that are part of a series of substantially equal periodic payments taken
at least annually over your life expectancy, or
e. timely rolled over to another IRA.
Minimum Required Distribution ("MRD"). You must begin to receive
distributions from your IRA by April 1 of the year following the year in which
you reach age 701/2. The distributions must be paid out at least annually based
upon your life expectancy or the combined life expectancy of you and your
designated primary beneficiary.
In calculating your MRD, your life expectancy may be recalculated annually.
If your life expectancy is not recalculated, the original life expectancy factor
will be reduced by one each year. The recalculation method is available for you
and your spousal beneficiary. You must make an IRREVOCABLE election whether to
recalculate. This election must be made before the first required distribution
date. If you fail to make an election, life expectancy will not be recalculated.
When you receive an MRD, please be aware that you may not roll over the MRD
to another IRA.
For purposes of calculating your MRD, you can aggregate your IRA accounts
from different custodians and take the MRD amount from any IRA. Therefore, T.
Rowe Price cannot monitor the required distributions from your T. Rowe Price
IRAs. Please check with your tax advisor to verify that you are receiving the
proper amount from all of your IRAs.
All distribution requests must be made in writing. Please contact T. Rowe
Price to receive the proper distribution form. Payment Options. Your account may
be distributed to you in one or both of the following methods:
a. A lump-sum payment of all or a part of the IRA.
b. Substantially equal installments taken at least annually for a period
not exceeding your life expectancy or the combined life expectancy of you and
your designated primary beneficiary.
<PAGE>
Taxation. Distributions from your IRA will be treated as part taxable and
part nontaxable if you have made nondeductible contributions to any IRA. You
must use IRS forms to determine how much of any distribution is nontaxable.
Unlike certain distributions from qualified plans, lump sum distributions from
IRAs are not eligible for capital gains or special averaging treatment. Unless
you elect in writing not to have federal income taxes withheld, the IRS requires
T. Rowe Price to withhold from the entire distribution an amount determined by
current IRS tables and regulations.
Payment to Beneficiary. If you die after distributions begin, the remaining
money will be distributed to your designated primary beneficiary in accordance
with the regulations under section 401(a)(9) of the Code. If you die before
distributions begin, your entire interest will be distributed in accordance with
the provisions outlined in Section 3.3 of the IRA Agreement. Your designated
beneficiary will be the last written designation that you filed with T.Rowe
Price during your lifetime.
Penalty Taxes
Excess Contributions. If you contribute more to an IRA than allowed in a
year, you must pay a 6% excise tax. Contributions (except rollover
contributions) which are subject to the excise tax are those contributions which
are greater than the lesser of (1) $2,000, or (2) your compensation for the
year. The 6% excise tax will apply for each year the excess contributions remain
in the IRA.
You can avoid the excise tax by withdrawing the excess contribution and any
earnings on it, if any, before the due date for filing your federal tax return
including extensions, for the year of the excess contribution. The withdrawn
earnings must be included in income for the tax year in which the excess
contribution was made. If you do not withdraw the excess contribution by the due
date of your tax return, you may be able to treat the excess contribution as a
contribution for the year after the excess contribution was made and eliminate
the penalty for that following year.
Failure to Report Nondeductible Contributions Properly. If, on your tax
return, you overstate the amount of a nondeductible contribution, you will be
subject to a $100 penalty for each overstatement unless you can prove that the
overstatement was due to a reasonable cause. Failure to report nondeductible
contributions will result in a $50 penalty.
Premature Distributions. If you receive distributions from your IRA before
you reach age 59 1/2, you may be subject to a 10% penalty tax in addition to the
ordinary income taxes you must pay on the distribution. See Timing of
Distributions section above. Excess Accumulations. After you reach age 70 1/2, a
50% penalty tax will be imposed on any amount which must be distributed to you
under the minimum required distribution rules, but which you fail to withdraw.
Excess Distributions. If the total annual amount you receive in a year from
all retirement plans, including IRAs, is in excess of the lesser of $150,000 or
$112,500 (as indexed), a 15% excise tax is applied to the excess amount. This
tax does not apply to nontaxable distributions or amounts rolled over.
<PAGE>
Please refer to IRS Publication 590, Individual Retirement Arrangements
(IRAs), for additional information concerning these complicated rules. You may
obtain this publication from your local IRS office or call 1-800-TAX-FORM. In
addition, you should contact your tax advisor to determine how these penalties
may affect you.
Fees
Fees. An annual fiduciary fee of $10 will be charged for each IRA mutual
fund account. However, this fee will be waived if the individual IRA mutual fund
account balance is $5,000 or greater at the time of fee billing. If you close
any mutual fund account in your T. Rowe Price IRA during the year other than by
exchange to another T. Rowe Price mutual fund account, the $10 fiduciary fee
will be deducted automatically from the proceeds of the redemption.
Some of these fees may be deductible on your federal income tax return if
you itemize your deductions and if you pay the fee directly during the same
calendar year for which you are claiming the deduction.
Information on fees and commissions associated with a Discount Brokerage
account is in the material provided with your Self-Directed IRA kit.
Miscellaneous
Tax Forms. T. Rowe Price will send you Form 5498 each year that you
contribute to your IRA. This form shows the total contributions for the prior
tax year and the total rollover contributions for the prior calendar year. You
also will receive a statement of the market value of your IRA account(s) on the
preceding December 31.
If you make nondeductible contributions, you must report the amount to the
IRS on Form 8606. If you incur a penalty tax due to excess accumulations,
premature distributions, excess contributions and/or excess distributions, you
must file Form 5329 for that year.
Investment Performance. The growth of your mutual fund account can be
neither projected nor guaranteed. IRS Approval. The updated T. Rowe Price Trust
Company IRA Custodial Agreement was approved by the Internal Revenue Service on
August 2, l993. The IRS approval concerns the form of the IRA Agreement with
respect to its tax qualification and does not involve the merits of investing in
the particular investment.
We recommend that you consult with your personal tax advisor concerning any
questions you have about your IRA. You also may obtain information from any
district office of the Internal Revenue Service.
<PAGE>
================================================================================
T. Rowe Price Funds
Individual Retirement Account
Custodial Agreement
================================================================================
Introduction
- --------------------------------------------------------------------------------
This Agreement is an amendment and restatement of the T. Rowe Price Funds
Prototype Individual Retirement Account Agreement which was approved by the
Internal Revenue Service (the "IRS") on March 27, 1986. This Agreement was
approved by the IRS on August 2, 1993.
By signing the Application, the individual hereinafter referred to as
Investor (the "Investor") establishes an Individual Retirement Custodial Account
(the "Account") under section 408(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), sponsored by T. Rowe Price Trust Company (the "Sponsor"),
and T. Rowe Price Trust Company (the "Custodian"), by accepting the Application,
accepts the custodianship of the Account. The Investor and the Custodian agree
that the Account is subject to the terms and conditions of this Agreement and
the Application signed by the Investor, which shall be effective as of the date
the Application is accepted by the Custodian.
Article I - Contributions
1.1 Regular Contributions. Except in the case of a rollover contribution
described in section 402, 403 or 408 of the Code or an employer contribution to
a Simplified Employee Pension Plan described in section 408(k) of the Code, for
any tax year the Investor may contribute no more than the lesser of the
Investor's compensation or $2,000. Contributions for a given tax year may be
made during that year or no later than the time prescribed by law for filing the
tax return for that year (not including extensions).
For this purpose, "compensation" means wages, salaries, professional fees
or other amounts derived from or received for personal service actually rendered
(including, but not limited to, commissions-paid salespeople, compensation for
services on the basis of a percentage of profits, commissions on insurance
premiums, tips and bonuses) and includes earned income, as defined in section
401(c)(2) of the Code (reduced by the deduction the self-employed individual
takes for contributions made to a qualified retirement plan pursuant to section
401(a) of the Code). For purposes of this definition, section 401(c)(2) of the
Code shall be applied as if the term trade or business for purposes of section
1402 of the Code included service described in subsection (c)(6). Compensation
does not include amounts derived from or received as earnings or profits from
property (including, but not limited to, interest and dividends) or amounts not
includable in gross income. Compensation also does not include any amount
received as a pension or annuity or as deferred compensation. The term
"compensation" shall include any amount includable in the individual's gross
income under section 71 of the Code with respect to a divorce or separation
instrument described in section 71(b)(2)(A) of the Code.
<PAGE>
1.2 Rollover Contribution. The Custodian may accept rollover contributions
as an investment in the Account. To effect a rollover, the Investor shall
execute any and all forms as the Custodian may reasonably request.
1.3 Transfer of Assets. The Custodian may accept, in the form or manner
acceptable to it, a transfer of assets held on behalf of the Investor from a
trustee or custodian of another individual retirement account. At the written
request of the Investor, the Custodian may, in the form or manner acceptable to
it, transfer assets in the Account directly to the trustee or custodian of
another individual retirement account established on behalf of the Investor or,
as provided in section 408(d)(6) of the Code, to an individual retirement
account established on behalf of the Investor's spouse or former spouse incident
to divorce.
1.4 Return of Excess Contributions. At the written request of the Investor,
the Custodian shall return to the Investor any excess contribution as defined in
section 408(d)(4) or 408(d)(5) of the Code (and any income on such excess
contribution, if the Investor's request asks for such income and states that the
return is intended to comply with section 408(d)(4) of the Code).
1.5 Form of Contributions. Rollover contributions or transfers may be made
in cash or other property acceptable to the Custodian and which are permissible
investments under section 408 of the Code. All other contributions must be made
in cash.
1.6 Responsibility of Custodian. The Custodian shall have no obligation to
verify the allowability, amount, deductibility or tax effect of any
contribution, transfer or return of excess contributions made by or on behalf of
the Investor.
Article II - Investments
2.1 Investment Instructions. The Custodian shall invest and reinvest all
contributions and transfers to the Account in accordance with the Investor's
written directions in the Application and in accordance with any subsequent
directions given in the form and manner acceptable to the Custodian by the
Investor (or, following the Investor's death, the beneficiary). If any
investment instructions are unclear in the opinion of the Custodian, or if any
contribution exceeds $2,000 and is not identified as a rollover contribution,
the Custodian may hold or return all or a portion of the contribution or
transfer uninvested without liability for loss of income or depreciation and
without liability for interest, pending receipt of proper instructions or
clarification.
<PAGE>
2.2 Permissible Investments. Assets in the Account may be invested or
reinvested in shares of one or more of the regulated investment companies for
which T. Rowe Price Associates, Inc., or any of its affiliates, serves as
investment adviser ("Price Fund") and any other investment permitted under
section 408(a) of the Code which the Custodian permits as an investment under
this Agreement ("Other Investment Vehicle"). The Investor must provide specific
instructions to the Custodian of specific purchases, sales, exchanges and other
transactions in the Account. All such transactions must comply with this
Agreement and the current prospectus, or other offering materials, of the
investment(s) involved. By giving instructions to the Custodian to invest in a
Price Fund, the Investor will be deemed to have acknowledged receipt of the
current prospectus for such Price Fund. The Custodian shall execute such
instructions promptly; provided, however, that neither the Custodian nor any
affiliated company shall be obligated to invest any portion of the Investor's
initial contribution to his or her Account until seven calendar days shall have
elapsed from the date of acceptance of the Investor's Application by the
Custodian.
