ANNUAL REPORT
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T. Rowe Price Spectrum Funds
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December 31, 1996
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Report Highlights
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* The stock market overcame a midyear correction to chalk up another
outstanding year. After a dismal first half, the bond market largely
recovered, although full-year returns were modest.
* Spectrum Growth Fund returned 9.79% over the last six months and 20.53% for
the full year.
* Spectrum Income returned 6.55% over the last six months, helping it
overcome flat results in the first half. Its full-year return was 7.64%,
better than most investment-grade bonds.
* Spectrum Growth was boosted in the second half by its holdings of larger
companies. Spectrum Income benefited from its holdings of high-yield bonds,
international bonds, and stocks.
* We expect stocks to advance at a much slower pace in 1997, while bond
returns should come mostly from income rather than capital appreciation.
<PAGE>
Fellow Shareholders
After an exhilarating 1995, the stock market staged an impressive encore
last year, chalking up one of its best back-to-back advances in history. Stocks
shrugged off rising interest rates earlier in 1996 and a midyear correction to
soar to record levels over the last six months. Bonds had a seesaw year, with
prices dropping in the first half due to a surging economy and inflation
concerns, but largely recovering over the last six months as the economy cooled
and inflation fears subsided.
Spectrum Income outperformed its peer group in both halves of 1996, through
both rising and falling interest rates, to post a respectable full-year gain.
Spectrum Growth, while trailing its peers during the second-half rally, matched
them for the year with a strong, double-digit gain.
MARKET ENVIRONMENT
On the heels of its 38% gain in 1995, the overall stock market (as measured
by the Standard & Poor's 500 Stock Index) posted a 23% return in 1996. Market
volatility picked up significantly last year amid shifting signals on economic
growth and inflation. The economy soared to an annualized growth rate of 4.7% in
the second calendar quarter, fanning fears of inflation. In response, bond
yields moved up sharply, with the benchmark 30-year Treasury bond yield rising
to a high of just over 7% in June. However, with the economy slowing to a 2.1%
growth rate in the third quarter, rates retraced most of their rise, with the
long bond yield finishing the year at 6.6%.
[Edgar description: A 3-line chart showing yields on the 30-year Treasury
bond, 5-year Treasury note, and 90-day Treasury bill from 12/31/95 to 12/31/96.]
After enduring a modest correction in the summer, the stock market rallied
strongly over the second half, buoyed by moderate economic growth, subdued
inflation, and strong cash flows into equity mutual funds. Large-capitalization
blue-chip companies overtook their smaller brethren over the last six months and
for the full year, as investors sought the relative safety of bigger companies.
The natural resources sector also had a good year due primarily to soaring
energy prices.
While slowing over the last six months, many foreign equity markets posted
decent gains for the year, though few outperformed the exuberant U.S. market.
Individual countries in Europe, Latin America, and Asia surged to double-digit
returns, but Japan was again disappointing. As in the U.S., larger international
companies outperformed their smaller counterparts and companies based in
emerging markets.
<PAGE>
After suffering losses in the first half due to rising interest rates, the
U.S. bond market recovered over the last six months but notched only modest
returns for all of 1996. The Lehman Aggregate Bond Index of investment-grade
bonds provided a 3.6% return for the year. High-yield bonds, which are more
sensitive to the direction of the economy and the stock market than to interest
rates, were the best performers. Since interest rates ended the year a bit
higher than where they began, bond performance came entirely from income rather
than capital appreciation. Hence, higher-yielding corporate and mortgage-backed
securities outperformed Treasuries for the full year.
Foreign investment-grade bonds performed somewhat better than their U.S.
counterparts for the year, boosted by falling interest rates in many countries,
although returns to U.S. investors were dampened by a strengthening dollar.
However, the real story abroad was in the bonds of emerging market countries,
whose 34% return for 1996 outpaced many stock markets.