2.3 Reinvestment of Earnings. All dividends and other distributions
received by the Custodian on shares of any Price Fund held in the Account shall
be reinvested in additional shares of such Price Fund unless the Investor elects
in writing, in the form and manner acceptable to the Custodian, to receive such
dividends and other distributions in cash. Dividends, interest or any other
distributions received with respect to Other Investment Vehicles held in the
Account shall be reinvested in accordance with the Investor's written
instructions in the Application or in subsequent written instructions furnished
to the Custodian in the form and manner acceptable to the Custodian.
2.4 Registration of Assets. All assets held in the Account shall be
registered in the name of the Custodian for the benefit of the Investor. The
Custodian shall deliver, or cause to be delivered, to the Investor all notices,
prospectuses, financial statements, proxies and proxy solicitation materials
relating to the Price Fund shares or Other Investment Vehicles held in the
Account. The Custodian shall not vote any such shares or Other Investment
Vehicles except in accordance with written instructions received from the
Investor; provided, however, that the Custodian may, without written direction
from the Investor, vote shares "present" solely for purposes of establishing a
quorum.
2.5 Impermissible Investments. The Account cannot invest in life insurance
contracts or collectibles within the meaning of section 408(m) of the Code. The
Account cannot be commingled with other property except in a common trust fund
or in a common investment fund.
2.6 Responsibility of Custodian. The Custodian shall be entitled to rely
completely on investment instructions furnished to it by the Investor and shall
have no duty or obligation to question such investment instructions. The
Investor acknowledges that the Custodian does not undertake to render any
investment advice and that the Custodian is not responsible for any loss which
results from the Investor's exercise of (or failure to exercise) investment
control.
<PAGE>
Article III - Distribution Rules
3.1 General Requirements. Subject to the following requirements of this
Article, the Investor may elect in a form or manner acceptable to the Custodian
to have all or any part of the Account distributed in one or any combination of
the following ways:
a.single sum payment, or
b. monthly, quarterly or annual installment payments.
3.2 Lifetime Minimum Required Distributions. The entire value of the
Account of the Investor will be distributed or commence to be distributed, no
later than the first day of April following the calendar year in which the
Investor attains age 701/2 (required beginning date), over a period certain not
extending beyond the life expectancy of the Investor, or the joint and last
survivor expectancy of the Investor and his or her designated beneficiary.
The amount to be distributed each year, beginning with the first calendar
year for which distributions are required and then for each succeeding calendar
year, shall not be less than the quotient obtained by dividing the Investor's
Account balance as of December 31 of the preceding year by the lesser of (a) the
applicable life expectancy, or (b) if the Investor's spouse is not the
designated beneficiary, the applicable divisor determined from the table set
forth in Q&A-4 or Q&A-5, as applicable, of section 1.401(a)(9)-2 of the Proposed
Income Tax Regulations or any successor regulation.
Distributions after the death of the Investor shall be distributed using
the applicable life expectancy as the relevant divisor without regard to
proposed regulations section 1.401(a)(9)-2.
Life expectancy is computed by use of the expected return multiples in
Tables V and VI of section 1.72-9 of the Income Tax Regulations. Unless
otherwise elected by the Investor by the time distributions are required to
begin, life expectancies shall not be recalculated. Such election shall be
irrevocable by the Investor and shall apply to all subsequent years. The life
expectancy of a non-spouse beneficiary may not be recalculated even if the
Investor elects to recalculate life expectancies annually. Instead, if the
Investor elects recalculation, life expectancy will be calculated using the
attained age of such beneficiary during the calendar year in which the Investor
attains age 70 1/2, and payments for subsequent years shall be calculated based
on such life expectancy reduced by one for each calendar year which has elapsed
since the calendar year life expectancy was first calculated.
3.3 Minimum Required Distributions Upon Death.
a. If the Investor dies after distribution of his or her interest has
begun, the remaining portion of such interest will continue to be distributed at
least as rapidly as under the method of distribution being used prior to the
Investor's death.
<PAGE>
b. If the Investor dies before distribution of his or her interest begins,
distribution of the Investor's entire Account shall be completed by December 31
of the calendar year containing the fifth anniversary of the Investor's death
except to the extent that an election is made to receive distributions in
accordance with (i), (ii) or (iii) below:
(i)If the Investor's interest is payable to a designated beneficiary, then
the entire interest of the Investor may be distributed over a period certain not
greater than the life expectancy of the designated beneficiary commencing on or
before December 31 of the calendar year immediately following the calendar year
in which the Investor died.
(ii) If the designated beneficiary is the Investor's surviving spouse, the
date distributions are required to begin in accordance with (i) above shall not
be earlier than the later of (1) December 31 of the calendar year immediately
following the calendar year in which the Investor died, or (2) December 31 of
the calendar year in which the Investor would have attained age 70 1/2.
(iii) If the designated beneficiary is the Investor's surviving spouse, the
spouse may elect to treat the Account as his or her own individual retirement
arrangement (IRA) by giving written notice of such election to the Custodian at
least 30 days before distributions are required to begin under (ii) above.
c. Life expectancy is computed by use of the expected return multiples in
Tables V and VI of section 1.72-9 of the Income Tax Regulations. For purposes of
distributions beginning after the Investor's death, unless otherwise elected by
the surviving spouse by the time distributions are required to begin, life
expectancies shall not be recalculated annually. An election to recalculate life
expectancies annually shall be irrevocable by the surviving spouse and shall
apply to all subsequent years. In the case of any other designated beneficiary,
life expectancies shall be calculated using the attained age of such beneficiary
during the calendar year in which distributions are required to begin pursuant
to this section, and payments for any subsequent calendar year shall be
calculated based on such life expectancy reduced by one for each calendar year
which has elapsed since the calendar year life expectancy was first calculated.
d. Distributions under this section are considered to have begun if the
distributions are made on account of the Investor reaching his or her required
beginning date. If the Investor receives distributions prior to the required
beginning date and the Investor dies, distributions will not be considered to
have begun.
3.4 Aggregation of IRAs for Purposes of Minimum Required Distributions. An
Investor (or beneficiary, if applicable) may satisfy the minimum distribution
requirements described above and under sections 408(a)(6) and 408(b)(3) of the
Code by receiving a distribution from one IRA that is equal to the amount
required to satisfy the minimum distribution requirements for two or more IRAs.
For this purpose, the Investor may use the "alternative method" described in
Notice 88-38, 1988-1 C.B. 524, to satisfy the minimum distribution requirements
described above. Accordingly, if the Investor fails to elect one of the
described methods of distribution before the required beginning date, the
Custodian will assume the Investor has received the minimum required
distribution from another source.
<PAGE>
3.5 Responsibility of Custodian. The Custodian will not assume any
responsibility to make any distribution from the Account except at the written
direction of the Investor (or beneficiary, if applicable). Furthermore, the
Custodian shall have no responsibility for the tax consequences of any
distribution, or the failure to elect any distribution, from the Account; such
responsibility is solely that of the Investor (or beneficiary, if applicable).
3.6 Beneficiary Designation. The Investor may designate and change his
beneficiary or beneficiaries by filing a written designation with the Custodian
prior to the Investor's death in the form or manner acceptable to the Custodian.
If no such designation is in effect at the time of the Investor's death, the
beneficiary shall be the Investor's surviving spouse, or, if there is no
surviving spouse, then the estate of the Investor.
Article IV - Reporting, Disclosure and Charges
4.1 Investor Information. The Investor agrees to provide in the manner
requested by the Custodian any information that may be necessary for the
Custodian to prepare reports required by the IRS.
4.2 Custodian Reports. The Custodian agrees to submit reports to the IRS
and to the Investor which contain information prescribed by the IRS. Within 60
days after the close of each calendar year, or after the Custodian's resignation
or removal pursuant to Section 7.1, the Custodian shall send to the Investor a
written report reflecting the transactions made during such period and the
market value of the Account at the close of the period. If, within 60 days after
receiving such report, the Investor does not object in writing to any specific
item in such report, the accounting in such report shall be deemed final and the
Custodian shall, to the extent permitted by applicable law, be forever released
and discharged from all liability and accountability with respect to items set
forth in such report.
4.3 Custodian Fees and Expenses. The Custodian shall be entitled to such
fees for maintaining and administering the Account as it may establish from time
to time and which may be changed by it at any time upon 30 days' written notice
to the Investor. All such fees, and all other expenses incurred in maintaining
the Account (including, but not limited to, taxes, brokerage commissions and
transfer taxes) shall be charged to the Account unless, with the consent of the
Custodian, all or part of such fees and expenses are paid by the Investor.
Article V - Additional Provisions Regarding the Custodian
5.1 Duties of Custodian. The parties do not intend to confer any fiduciary
duties on the Custodian, and none shall be implied. The Custodian may rely
conclusively upon and shall be protected in acting upon any written order from
the Investor or the Investor's beneficiary or any other notice, request, consent
or certificate believed by it to be genuine. The Custodian may perform any of
its administrative duties through other persons designated by the Custodian from
time to time, except that assets must be registered as stated in Section 2.4. No
such delegation or future change therein shall be considered as an amendment of
this Agreement.
<PAGE>
5.2 Indemnification. To the extent permitted by applicable law, the
Investor shall fully indemnify the Custodian and hold it harmless from any and
all liability whatsoever which may arise in connection with this Agreement and
matters which it contemplates except those which arise due to the Custodian's
gross negligence or willful misconduct. The Custodian shall not be obligated or
expected to commence or defend any legal action or proceeding in connection with
this Agreement unless agreed upon by the Custodian and the Investor and unless
the Custodian is fully indemnified for so doing to the Custodian's satisfaction.
Article VI -- Amendment
6.1 General. The Sponsor reserves the right to amend the Agreement at any
time in any manner which would not cause the Agreement to be disqualified under
section 408 of the Code. Any amendment by the Sponsor shall be effective upon
communication, in writing, to the Investor, and the Investor shall be deemed to
have consented thereto unless, within 30 days after such communication to the
Investor is mailed, the Investor gives the Custodian a proper written order for
a lump-sum distribution or a transfer of the entire Account.
6.2 Exceptions. This Article shall not be construed to restrict the
Custodian's freedom to agree with the Price Funds upon the terms by which Price
Funds may be offered or chosen for investment in the Account. Also, this Article
VI shall not be construed to restrict any change in fees made as provided in
Section 4.3. No such agreement or change shall be deemed to be an amendment of
this Agreement.
Article VII - Resignation or Removal of Custodian
7.1 General. The Custodian may resign and appoint a successor custodian at
any time upon at least thirty days' prior written notice to the Investor. The
Investor may remove the Custodian and designate a successor custodian at any
time upon thirty days' prior written notice to the Custodian. Upon such
resignation or removal, and upon receipt by the Custodian of written acceptance
of its appointment by the successor custodian, which must be a bank or other
person qualified to serve as a custodian under section 408 of the Code, the
Custodian shall transfer to such successor custodian the assets of the Account
and all pertinent records (or copies thereof), provided that (if so requested by
the Custodian) such successor custodian agrees not to dispose of any such
records without the Custodian's consent. The Custodian is authorized, however,
to reserve such a portion of such assets as it may deem advisable for payment
for all its fees, compensation, costs and expenses, or for payment of any other
liabilities constituting a charge on or against the assets of the Account or on
or against the Custodian, with any balance of such reserve remaining after the
payment of all such items to be paid over to the successor custodian. If, within
thirty days after the Custodian's resignation or removal, or such longer time as
the Custodian may agree to, the Investor or Custodian has not appointed a
successor custodian which has accepted such appointment, the Custodian shall
terminate the Account pursuant to Article VIII.
<PAGE>
7.2 Responsibility of Custodian. After the Custodian has transferred the
Account assets (including any reserve balance as contemplated above) to the
successor custodian, the Custodian shall be relieved of all further liability
with respect to this Agreement, the Account and the assets thereof.
Article VIII - Termination of Account
8.1 General. The Investor may terminate the Account at any time upon prior
written notice to the Custodian. The Custodian shall terminate the Account if,
within the time specified in Section 7.1 after the Custodian's resignation or
removal, neither the Investor nor the Custodian have appointed a successor
custodian which has accepted such appointment. Termination of the Account shall
be effected by distributing all assets thereof in a lump sum to the Investor,
subject to the Custodian's right to reserve funds as provided in Section 7.1.
8.2 Responsibility of Custodian. Upon termination of the Account, this
Agreement shall terminate and have no further force and effect, and the
Custodian shall be relieved from all further liability with respect to this
Agreement, the Account and all assets thereof so distributed.
Article IX - Miscellaneous
9.1 Governing Law. This Agreement shall be construed and enforced according
to the laws of the State of Maryland; however, it is intended that this
Agreement create an Account for a qualified individual retirement account under
the Code, and this Agreement shall be construed so as to accomplish that
purpose.
9.2 Gender; Plural. Whenever used in this Agreement, personal pronouns are
deemed to mean masculine and feminine. The singular form, whenever used herein,
shall mean or include the plural form where applicable, and vice versa.
9.3 Notices. Any notice, accounting or other communication which the
Custodian may give the Investor shall be deemed given when mailed to the
Investor at the address on record with the Custodian. All notices the Investor
is required to give to the Custodian shall be deemed given when received by the
Custodian at its principal office.
9.4 Enforceability. If any provision of this Agreement shall be for any
reason invalid or unenforceable, the remaining provisions shall, nevertheless,
continue in effect and shall not be invalidated thereby unless they are rendered
unconscionable, inadequate or incapable of being interpreted as a result of the
deletion of the invalid or unenforceable portions of the Agreement.
9.5 Exclusive Benefit; Nonforfeitability. The Account has been created for
the exclusive benefit of the Investor and his or her beneficiaries. The interest
of the Investor in the Account shall at all times be nonforfeitable, but shall
be subject to the fees, expenses and charges described in Sections 4.3, 7.1 and
8.1.
<PAGE>
9.6 Prohibition Against Assignment. Other than as provided in Sections 4.3,
7.1 and 8.1, no interest, right or claim in or to any portion of the Account or
any payment therefrom shall be assignable, transferable or subject to sale,
mortgage, pledge, hypothecation, commutation, anticipation, garnishment,
attachment, execution or levy of any kind. The Custodian shall not recognize any
attempt to do any of the above, except to the extent required by law.
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE SPECTRUM FUND, INC. ("Spectrum Fund")
Spectrum Income Fund ("Income Fund")
Spectrum Growth Fund ("Growth Fund")
(the "Funds")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the Funds'
prospectus dated May 1, 1996, which may be obtained from T. Rowe
Price Investment Services, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you
are not a shareholder, please call 1-800-638-5660. A prospectus
with more complete information, including management fees and
expenses will be sent to you. Please read it carefully.
The date of this Statement of Additional Information is
May 1, 1996.
PAGE 3
TABLE OF CONTENTS
Page Page
Capital Stock . . . . . . . 29 Investment Restrictions . . 11
Code of Ethics . . . . . . 20 Legal Counsel . . . . . . . 30
Custodian . . . . . . . . . 20 Management of the Funds . . 13
Distributor for the Funds . 19 Net Asset Value Per Share . 21
Dividends . . . . . . . . . 21 Pricing of Securities . . . 21
Federal and State
Registration of Shares . . 30 Principal Holders of
Independent Accountants . . 30 Securities . . . . . . . . 16
Investment Management
Services . . . . . . . . . 16 Repurchase Agreements . . . 3
Investment Objective Special Considerations . . 10
and Policies . . . . . . . 2 Tax Status . . . . . . . . 21
Investment Performance . . 23 Yield Information . . . . . 22
Investment Policies . . . . 3
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of
the Funds' investment objectives and policies discussed in the
Funds' prospectus. The Funds' will not make a material change in
their investment objectives without obtaining shareholder
approval. Unless otherwise specified, the investment programs
and restrictions of the Funds are not fundamental policies. The
operating policies of a Fund are subject to change by Spectrum
Fund's Board of Directors without shareholder approval. However,
shareholders will be notified of a material change in an
operating policy. The fundamental policies of a Fund may not be
changed without the approval of at least a majority of the
outstanding shares of the Fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
Spectrum Fund
The following information supplements the discussion of
each Fund's investment objectives and policies discussed in the
prospectus.
The proliferation of mutual funds has left many
investors in search of a means of diversifying among a number of
mutual funds while obtaining professional management in
determining which funds to select, how much of their assets to
commit to each fund, and when to make the selections. In
response to this need, the Spectrum Fund has been created as a
means of providing a simple and effective means of structuring a
comprehensive mutual fund investment program. By selecting the
Spectrum Growth Fund or
PAGE 4
Spectrum Income Fund, or a combination of both, investors may
choose the investment objective appropriate for their long-term
investment goals. The Spectrum Funds will attempt to achieve
these goals by diversification in a selected group of other T.
Rowe Price Funds. Although the Spectrum Funds are not asset
allocation or market timing funds, each, over time, will adjust
the amount of its assets invested in the various other T. Rowe
Price Funds as economic, market and financial conditions warrant.
InterFund Borrowing and Lending
Subject to approval by the Securities and Exchange
Commission, and certain state regulatory agencies, each Fund may
borrow funds from, and certain of the Underlying Price Funds may
make loans to and borrow funds from, other Price Funds. These
Funds have no current intention of engaging in these practices at
this time.
Repurchase Agreements
Each Fund may enter into repurchase agreements through
which investors (such as the Funds) purchases a security (the
"underlying security") from a well-established securities dealer
or a bank which is a member of the Federal Reserve System. Any
such dealer or bank will be on T. Rowe Price's approved list and
have a credit rating with respect to its short-term debt of at
least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe
Price Associates, Inc. ("T. Rowe Price"). At that time, the bank
or securities dealer agrees to repurchase the underlying security
at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less
than a week. Neither Fund will enter into a repurchase agreement
which does not provide for payment within seven days if, as a
result, more than 10% of the value of its net assets would then
be invested in such repurchase agreements. The Funds will only
enter into a repurchase agreement where (i) the underlying
securities are of the type (excluding maturity limitations) which
each Fund's investment guidelines would allow it to purchase
directly (however, the underlying securities for the Prime
Reserve Fund will either be U.S. government securities or
securities which, at the time the repurchase agreement is entered
into, are rated in the highest rating category by public rating
agencies), (ii) the market value of the underlying security,
including interest accrued, will be at all times equal to or
exceed the value of the repurchase agreement, and (iii) payment
for the underlying security is made only upon physical delivery
or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of bankruptcy
or other default of a seller of a repurchase agreement, the Funds
could experience both delays in liquidating the underlying
security and losses, including: (a) possible decline in the value
of the underlying security during the period while the Fund seeks
to
PAGE 5
enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c)
expenses of enforcing its rights.
INVESTMENT POLICIES
The following is a description of the investment
objective and program for each of the Underlying Price Funds.
Spectrum Income Fund
T. Rowe Price Short-Term Bond Fund, Inc. seeks a high
level of income consistent with minimum fluctuation in principal
value and liquidity. The Fund will invest in a diversified
portfolio of short- and intermediate-term corporate, government,
and mortgage securities. The fund may also invest in other types
of securities such as bank obligations, collateralized mortgage-
obligations (CMOs), foreign securities, hybrids, and futures and
options. Under normal circumstances, at least 65% of the Fund's
total assets will be invested in short-term bonds. In this
regard, the dollar-weighted average effective maturity will not
exceed three years, and the Fund will not purchase any security
whose effective maturity, average life or tender date, measured
from the date of settlement, exceeds seven years. The Fund will
purchase securities rated within the four highest credit
categories by at least one established public rating agency (or,
if unrated, a T. Rowe Price equivalent). Short and intermediate-
term securities typically yield more than money market
securities, but less than longer term securities. Also, share
price fluctuations should be lower than a mutual fund investing
in longer term securities.
T. Rowe Price GNMA Fund seeks to provide high level of
current income consistent with maximum credit protection and
moderate price fluctuation by investing exclusively in securities
backed by the full faith and credit of the U.S. government and
instruments involving these securities. The fund invests
primarily in mortgage-backed securities issued and guaranteed by
the Government National Mortgage Association (GNMA), an agency of
the Department of Housing and Urban Development (HUD). The GNMA
guarantee does not apply in any way to the price of GNMA
securities or the fund, both of which will fluctuate with market
conditions. The fund can also purchase bills, notes and bonds
issued by the U.S. Treasury as well as related futures, other
agency securities backed by the full faith and credit of the U.S.
Government; and securities involving GNMAs, such as CMO's and
stripped certificates (securities that receive only the interest
or principal portion of the underlying mortgage payments).
Mortgage-Backed Securities. Mortgage-backed securities
are securities representing an interest in a pool of mortgages.
The mortgages may be of a variety of types, including adjustable
rate, conventional 30-year fixed rate, graduated payment, and 15-
PAGE 6
year. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the fund.
This is in contrast to traditional bonds where principal is
normally paid back at maturity in a lump sum. Unscheduled
prepayments of principal shorten the securities' weighted average
life and may lower their total return. (When a mortgage in the
underlying mortgage pool is prepaid, an unscheduled principal
prepayment is passed through to the fund. This principal is
returned to the fund at par. As result, if a mortgage security
were trading at a premium, its total return would be lowered by
prepayments, and if a mortgage security were trading at a
discount, its total return would be increased by prepayments.)
The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the federal
agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in
governmental regulation or tax policies. As a result the actual
or "effective" maturity of a mortgage-backed security is
virtually always shorter than its stated maturity.
T. Rowe Price International Bond Fund seeks a high
level of current income and capital appreciation by investing in
a diversified portfolio of high-quality nondollar-denominated,
government and corporate bonds outside the U.S. The Fund also
seeks to moderate price fluctuation by actively managing its
maturity structure and currency exposure.
The Fund will invest primarily (at least 65% of assets)
in debt securities that are considered high quality at the time
of purchase. The Fund may also invest up to 20% of its total
assets in below investment grade, high-risk ("junk") bonds,
including bonds in default or those which have received the
lowest rating.
Rowe Price-Fleming International, Inc. ("Price-
Fleming"), the Fund's investment manager, will base its
investment decisions on fundamental market attractiveness,
currency trends, local market factors and credit quality. The
Fund will generally invest in countries where the combination of
fixed income market returns and currency exchange rate movements
is attractive, or, if the currency trend is unfavorable, where
the currency risk can be minimized through hedging.
Although the fund expects to maintain an intermediate
to long weighted average maturity, it has no maturity
restrictions on the overall portfolio or on individual
securities. Normally, the fund does not hedge its foreign
currency exposure back to the dollar, nor involve more than 50%
of total assets in cross hedging transactions. Therefore, changes
in foreign interest rates and currency exchange rates are likely
to have a significant impact on total return and the market value
of portfolio securities. Such changes provide greater
opportunities for capital gains and greater risks of capital
loss. Price-Fleming attempts to reduce these risks
PAGE 7
through diversification among foreign securities and active
management of maturities and currency exposures.
The Fund will normally not hedge its foreign currency
exposure back to the dollar and will normally have no more than
50% of the value of its total assets involved in cross hedging
transactions. Therefore, its total return, and, in particular,
the principal value of its foreign-currency-denominated debt
securities, is likely to be significantly affected by changes in
foreign interest rate levels and foreign currency exchange rates.
These changes provide greater opportunity for capital gains as
well as greater risks of capital loss. Exchange rate movements
can be large and endure for extended periods of time. Price-
Fleming will attempt to reduce the risks associated with
investments in international fixed income securities through
portfolio diversification and active management of the Fund's
maturity structure and currency exposure.
Because Price-Fleming currently expects to invest a
large percentage of assets in foreign government securities in
order to maintain liquidity and to reduce credit risk, the Fund
has registered as a "non-diversified" investment company. The
Fund may, for temporary defensive purposes, invest, without
limitation, in U.S. dollar-denominated debt securities.
T. Rowe Price High Yield Fund, Inc. has high current
income and, secondarily, capital appreciation as its objective.
Under normal conditions the fund expects to invest at least 80%
of its total assets in a widely diversified portfolio of high-
yield bonds (so-called "junk" bonds), and income producing
convertible securities and preferred stocks. The fund may also
invest in a variety of other securities, including foreign
securities, pay-in-kind bonds, private placements, bank loans,
hybrid instruments, futures and options. The fund's longer
average maturity (expected to be in the 8- to 12- year range),
makes its price more sensitive to broad changes in interest rate
movements than shorter-term bond funds. The portfolio manager
buys defaulted bonds only if significant potential for capital
appreciation is expected. In addition, the Fund may invest in
medium quality, investment grade securities, and, for temporary
defensive purposes, higher quality securities. The Fund may also
invest up to 20% of its net assets in non-U.S. dollar-denominated
fixed income securities.
Special Risks of Investing in Junk Bonds
The following special considerations are additional
risk factors associated with the Fund's investments in lower
rated debt securities.
Youth and Growth of the Lower Rated Debt Securities
Market. The market for lower rated debt securities is relatively
new and its growth has paralleled a long economic expansion.
Past
PAGE 8
experience may not, therefore, provide an accurate indication of
future performance of this market, particularly during periods of
economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market,
the value of lower rated debt securities in the Fund's portfolio,
the Fund's net asset value and the ability of the bonds' issuers
to repay principal and interest, meet projected business goals
and obtain additional financing than on higher rated securities.
These circumstances also may result in a higher incidence of
defaults than with respect to higher rated securities. An
investment in this Fund is more speculative than investment in
shares of a fund which invests only in higher rated debt
securities.
Sensitivity to Interest Rate and Economic Changes.
Prices of lower rated debt securities may be more sensitive to
adverse economic changes or corporate developments than higher
rated investments. Debt securities with longer maturities, which
may have higher yields, may increase or decrease in value more
than debt securities with shorter maturities. Market prices of
lower rated debt securities structured as zero coupon or pay-in-
kind securities are affected to a greater extent by interest rate
changes and may be more volatile than securities which pay
interest periodically and in cash. Where it deems it appropriate
and in the best interests of Fund shareholders, the Fund may
incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to
protect the interests of security holders of its portfolio
companies.
Liquidity and Valuation. Because the market for lower
rated securities may be thinner and less active than for higher
rated securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Nonrated
securities are usually not as attractive to as many buyers as
rated securities are, a factor which may make nonrated securities
less marketable. These factors may have the effect of limiting
the availability of the securities for purchase by the Fund and
may also limit the ability of the Fund to sell such securities at
their fair value either to meet redemption requests or in
response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of
lower rated debt securities, especially in a thinly traded
market. To the extent the Fund owns or may acquire illiquid or
restricted lower rated securities, these securities may involve
special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties. Changes in values of debt
securities which the Fund owns will affect its net asset value
per share. If market quotations are not readily available for
the Fund's lower rated or nonrated securities, these securities
will be valued by a method that the Fund's Board of Directors
believes accurately reflects fair value. Judgment plays a
greater role in valuing lower rated debt securities than with
respect to securities for which more
PAGE 9
external sources of quotations and last sale information are
available.
Congressional Action. New and proposed laws may have
an impact on the market for lower rated debt securities. T. Rowe
Price is unable at this time to predict what effect, if any, any
such legislation may have on the market for lower rated debt
securities.
Taxation. Special tax considerations are associated
with investing in lower rated debt securities structured as zero
coupon or pay-in-kind securities. The Fund accrues income on
these securities prior to the receipt of cash payments. The Fund
must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax
laws and may, therefore, have to dispose of its portfolio
securities to satisfy distribution requirements.
T. Rowe Price New Income Fund, Inc. seeks the highest
level of income over time consistent with the preservation of
capital through investment primarily in marketable debt
securities. The Fund invests in long, intermediate and short-
term debt securities. The Fund has no maturity restrictions, but
the average portfolio maturity is generally expected to be
between four and 15 years although it may vary significantly. At
least 80% of the Fund's total assets will be invested in income-
producing, investment-grade instruments, including (but not
limited to) U.S. Government and agency obligations, mortgage-
backed securities, corporate debt securities, asset-backed
securities, bank obligations, CMO's, commercial paper, foreign
securities, and others. The Fund will purchase securities rated
investment grade by at least one of the established public rating
agencies (e.g., AAA, AA, A, or BBB by Standard & Poor's
Corporation (S&P) or Aaa, Aa, A, or Baa by Moody's investors
Services, Inc. (Moody's)) or, if unrated, are of equivalent
investment quality as determined by the Fund's investment
manager, T. Rowe Price. Debt securities within the top two
credit categories comprise what are generally known as high-grade
bonds. Medium-grade bonds (e.g., BBB by S&P) are more
susceptible to adverse economic conditions or changing
circumstances than higher grade bonds. The Fund may invest up to
5% of net assets in securities rated at the time of purchase
within T. Rowe Price top four credit categories without regard to
the public agency ratings. Without regard to quality, the Fund
may invest up to 25% of its total assets (not including cash) in
preferred and common stocks and convertible securities,
convertible into or which carry warrants for common stocks or
other equity securities. The Fund may also invest up to 20% of
its net assets in non-U.S. dollar-denominated fixed income
securities.
PAGE 10
Spectrum Growth Fund
T. Rowe Price Growth & Income Fund, Inc. seeks long-
term capital growth, a reasonable level of current income, and
increasing future income through investments primarily in
dividend-paying stocks with prospects for appreciation and
increasing dividends. The Fund's assets are invested primarily
in common stocks of companies whose earnings are expected by T.
Rowe Price to grow at a rate in excess of that of common stocks
in general and are adequate to support a growing dividend. To
further its objectives, the Fund may also purchase common stocks
which do not provide current income, but which offer prospects
for capital appreciation and future income. Relative value
(based on a company's asset value or projected earnings growth),
dividend yield, and potential for dividend and earnings growth
are the predominant considerations in evaluating prospective Fund
holdings.
In seeking to achieve its investment objective, the
Fund may invest in companies which are believed to be undervalued
or out of favor in the eyes of the investment community. An
undervalued company is generally one where (1) the stock/bond
price is low in relation to the general market, industry
standards or a company's historical record based on an evaluation
of various financial measures such as earnings, cash flow, book
value and dividends; or (2) potential value exists because of a)
a company's assets, such as real estate, which are carried on a
company's books at lower than market value, or b) intangibles,
such as franchise value, a dominant market share in the industry
or a well-known brand name.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (25% of total assets), convertible
securities and warrants, when considered consistent with the
Fund's investment objectives and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options. The Fund's investments
in convertible securities, preferred stocks and debt securities
are limited to 30% of the Fund's total assets. The Fund's
investments in non-investment grade debt securities are limited
to 10% of total assets.
T. Rowe Price International Stock Fund seeks long-term
growth of capital through investments primarily in common stocks
of established, non-U.S. companies.
The Fund intends to diversify investments broadly among
countries and to normally have at least three different countries
represented in the portfolio. The Fund may invest in countries
of the Far East and Europe as well as Africa, Australia, Canada,
and other areas (including newly industrialized and emerging
countries).
PAGE 11
The Fund expects to invest substantially all of its
assets in common stocks. However, the Fund may also invest in a
variety of other equity related securities, such as preferred
stocks, warrants and convertible securities, as well as corporate
and governmental debt securities, when considered consistent with
the Fund's investment objective and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options. The Fund's investments
in securities other than common stocks is, under normal market
conditions, limited to no more than 35% of total assets.
However, for temporary defensive purposes, the Fund may invest
all or a significant portion of its assets in U.S. government and
corporate debt obligations. The Fund will not purchase any debt
security which at the time of purchase is rated below investment
grade. This would not prevent the Fund from retaining a security
downgraded to below investment grade after purchase.
T. Rowe Price New Era Fund, Inc. seeks long-term
capital appreciation by investing primarily in common stocks of
companies that own or develop natural resources and other basic
commodities, as well as through investment in stocks of selected,
non-resource growth companies. Current income is not a factor in
the selection of stocks for investment by the Fund. The Fund
invests in a diversified group of companies whose earnings and/or
value of tangible assets are expected to grow faster than the
rate of inflation over the long term. T. Rowe Price believes the
most attractive opportunities which satisfy the Fund's objective
are in companies which own or develop natural resources and in
companies where management has the flexibility to adjust prices
or the ability to control operating costs. The percentage of the
Fund's assets invested in natural resource and related businesses
versus the percentage invested in non-resource companies may vary
greatly depending upon economic and monetary conditions and the
outlook for inflation. The earnings of natural resource
companies may be expected to follow irregular patterns, because
these companies are particularly influenced by the forces of
nature and international politics. Companies which own or
develop real estate might also be subject to irregular
fluctuations of earnings, because these companies are affected by
changes in the availability of money, interest rates, and other
factors.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (35% of total assets), convertible
securities and warrants, when considered consistent with the
Fund's investment objective and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options. The Fund's investments
in non-investment grade debt securities are limited to 10% of
total assets.
PAGE 12
T. Rowe Price Growth Stock Fund, Inc. seeks long-term
growth of capital and increasing dividend income through
investment primarily in common stocks of well-established growth
companies. The fund will invest primarily in the common stocks
of a diversified group of growth companies. A growth company is
defined as one which: (1) has demonstrated historical growth of
earnings faster than the growth of inflation and the economy in
general; and (2) has indications of being able to continue this
growth pattern in the future. While current dividend income is
not a prerequisite in the selection of a growth company, the
companies in which the Fund will invest normally have a record of
paying dividends and are generally expected to increase the
amounts of such dividends in future years as earnings increase.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (30% of total assets), convertible
securities and warrants, when considered consistent with the
Fund's investment objectives and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options.
T. Rowe Price New Horizons Fund, Inc. seeks long-term
growth of capital through investment primarily in common stocks
of small, rapidly growing companies. The fund will invest
primarily in a diversified group of small, emerging growth
companies. It seeks to invest early in the corporate life cycle
and before a company becomes widely-recognized by the investment
community. The Fund may also invest in companies which offer the
possibility of accelerating earnings growth because of
rejuvenated management, new products, or structural changes in
the economy. Current income is not a factor in the selection of
stocks.
Investors should realize that the very nature of
investing in small companies involves greater risk than is
customarily associated with more established companies. The Fund
is designed for long-term investors who are willing to accept
greater investment risks in search of substantial long-term
rewards. Small companies often have limited product lines,
markets, or financial resources, and they may be dependent upon a
small group of inexperienced managers. The securities of small
companies may have limited marketability and may be subject to
more abrupt or erratic market movements than securities of larger
companies or the market averages in general. However, small
companies may offer greater opportunities for capital
appreciation than larger, more established companies. In
addition, small companies are often overlooked by the investment
community. Therefore, these securities may be undervalued and
provide the potential for significant capital appreciation.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (10% of total assets), convertible
PAGE 13
securities and warrants, when considered consistent with the
Fund's investment objective and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options.
Income and Growth Funds
T. Rowe Price Prime Reserve Fund, Inc. is a money
market fund which maintain a stable share price of $1.00. This
policy has been maintained since its inception; however, the
$1.00 price is not guaranteed or insured by the U.S. government,
nor is its yield fixed. The Fund generally purchases securities
which mature in 13 months or less, although the Fund may purchase
U.S. government securities with a maturity of up to 25 months.
The dollar-weighted average maturity of the Fund will not exceed
90 days.
The objectives of the Fund are preservation of capital,
liquidity, and, consistent with these objectives, the highest
possible current income through investments primarily in high-
quality money market securities. To achieve its objectives, the
Fund invests in a diversified portfolio of domestic and foreign
U.S. dollar-denominated money market securities rated within the
two highest credit categories assigned by established rating
agencies or, if not rated, of equivalent investment quality as
determined by the Fund's investment manager, T. Rowe Price.
The Fund will invest at least 95% of its total assets
in prime money market instruments--that is, securities which are
rated within the highest credit category assigned by at least two
established rating agencies (or one rating agency if the security
is rated by only one, or, if not rated, T. Rowe Price's
equivalent). A security is considered rated if the security
itself, the issuer, or a comparable security of the issuer is
rated. T. Rowe Price subjects all securities eligible for
investment to its own credit analysis and considers all Fund's
securities may have adjustable rates of interest with periodic
demand features.
T. Rowe Price Equity Income Fund seeks to provide
substantial dividend income as well as long-term capital
appreciation by investing primarily in dividend-paying common
stocks of established companies. In pursuing its objective, the
Fund emphasizes companies with favorable prospects for increasing
dividend income, and secondarily, capital appreciation. Over
time, the income component (dividends and interest earned) of the
Fund's investments is expected to be a significant contributor to
the Fund's total return. The Fund's income yield is expected to
be significantly above that of the Standard & Poor's 500 Stock
Index.
To achieve its objective, the Fund will, under normal
circumstances, invest at least 65% of its assets in income-
producing common stocks, whose prospectus for dividend growth and
PAGE 14
capital appreciation are considered favorable by T. Rowe Price.
To enhance capital appreciation potential, the Fund also uses a
value-oriented approach, which means it invests in stocks it
believes are currently undervalued. The Fund's investments will
generally be made in companies which share some of the following
characteristics:
established operating histories;
above-average current dividend yields relative to
the S&P 500;
low price/earnings ratios relative to the S&P 500;
sound balance sheets and other financial
characteristics; and
low stock price relative to company's underlying
value as measured by assets, earnings, cash flow or
business franchises.
The Fund may also invest its assets in fixed income
securities (corporate, government, and municipal bonds of various
maturities). The Fund would invest in municipal bonds when the
expected total return from such bonds appears to exceed the total
returns obtainable from corporate or government bonds of similar
credit quality. Interest earned on municipal bonds purchased by
the Fund will be taxable income to Fund shareholders. Although
the Fund will invest primarily in U.S. common stocks, it may also
purchase other types of securities, for example, foreign
securities (25% of total assets), convertible securities and
warrants, when considered consistent with the Fund's investment
objective and program. The Fund may also engage in a variety of
investment management practices, such as buying and selling
futures and options.
SPECIAL CONSIDERATIONS
Prospective investors should consider that certain
Underlying Price Funds (the "Price Funds") may engage in the
following:
(1) Foreign Currency Transactions. Enter into foreign
currency transactions. Since investments in
foreign companies will usually involve currencies
of foreign countries, and the International Bond
and International Stock Funds, as well as certain
other Price Funds, will hold funds in bank
deposits in foreign custodians during the
completion of investment programs, the value of
the assets of the Price Funds as measured in U.S.
dollars may be affected favorably or unfavorably
by changes in foreign currency exchange rates and
exchange control regulations, and these Price
Funds may incur costs in connection with
conversions between various currencies. The Price
Funds will generally
PAGE 15
conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis
at the prevailing rate in the foreign currency
exchange market, or through entering into forward
contracts to purchase or sell foreign currencies.
The Price Funds will generally not enter into a
forward contract with a term of greater than one
year. Although foreign currency transactions will
be used primarily to protect the Price Funds from
adverse currency movements, they also involve the
risk that anticipated currency movements will not
be accurately predicted.
(2) Lending Portfolio Securities. Lend portfolio
securities for the purpose of realizing additional
income. The Price Funds may lend securities to
broker-dealers or institutional investors. Any
such loan will be continuously secured by
collateral at least equal to the value of the
security loaned. Such lending could result in
delays in receiving additional collateral or in
the recovery of the securities or possible loss of
rights in the collateral should the borrower fail
financially.
(3) Futures Contracts and Options (types of
potentially high-risk derivatives). Enter into
interest rate, stock index or currency futures
contracts. Certain Price Funds may enter into
such contracts (or options thereon), or a
combination of such contracts, (1) as a hedge
against changes in prevailing levels of interest
rates, price movements or currency exchange rates
in the Price Funds' portfolios in order to
establish more definitely the effective return on
securities or currencies held or intended to be
acquired by such Price Funds; (2) as an efficient
means of adjusting the Price Funds' exposure to
the markets; or (3) to adjust the duration of the
Price Funds' portfolios. Initial margin deposits
and premiums on options used for non-hedging
purposes will not equal more than 5% of each Price
Fund's net asset value. Certain Price Funds may
also purchase and sell call and put options on
securities, currencies and financial and stock
indices. The aggregate market value of each
Fund's currencies or portfolio securities covering
call or put options will not exceed 25% of a
Fund's net assets. Futures contracts and options
can be highly volatile and could result in
reduction of a Price Fund's total return and a
Price Fund's attempt to use such investments for
hedging purposes may not be successful.
PAGE 16
FOR MORE INFORMATION ABOUT AN UNDERLYING PRICE FUND, CALL
1-800-638-5660 (1-410-547-2308).
INVESTMENT RESTRICTIONS
Fundamental policies of the Funds may not be changed
without the approval of the lesser of (1) 67% of the Funds'
shares present at a meeting of shareholders if the holders of
more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the Funds' outstanding shares.
Other restrictions, in the form of operating policies, are
subject to change by Spectrum Fund's Board of Directors without
shareholder approval. Any investment restriction which involves
a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, a Fund.
Fundamental Policies
As a matter of fundamental policy, each Fund may not:
(1) Borrowing. Borrow money, except each Fund may
borrow from banks or other Price Funds as a
temporary measure for extraordinary or emergency
purposes, and then only in amounts not exceeding
30% of its total assets valued at market. Each
Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption
requests which might otherwise require untimely
disposition of portfolio securities (see page 13
of the prospectus). Interest paid on any such
borrowings will reduce net investment income;
(2) Commodities. Purchase or sell commodities or
commodity or futures contracts;
(3) Loans. Make loans, although the Funds may
purchase money market securities and enter into
repurchase agreements;
(4) Margin. Purchase securities on margin, except for
use of short-term credit necessary for clearance
of purchases of portfolio securities;
(5) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by the
Funds as security for indebtedness except as may
be necessary in connection with permissible
borrowings, in which event such mortgaging,
PAGE 17
pledging, or hypothecating may not exceed 30% of
each Fund's total assets, valued at market;
(6) Real Estate. Purchase or sell real estate,
including limited partnership interests therein,
unless acquired as a result of ownership of
securities or other instruments (although each
Fund may purchase money market securities secured
by real estate or interests therein, or issued by
companies or investment trusts which invest in
real estate or interests therein);
(7) Senior Securities. Issue senior securities;
(8) Short Sales. Effect short sales of securities; or
(9) Underwriting. Underwrite securities issued by
other persons, except to the extent the Funds may
be deemed to be underwriters within the meaning of
the Securities Act of 1933 in connection with the
purchase and sale of their portfolio securities in
the ordinary course of pursuing their investment
programs.
Operating Policies
As a matter of operating policy, each Fund may not:
(1) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
(2) Illiquid Securities. Purchase illiquid securities
if, as a result, more than 15% of its net assets
would be invested in such securities provided that
each Fund will not invest more than 10% of its
total assets in restricted securities;
(3) Oil and Gas Programs. Purchase participations or
other direct interests or enter into leases with
respect to, oil, gas, other mineral exploration or
development programs;
(4) Options. Invest in options;
(5) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of
any issuer if, to the knowledge of the Funds'
management, those officers and directors of
Spectrum Fund, and of its investment manager, who
each owns beneficially more than .5% of the
PAGE 18
outstanding securities of such issuer, together
own beneficially more than 5% of such securities;
(6) Unseasoned Issuers. Purchase the securities of
any issuer (other than obligations issued or
guaranteed by the U.S. government or any foreign
government, their agencies or instrumentalities or
shares of Price mutual funds) if, as a result,
more than 5% of the value of each Fund's total
assets would be invested in the securities of
issuers which at the time of purchase had been in
operation for less than three years, including
predecessors and unconditional guarantors; or
(7) Warrants. Invest in warrants.
Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission (Investment Company Act Release No. IC-
21425, October 18, 1995): (i) there is no limit on the amount
the Funds may own of the total outstanding voting securities of
registered investment companies which are members of the T. Rowe
Price family of funds, (ii) each Fund, in accordance with its
prospectus, may invest more than 5% of its assets in any one such
investment company, and (iii) each Fund may invest more than 10%
of its assets, collectively, in registered investment companies
which are members of the T. Rowe Price family of funds.
Because of their investment objectives and policies,
the Funds will each concentrate more than 25% of their assets in
the mutual fund industry. In accordance with the Funds'
investment programs set forth in the prospectus, each of the
Funds may invest more than 25% of its assets in certain of the
Underlying Price Funds. However, each of the Underlying Price
Funds in which each Fund will invest (other than New Income Fund,
Short-Term Bond Fund, High Yield Fund and International Bond
Fund) will not concentrate more than 25% of its total assets in
any one industry. The New Income Fund and Short-Term Bond Fund
will, under certain conditions, invest up to 50% of their assets
in any one of the following industries: gas, utility, gas
transmission utility, electric utility, telephone utility and
petroleum.
The Short-Term Bond Fund, International Bond Fund and
High Yield Fund will each normally concentrate 25% or more of
their assets in the securities of the banking industry when their
position in issues maturing in one year or less equals 35% or
more of their total assets.
Redemptions in Kind
In the unlikely event a shareholder were to receive an
in kind redemption of portfolio securities of either Fund,
brokerage
PAGE 19
fees could be incurred by the shareholder in subsequent sale of
such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of a fund's shares for
securities or assets other than cash will be limited to (1) bona
fide reorganizations; (2) statutory mergers; or (3) other
acquisitions of portfolio securities that: (a) meet the
investment objectives and policies of the Fund; (b) are acquired
for investment and not for resale except in accordance with
applicable law; (c) have a value that is readily ascertainable
via listing on or trading in a recognized United States or
international market; and (d) are not illiquid.
MANAGEMENT OF THE FUNDS
The management of each Fund's business and affairs is
the responsibility of the Board of Directors for Spectrum Fund.
In exercising their responsibilities, the Board, among other
things, will refer to the Special Servicing Agreement (see page
18) and policies and guidelines included in an Application for an
Exemptive Order (and accompanying Notice and Order issued by the
Commission). A majority of Spectrum Fund's directors will be
non-interested persons as defined in Section 2(a)(19) of the 1940
Act. However, the interested directors and the officers of
Spectrum Fund and T. Rowe Price also serve in similar positions
with most of the Underlying Price Funds. Thus, if the interests
of a Fund and the Underlying Price Funds were ever to become
divergent, it is possible that a conflict of interest could arise
and affect how this latter group of persons fulfill their
fiduciary duties to that Fund and the Underlying Price Funds.
The directors of Spectrum Fund believe they have structured each
Fund to avoid these concerns. However, conceivably, a situation
could occur where proper action for Spectrum Fund or the Growth
Fund or Income Fund separately, could be adverse to the interests
of an Underlying Price Fund, or the reverse could occur. If such
a possibility arises, the directors and officers of the affected
funds and T. Rowe Price will carefully analyze the situation and
take all steps they believe reasonable to minimize and, where
possible, eliminate the potential conflict. Moreover,
limitations on aggregate investments in the Underlying Price
Funds and other restrictions have been adopted by Spectrum Fund
to minimize this possibility, and close and continuous monitoring
will be exercised to avoid, insofar as possible, these concerns.
The officers and directors of Spectrum Fund are listed
below. Unless otherwise noted, the address of each is 100 East
PAGE 20
Pratt Street, Baltimore, Maryland 21202. Except as indicated,
each has been an employee of T. Rowe Price for more than five
years. In the list below, Spectrum Fund's directors who are
considered "interested persons" of T. Rowe Price or the Fund as
defined under Section 2(a)(19) of the Investment Company Act of
1940 are noted with an asterisk (*). Mr. Riepe is referred to as
an inside director by virtue of his directorship and employment
by T. Rowe Price.
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T.
Rowe Price; Chairman of the Board, T. Rowe Price Services, Inc.,
and T. Rowe Price Retirement Plan Services, Inc.; Chairman of the
Board and Director, T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
JEFFREY H. DONAHUE, Director--Senior Vice President and Chief
Financial Officer of The Rouse Company, a full-service real
estate and development company, Columbia, Maryland; Address:
10275 Little Patuxent Parkway, Columbia, Maryland 21044
A. MACDONOUGH PLANT, Director--Partner, law firm of Stewart,
Plant & Blumenthal; (formerly until 4/91) Partner, law firm of
Semmes, Bowen & Semmes, Baltimore, Maryland; Address: Suite 910,
7 Seven St. Paul Street, Baltimore, Maryland 21202
PETER VAN DYKE, President--Managing Director, T. Rowe Price; Vice
President, Price-Fleming and T. Rowe Price Trust Company
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
GEORGE J. COLLINS, Vice President--President, Chief Executive
Officer, and Managing Director, T. Rowe Price; Director, Price-
Fleming, T. Rowe Price Trust Company and T. Rowe Price Retirement
Plan Services, Inc.; Chartered Investment Counselor
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, Price-Fleming and T. Rowe Price
Retirement Plan Services, Inc.
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company; formerly, (1972-1989) charter
member of the U.S. Senior Executive Service and Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental Protection
Agency
WILLIAM T. REYNOLDS, Managing Director, T. Rowe Price
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Price-Fleming
M. DAVID TESTA, Vice President--Managing Director, T. Rowe Price;
Chairman of the Board, Price-Fleming; Director and Vice
President, T. Rowe Price Trust Company; Chartered Financial
Analyst
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
PAGE 21
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price,
T. Rowe Price Services, Inc., and T. Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Price-Fleming
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price; Vice President, T. Rowe Price Services,
Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
JUDITH B. WARD, Assistant Vice President--Assistant Vice
President, T. Rowe Price
COMPENSATION TABLE
The Funds do not pay pension or retirement benefits to
its officers or directors. Also, any director of a Fund who is
an officer or employee of T. Rowe Price does not receive any
remuneration from the Funds.
_________________________________________________________________
Total Compensation
from Fund and
Name of Aggregate Fund Complex
Person, Compensation Paid to
Position from Fund(a) Directors(b)
_________________________________________________________________
Spectrum Income
Jeffrey H. Donahue, $7,210 $30,011
Director
A. MacDonough Plant, 7,210 29,750
Director
Spectrum Growth
Jeffrey H. Donahue, 8,840 30,011
Director
A. MacDonough Plant, 8,840 29,750
Director
(a) Amounts in this column are for the fiscal year January 1,
1995 to December 31, 1995.
(b) Amounts in this column included three funds at December 31,
1995.
PAGE 22
The Fund's Executive Committee, comprised of Mr. Riepe and
Mr. Plant, have been authorized by the Board of Directors to
exercise all powers of the Board to manage Spectrum Fund in the
intervals between meetings of the Board, except the powers
prohibited by statute from being delegated.
Spectrum Fund's officers will receive no remuneration from
the Fund, but are paid by T. Rowe Price. Spectrum Fund's
officers and interested directors presently serve as officers or
interested directors of most of the Underlying Price Funds. The
Underlying Price Funds pay their disinterested directors a
director's fee plus a proportionate share of travel and other
expenses incurred in attending Board meetings.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of Spectrum Fund, as a group, owned less than 1% of the
outstanding shares of the Fund.
As of March 31, 1996, no stockholder benefically owned more
than 5% of the outstanding shares of either Spectrum Income Fund
or Spectrum Growth Fund.
INVESTMENT MANAGEMENT SERVICES
The business of Spectrum Fund will be conducted by its
officers, directors, and investment manager in accordance with
policies and guidelines set up by Spectrum Fund's directors which
were included in the Exemptive Order issued by the Securities and
Exchange Commission (Investment Company Act Release No. IC-21425,
October 18, 1995).
Each Fund will operate at a zero expense ratio. To
accomplish this, the payment of each Fund's operational expenses
is subject to the Special Servicing Agreement described below as
well as certain undertakings made by T. Rowe Price, under its
Investment Management Agreement with T. Rowe Price. Fund
expenses include: shareholder servicing fees and expenses;
custodian and accounting fees and expenses; legal and auditing
fees; expenses of preparing and printing prospectuses and
shareholder reports; registration fees and expenses; proxy and
annual meeting expenses, if any; and directors' fees and
expenses.
Special Servicing Agreement. Spectrum Fund has entered into
a Special Servicing Agreement ("Agreement") between and among the
Underlying Price Funds, T. Rowe Price and T. Rowe Price Services,
PAGE 23
Inc. ("Price Services"). Under the Agreement, Price Services
will act as Shareholder Servicing Agent for Spectrum Fund and
arrange for all other services necessary for the operation of
Spectrum Fund.
The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund determines that
such Underlying Price Fund's share of the aggregate expenses of
Spectrum Fund is less than the estimated savings to such
Underlying Price Fund from the operation of Spectrum Fund, the
Underlying Price Fund will bear those expenses in proportion to
the average daily value of its shares owned by each Fund,
provided further that no Underlying Price Fund will bear such
expenses in excess of the estimated savings to it. Such savings
are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been
invested directly in the Underlying Price Funds and the resulting
reduction in shareholder servicing costs. Although such cost
savings are not certain, the estimated savings to the Underlying
Price Funds generated by the operation of Spectrum Fund are
expected to be sufficient to offset most, if not all, of the
expenses incurred by Spectrum Fund.
The Special Servicing Agreement also gives authority to
Spectrum Fund to utilize the Price name so long as (1) the
Special Servicing Agreement is in effect, and (2) the assets of
the Growth Fund and the Income Fund are invested pursuant to each
Fund's objectives and policies in shares of the various
Underlying Price Funds (except for such cash or cash items as the
directors may determine to maintain from time to time to meet
current expenses and redemptions). The Special Servicing
Agreement provides that the Funds will utilize assets deposited
with the custodian of each Fund from the sale of each Fund's
shares to promptly purchase shares of the specified Underlying
Price Funds, and will undertake redemption or exchange of such
shares of the Underlying Price Funds in the manner provided by
the objectives and policies of each Fund.
Under the Investment Management Agreement with the Funds,
and the Special Servicing Agreement, T. Rowe Price has agreed to
bear any expenses of Spectrum Fund which exceed the estimated
savings to each of the Underlying Price Funds. Of course,
shareholders of Spectrum Fund will still indirectly bear their
fair and proportionate share of the cost of operating the
Underlying Price Funds in which the Spectrum Fund invests
because, Spectrum Fund, as a shareholder of the Underlying Price
Funds, will bear its proportionate share of any fees and expenses
paid by the Underlying Price Funds. Spectrum Fund, as a
shareholder of the selected Underlying Price Funds, will benefit
only from cost-sharing reductions in proportion to its interest
in such Underlying Price Funds.
PAGE 24
Services
Under the Management Agreement with each Fund, T. Rowe Price
provides each Fund with discretionary investment services.
Specifically, T. Rowe Price is responsible for supervising and
directing the investments of each Fund in accordance with each
Fund's investment objectives, program, and restrictions as
provided in their prospectus and this Statement of Additional
Information. T. Rowe Price is also responsible for effecting all
security transactions on behalf of each Fund, including the
negotiation of commissions and the allocation of principal
business and portfolio brokerage. However, it should be
understood that the Funds will invest their assets almost
exclusively in the shares of the Underlying Price Funds and such
investments will be made without the payment of any commission or
other sales charges. In addition to these services, T. Rowe
Price provides each Fund with certain corporate administrative
services, including: maintaining Spectrum Fund's corporate
existence, corporate records, and registering and qualifying each
Fund's shares under federal and state laws; monitoring the
financial, accounting, and administrative functions of each Fund;
maintaining liaison with the agents employed by each Fund such as
the custodian and transfer agent; assisting each Fund in the
coordination of such agents' activities; and permitting T. Rowe
Price's employees to serve as officers, directors, and committee
members of each Fund without cost to the Fund.
T. Rowe Price has agreed not to be paid a management fee for
performing its services. However, T. Rowe Price and Price-
Fleming will receive management fees from managing the Underlying
Price Funds in which Spectrum Fund invests.
Each Fund's Management Agreement also provides that T. Rowe
Price, its directors, officers, employees, and certain other
persons performing specific functions for the Fund will only be
liable to the Fund for losses resulting from willful misfeasance,
bad faith, gross negligence, or reckless disregard of duty.
Each Fund's Management Agreement provides that the Fund will
bear all expenses of its operations not specifically assumed by
T. Rowe Price. However, T. Rowe Price will reimburse the Fund
for certain expenses which in any year exceed the limits
prescribed by any state in which the Fund's shares are qualified
for sale. Presently, the most restrictive expense ratio
limitation imposed by any state is 2.5% of the first $30 million
of the Fund's average daily net assets, 2% of the next $70
million of such assets, and 1.5% of net assets in excess of $100
million. For the purpose of determining whether the Fund is
entitled to reimbursement, the expenses of the Fund are
calculated on a monthly basis. If the
PAGE 25
Fund is entitled to reimbursement, that month's management fee
will be reduced or postponed with any adjustment made after the
end of the year.
Management Fees of Underlying Price Funds
Each Underlying Price Fund pays T. Rowe Price or Price-
Fleming a fee ("Fee") which consists of two components: a Group
Management Fee ("Group Fee") and an Individual Fund Fee ("Fund
Fee"). The Fee is paid monthly to T. Rowe Price or Price-Fleming
on the first business day of the next succeeding calendar month
and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of
the daily Group Fee accruals ("Daily Group Fee Accruals") for
each month. The Daily Group Fee Accrual for any particular day
is computed by multiplying the Price Funds' group fee accrual as
determined below ("Daily Price Funds' Group Fee Accrual") by the
ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
_________________________________
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Next $16 billion
0.305% Thereafter
PAGE 26
The Individual Fund Fees and total management fees of
the Underlying Price Funds are as follows:
Individual Fee Total
as a % of Fund Management
Name of Fund Net Assets Fee Paid
International Bond Fund 0.35% 0.69%
International Stock Fund 0.35 0.69
New Horizons Fund 0.35 0.69
High Yield Fund 0.30 0.64
Equity Income Fund 0.25 0.59
Growth Stock Fund 0.25 0.59
New Era Fund 0.25 0.59
GNMA Fund 0.15 0.49
Growth & Income Fund 0.25 0.59
New Income Fund 0.15 0.49
Short-Term Bond Fund 0.10 0.44
Prime Reserve Fund 0.05 0.39
Based on combined Price Funds' assets of approximately
$48.6 billion at December 31, 1995, the Group Fee was 0.34%. The
total combined management fee for each of the Underlying Price
Funds would have been an annual rate as shown above.
For the purpose of calculating the Group Fee, the
Price Funds include all the mutual funds distributed by T. Rowe
Price Investment Services, Inc. (excluding the Spectrum Fund,
Equity Index Fund, and any institutional or private label mutual
funds). For the purpose of calculating the Daily Price Funds'
Group Fee Accrual for any particular day, the net assets of each
Price Fund are determined in accordance with the Fund's
prospectus as of the close of business on the previous business
day on which the Fund was open for business.
The monthly Fund Fee for each Underlying Price Fund
("Monthly Fund Fee") is the sum of the daily Fund Fee accruals
("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
accrual for any particular day is computed by multiplying the
fraction of one (1) over the number of calendar days in the year
by the individual Fund Fee Rate for each Fund and multiplying
this product by the net assets of the Fund for that day, as
determined in accordance with the Fund's prospectus as of the
close of business on the previous business day on which the Fund
was open for business.
DISTRIBUTOR FOR THE FUNDS
PAGE 27
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as Spectrum Fund's
distributor, on behalf of the Income and Growth Fund. Investment
Services is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association
of Securities Dealers, Inc. The offering of Spectrum Fund's
shares is continuous.
Investment Services is located at the same address as
Spectrum Fund and T. Rowe Price -- 100 East Pratt Street,
Baltimore, Maryland 21202.
Investment Services serves as distributor to Spectrum
Fund, on behalf of the Income and Growth Fund, pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides
for each Fund to pay its fees and expenses in connection with
registering and qualifying its shares under the various state
"blue sky" laws; preparing, setting in type, printing, and
mailing its prospectuses and reports to shareholders; and issuing
its shares, including expenses of confirming purchase orders.
However, all such fees and expenses are subject to the Special
Servicing Agreement.
The Underwriting Agreement provides that Investment
Services will pay all fees and expenses in connection with:
printing and distributing prospectuses and reports for use in
offering and selling shares for each Fund; preparing, setting in
type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a
broker-dealer; and offering and selling shares for each Fund,
except for those fees and expenses specifically assumed by the
Funds. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of Spectrum
Fund, on behalf of the Income and Growth Fund, in connection with
the sale of the shares for each Fund in all states in which the
shares are qualified and in which Investment Services is
qualified as a broker-dealer. Under the Underwriting Agreement,
Investment Services accepts orders for each Fund's shares at net
asset value. No sales charges are paid by investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"),
under an agreement with Spectrum Fund, on behalf of the Income
and Growth Fund, serves as the custodian for each Fund's
securities and cash, but it does not participate in the Funds'
investment decisions.
PAGE 28
Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve
Book Entry system, or the security depository system of the
Depository Trust Corporation. The Bank maintains shares of the
Underlying Funds in the book entry system of such funds transfer
agent. T. Rowe Price Services, Inc. State Street Bank's main
office is at 225 Franklin Street, Boston, Massachusetts 02110.
Payments of the fees and expenses of the Income and Growth Funds
under the Custodian Agreement are subject to the Special
Servicing Agreement.
CODE OF ETHICS
The Fund's investment adviser (T. Rowe Price) has a
written Code of Ethics which requires all employees to obtain
prior clearance before engaging in personal securities
transactions. Transactions must be executed within three business
days of their clearance. In addition, all employees must report
their personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; a change has occurred in T. Rowe Price's
rating of the security within seven calendar days prior to the
date of the proposed transaction; or the security is subject to
internal trading restrictions. In addition, employees are
prohibited from profiting from short-term trading (e.g.,
purchases and sales involving the same security within 60 days).
Any material violation of the Code of Ethics is reported to the
Board of the Fund. The Board also reviews the administration of
the Code of Ethics on an annual basis.
PRICING OF SECURITIES
The securities of the Underlying Price Funds held by
each Fund are valued at the net asset value of each Underlying
Price Fund. For the Growth Fund, short-term money market
investments are valued at cost which, when combined with accrued
interest receivable, approximates market value. For the Income
Fund, securities with less than one year to maturity are stated
at fair value which is determined by using a matrix system that
establishes a value for each security based on money market
yields.
NET ASSET VALUE PER SHARE
PAGE 29
The purchase and redemption price of each Fund's
shares is equal to its net asset value per share or share price.
Each Fund determines its net asset value per share by subtracting
its liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities each Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of each Fund is calculated as of the close of trading on
the New York Stock Exchange ("NYSE") every day the NYSE is open
for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering,
sale, redemption and repurchase of shares) for a Fund may be
suspended at times (a) during which the NYSE is closed, other
than customary weekend and holiday closings, (b) during which
trading on the NYSE is restricted (c) during which an emergency
exists as a result of which disposal by a Fund of securities
owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net
assets, or (d) during which a governmental body having
jurisdiction over the Fund may by order permit such a suspension
for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange
Commission (or any succeeding governmental authority) shall
govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
DIVIDENDS
Unless you elect otherwise, capital gain
distributions, if any, will be reinvested on the reinvestment
date using the NAV per share of that date. The reinvestment date
normally precedes the payment date by about 10 days although the
exact timing is subject to change.
TAX STATUS
Each Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended ("Code").
A portion of dividends paid by each Fund may be
eligible for the dividends-received deduction for corporate
shareholders. Capital gain distributions paid from these Funds
are never eligible for the dividends-received deduction. For tax
purposes, it does
PAGE 30
not make any difference whether dividends and capital gain
distributions are paid in cash or in additional shares. Each
Fund must declare dividends by December 31 of each year equal to
at least 98% of ordinary income (as of December 31) and capital
gains (as of October 31), in order to avoid a federal excise tax
and distribute within 12 months 100% of ordinary income and
capital gains as of December 31 in order to avoid a federal
income tax.
At the time of your purchase, each Fund's net asset
value may reflect undistributed income (Growth Fund only),
capital gains or net unrealized appreciation of securities held
by the Fund. A subsequent distribution to you of such amounts,
although constituting a return of your investment, would be
taxable either as dividends or capital gain distributions. For
federal income tax purposes, each Fund is permitted to carry
forward its net realized capital losses, if any, for eight years
and realize net capital gains up to the amount of such losses
without being required to pay taxes on, or distribute such gains.
On March 31, 1996, the books of the Income Fund indicated that
the Fund's aggregate net assets included net realized capital
gains of $(511,965.07) and unrealized appreciation of
$28,982,828.36. On March 31, 1996, the books of the Growth Fund
indicated that the Fund's aggregate net assets included
undistributed net investment income of $3,271,600.94, net
realized capital gains of $2,790,377.50, and unrealized
appreciation of $282,980,070.82.
If, in any taxable year, either Fund should not
qualify as a regulated investment company under the Code:
(i) the Fund would be taxed at normal corporate rates on the
entire amount of its taxable income, if any, without deduction
for dividends or other distributions to shareholders, and
(ii) the Fund's distributions to the extent made out of the
Fund's current or accumulated earnings and profits would be
taxable to shareholders as ordinary dividends (regardless of
whether they would otherwise have been considered capital gain
dividends), and would qualify for the 70% deduction for dividends
received by corporations.
Taxation of Foreign Shareholders
The Code provides that dividends from net income will
be subject to U.S. tax. For shareholders who are not engaged in
a business in the U.S., this tax would be imposed at the rate of
30% upon the gross amount of the dividends in the absence of a
Tax Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized
by the Fund are not subject to tax unless the foreign shareholder
is a nonresident alien individual who was physically present in
the U.S. during the tax year for more than 182 days.
PAGE 31
YIELD INFORMATION
Income Fund
From time to time, the Income Fund may advertise a
yield figure calculated in the following manner:
An income factor is calculated for each security in
the portfolio based upon the security's market value at the
beginning of the period and yield as determined in conformity
with regulations of the Securities and Exchange Commission. The
income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period, net of
expected reimbursements, are deducted from the income to arrive
at net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding
during the period. The net income per share is divided by the
net asset value on the last day of the period to produce a
monthly yield which is then annualized. Quoted yield factors are
for comparison purposes only, and are not intended to indicate
future performance or forecast the dividend per share of the
Fund.
The yield of the Fund calculated under the above-
described method for the month ended December 31, 1995 was 7.41%.
INVESTMENT PERFORMANCE
Total Return Performance
Each Fund's calculation of total return performance
includes the reinvestment of all capital gain distributions and
income dividends for the period or periods indicated, without
regard to tax consequences to a shareholder in the Fund. Total
return is calculated as the percentage change between the
beginning value of a static account in the Fund and the ending
value of that account measured by the then current net asset
value, including all shares acquired through reinvestment of
income and capital gains dividends. The results shown are
historical and should not be considered indicative of the future
performance of the Fund. Each average annual compound rate of
return is derived from the cumulative performance of the Fund
over the time period specified. The annual compound rate of
return of the Fund over any other period of time will vary from
the average.
PAGE 32
Spectrum Income Fund
Cumulative Performance Percentage Change
1 Year 3 Years Since Inception
Ended Ended (6/29/90) to
12/31/94+ 12/31/94 12/31/94++
_________ ________ _______________
Spectrum Income Fund -1.94% 18.82% 45.93%
90-day Treasury Bill 4.33 11.27 21.75
Lehman Brothers Govt./Corp.
Bond Index -3.51 15.26 41.51
Lipper Flexible Income -3.69 17.98 43.49
CPI 2.67 8.56 15.24
Average Annual Compound Rates of Return
1 Year 3 Years Since Inception
Ended Ended (6/29/90) to
12/31/94+ 12/31/94 12/31/94++
_________ ________ _______________
Spectrum Income Fund -1.94% 5.92% 8.75%
90-day Treasury Bill 4.33 3.62 4.46
Lehman Brothers Govt./Corp.
Bond Index -3.51 4.85 8.01
Lipper Flexible Income -3.69 5.67 8.34
CPI 2.95 2.87 3.26
+ If you invested $1,000 at the beginning of 1994, the total
return on 12/31/94 would be $980.60 ($1,000 x -1.94%).
++ Assumes purchase of one share of the Income Fund at the
inception price of $10.00 on 6/29/90.
PAGE 33
Spectrum Growth Fund
Cumulative Performance Percentage Change
1 Year 3 Years Since Inception
Ended Ended (6/29/90) to
12/31/94+ 12/31/94 12/31/94++
_________ ________ _______________
Spectrum Growth Fund 1.40% 31.55% 53.61%
S & P 500 1.35 20.06 47.23
Lipper Growth and Income
Fund Index -0.72 26.59 50.06
Wilshire 5000 -0.06 21.18 49.93
CPI 2.67 8.56 15.24
Average Annual Compound Rates of Return
1 Year 3 Years Since Inception
Ended Ended (6/29/90) to
12/31/94+ 12/31/94 12/31/94++
_________ ________ _______________
Spectrum Growth Fund 1.40% 9.57% 10.00%
S & P 500 1.35 6.29 8.97
Lipper Growth and Income
Fund Index -0.72 8.18 9.44
Wilshire 5000 -0.06 6.61 9.41
CPI 2.67 2.77 3.20
+ If you invested $1,000 at the beginning of 1994, the total
return on 12/31/94 would be $1,014 ($1,000 x 1.40%).
++ Assumes purchase of one share of the Growth Fund at the
inception price of $10.00 on 6/29/90. Over this time, stock
prices in general have risen.
Outside Sources of Information
From time to time, in reports and promotional
literature: (1) the Fund's total return performance or P/E ratio
may be compared to any one or combination of the following: (i)
the Standard & Poor's 500 Stock Index and Dow Jones Industrial
Average so that you may compare the Fund's results with those of
a group of unmanaged securities widely regarded by investors as
representative of the stock market in general; (ii) other groups
of mutual funds, including T. Rowe Price Funds tracked by: (A)
Lipper Analytical Services, a widely used independent research
firm which rates mutual funds by overall performance, investment
objective, and assets; (B) Morningstar, Inc. another widely used
independent research firm which ranks mutual funds; or (C) other
financial or business publications, such as Business Week, Money
Magazine,
PAGE 34
Forbes and Barron's, which provide similar information; (iii)
indices of stocks comparable to those in which the Fund invests;
(2) the Consumer Price Index (measure for inflation) may be used
to assess the real rate of return from an investment in the Fund;
(3) other government statistics such as GNP, and net import and
export figures derived from governmental publications, e.g. The
Survey of Current Business, may be used to illustrate investment
attributes of the Fund or the general economic, business,
investment, or financial environment in which the Fund operates;
(4) various financial, economic and market statistics developed
by brokers, dealers and other persons may be used to illustrate
aspects of the Fund's performance; (5) the effect of tax-deferred
compounding on the Fund's investment returns, or on returns in
general, may be illustrated by graphs, charts, etc. where such
graphs or charts would compare, at various points in time, the
return from an investment in the Fund (or returns in general) on
a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the return on
a taxable basis; and (6) the sectors or industries in which the
Fund invests may be compared to relevant indices or surveys (e.g.
S&P Industry Surveys) in order to evaluate the Fund's historical
performance or current or potential value with respect to the
particular industry or sector. The Income Fund may also compare
its performance or yield to a variety of fixed income investments
(e.g., repos, CDs, Treasury bills) and other measures of
performance set forth in financial publications maintained by
persons such as the Donoghue Organization, Merrill Lynch, Pierce
Fenner & Smith, Inc., Salomon Brothers, Inc. etc. In connection
with (5) above, information derived from the following chart may
be used:
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and
28% tax bracket.
Year Taxable Tax Deferred
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is
to accumulate personal savings for retirement. Due to the long-
term nature of the investment, even slight differences in
performance will result in significantly different assets at
retirement.
PAGE 35
Mutual funds, with their diversity of choice, can be used for IRA
investments. Generally, individuals may need to adjust their
underlying IRA investments as their time to retirement and
tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of
Funds and may help investors achieve various long-term investment
goals, such as investing money for retirement, saving for a down
payment on a home, or paying college costs. To explain how the
Fund could be used to assist investors in planning for these
goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be made
available. These currently include: the Asset Mix Worksheet
which is designed to show shareholders how to reduce their
investment risk by developing a diversified investment plan; the
College Planning Guide which discusses various aspects of
financial planning to meet college expenses and assists parents
in projecting the costs of a college education for their
children; the Retirement Planning Kit (also available in a PC
version) includes a detailed workbook to determine how much money
you may need for retirement and suggests how you might invest to
achieve your objectives; and the Retirees Financial Guide which
includes a detailed workbook to determine how much money you can
afford to spend and still preserve your purchasing power and
suggests how you might invest to reach your goal; Tax
Considerations for Investors discusses the tax advantages of
annuities and municipal bonds and how to assess whether they are
suitable for your portfolio, reviews pros and cons of placing
assets in a gift to minors account, and summarizes the benefits
and types; Personal Strategy Planner simplifies investment
decision making by helping investors define personal financial
goals, establish length of time the investor intends to invest,
determine risk "comfort zone" and select diversified investment
mix; and the How to Choose a Bond Fund guide which discusses how
to choose an appropriate bond fund for your portfolio. From time
to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that
such goals will be met.
To assist investors in understanding the different
returns and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown below.
Historical Returns for Different Investments
PAGE 36
Annualized returns for periods ended 12/31/95
50 years 20 years 10 years 5 years
Small-Company Stocks 13.8% 19.6% 11.9% 24.5%
Large-Company Stocks 11.9 14.6 14.8 16.6
Foreign Stocks N/A 15.1 13.9 9.7
Long-Term Corporate Bonds 5.7 10.5 11.2 12.1
Intermediate-Term U.S.
Gov't. Bonds 5.9 9.7 9.1 8.8
Treasury Bills 4.8 7.3 5.5 4.3
U.S. Inflation 4.4 5.2 3.5 2.8
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown below.
PAGE 37
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/95 $10,000
Investment
After Period
_____________________ ______________________ ____________
Nominal Real Best Worst
PortfolioGrowth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.8% 6.5% 24.9% 0.1%$ 92,675
II. Moderate
Risk 60% 30% 10% 13.1% 7.9% 29.1%-1.8%$116,826
III. High
Risk 80% 20% 0% 14.3 9.1% 33.4%-5.2%$145,611
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1995 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-94 and Lehman Brothers Government/Corporate Bond
Index from 1975), and 30-day Treasury bills from January 1976
through December 1995. Past performance does not guarantee
future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is
maintained each year. This exhibit is for illustrative
purposes only and is not representative of the performance of
any T. Rowe Price fund.
** Based on inflation rate of 5.2% for the 20-year period ended
12/31/95.
Insights
From time to time, Insights, a T. Rowe Price publication of
reports on specific investment topics and strategies, may be
included in the Fund's fulfillment kit. Such reports may include
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock
PAGE 38
investing, conservative stock investing, value investing,
investing in small companies, tax-free investing, fixed income
investing, investing in mortgage-backed securities, as well as
other topics and strategies.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
CAPITAL STOCK
The Articles of Incorporation of Spectrum Fund
currently establish two series (i.e., the Income Fund and the
Growth Fund), each of which represents a separate class of the
Corporation's shares and has different objectives and investment
policies. The Articles of Incorporation also provide that the
Board of Directors may issue additional series of shares. Each
share of each Fund represents an equal proportionate share in
that Fund, with each other share, and is entitled to such
dividends and distributions of income belonging to that Fund as
are declared by the Directors. In the event of the liquidation
of a Fund, each share is entitled to a pro rata share of the net
assets of that Fund.
The Funds' Charter authorizes the Board of Directors
to classify and reclassify any and all shares which are then
unissued, including unissued shares of capital stock into any
number of classes or series, each class or series consisting of
such number of shares and having such designations, such powers,
preferences, rights, qualifications, limitations, and
restrictions, as shall be determined by the Board subject to the
Investment Company Act and other applicable law. The shares of
any such additional classes or series might therefore differ from
the shares of the present class and series of capital stock and
from each other as to preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to
applicable law, and might thus be superior or inferior to the
capital stock or to other classes or series in various
characteristics. The Board of Directors may increase or decrease
the aggregate number of shares of stock or the number of shares
of stock of any class or series that the Funds have authorized to
issue without shareholder approval.
PAGE 39
Each share of each series has equal voting rights with
every other share of every other series, and all shares of all
series vote as a single group except where a separate vote of any
class or series is required by the Investment Company Act of
1940, the laws of the State of Maryland, the Funds' Articles of
Incorporation, the By-Laws of the Corporation, or as the Board of
Directors may determine in its sole discretion. Where a separate
vote is required with respect to one or more classes or series,
then the shares of all other classes or series vote as a single
class or series, provided that, as to any matter which does not
affect the interest of a particular class or series, only the
holders of shares of the one or more affected classes or series
is entitled to vote. The preferences, rights, and other
characteristics attaching to any series of shares, including the
present series of capital stock, might be altered or eliminated,
or the series might be combined with another series, by action
approved by the vote of the holders of a majority of all the
shares of all series entitled to be voted on the proposal,
without any additional right to vote as a series by the holders
of the capital stock or of another affected series.
Shareholders are entitled to one vote for each full
share held (and fractional votes for fractional shares held) and
will vote in the election of or removal of directors (to the
extent hereinafter provided) and on other matters submitted to
the vote of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Funds, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Corporation, a special meeting of
shareholders of the Corporation shall be called by the Secretary
of the Corporation on the written request of shareholders
entitled to cast at least 10% of all the votes of the
Corporation, entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Corporation to the extent
required by Section 16(c) of the 1940 Act.
PAGE 40
FEDERAL AND STATE REGISTRATION OF SHARES
The Funds' shares are registered for sale under the
Securities Act of 1933 and the Funds or their shares are
registered under the laws of all states which require
registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, whose
address is 919 Third Avenue, New York, New York 10022, is legal
counsel to the Funds.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the
Funds. The financial statements of each Fund for the year ended
December 31, 1995, and the report of independent accountants are
included in the Funds' Annual Report for the year ended December
31, 1995 on pages 8-14. A copy of the Annual Report accompanies
this Statement of Additional Information. The following
financial statements and the report of independent accountants
appearing in the Annual Report for the year ended December 31,
1995, are incorporated into this Statement of Additional
Information by reference:
Annual
Report Page
_____________
Report of Independent Accountants 14
Statement of Net Assets, December 31, 1995 8
Statement of Operations, year ended
December 31, 1995 9
Statement of Changes in Net Assets, years ended
December 31, 1995 and December 31, 1994 10
Notes to Financial Statements,
December 31, 1995 11
Financial Highlights 12-13