YEAR-END DISTRIBUTIONS
Spectrum Growth Fund's Directors declared a fourth quarter dividend of
$0.20 per share, a short-term capital gain of $0.13 per share, and a long-term
gain of $0.80. Spectrum Income's Directors declared a fourth quarter short-term
capital gain of $0.02 and a long-term gain of$0.12. All distributions were paid
on December 30 to shareholders of record on December 26. You should already have
received a check or statement reflecting these distributions, as well as your
Form 1099-DIV reporting them for tax purposes.
SPECTRUM GROWTH FUND
Your fund had another good year, providing a strong, double-digit gain,
essentially matching its peer group. Over the last six months, while posting a
strong absolute return, the fund lagged its peer group due mostly to its
exposure to foreign markets, which trailed the robust U.S. market.
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Performance Comparison
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Periods Ended 12/31/96 ........... 6 Months 12 Months
Spectrum Growth Fund ............. 9.79% 20.53%
Lipper Growth & Income
Fund Index ....................... 11.28 20.69
================================================================================
Over the last six months, the fund benefited from the strong showing of
larger stocks through several of its funds: Equity Income, Growth & Income,
Growth Stock, and New Era. These funds returned between 11.39% and 14.32%. We
raised our holdings in the Growth & Income Fund by two percentage points since
last June. (Allocations to each of the underlying funds are shown in the table
following this letter.)
<PAGE>
We reduced our exposure to small-capitalization stocks by trimming our
allocation to the New Horizons Fund by one percentage point, redeploying the
assets in larger stocks. This strategy proved beneficial when the economy slowed
and investors leaned toward larger companies with sustained earnings growth.
While getting good performance from our exposure to natural resources,
particularly energy, through the New Era Fund (a 12.70% return in the second
half), we trimmed our holding as data suggested a weakening economy.
[Edgar description: A pie chart showing security diversification for
Spectrum Growth Fund on 12/31/96. Showing Domestic Stocks 63%; International
Stocks 31%; Money Markets 5%; Bonds 1%]
For the full year, Spectrum Growth got good mileage from all its underlying
equity funds, with returns ranging from 15.99% for the International Stock Fund
to 25.64% for the Growth & Income Fund.
We maintained our exposure to international stocks at 31% of assets (as
shown in the pie chart), primarily through the International Stock Fund, where
we kept a maximum allocation. Although we have held this outlook for some time,
we continue to believe that foreign stocks offer better value right now than
their domestic counterparts.
SPECTRUM INCOME FUND
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Performance Comparison
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Periods Ended 12/31/96 6 Months 12 Months
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Spectrum Income Fund 6.55% 7.64%
Lipper General Bond
Funds Average 6.27 6.05
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Buoyed by its broad diversification N including holdings in high yield and
international bonds, and U.S. stocks N Spectrum Income avoided the losses
suffered by most bond funds in the first half of the year and edged ahead of its
peer group average during the second-half rally. For the full year, the fund
outpaced its peers by an even wider margin and provided a respectable absolute
return.
<PAGE>
While most investment-grade bond sectors provided annual returns of 5.5% or
less, Spectrum Income did better. We held exposure to high-yield bonds steady at
17% of net assets (as shown in the pie chart) through our position in the High
Yield Fund, which returned 11.58% for the year N by far the best fixed income
performer. International bonds nosed out their domestic counterparts for the
year, and your fund participated through its position in the International Bond
Fund (shown in the table following this letter). Finally, the fund benefited
from the strong U.S. stock market through its position in the Equity Income
Fund.
[Edgar description: A pie chart showing security diversification for
Spectrum Income Fund on 12/31/96. High-Grade Bonds 55%; High-Yield Bonds 17%;
Internatioanl Bonds 7%; Stocks 14%; Money Markets 7%]
Over the last six months, we trimmed our holdings of international bonds
because we expect the dollar to remain strong against most currencies and dampen
returns to U.S. investors on foreign securities. Given the robust advance of
U.S. stocks and the possibility of increased volatility, we trimmed exposure to
stocks by moving assets out of the Equity Income Fund and into the Short-Term
Bond Fund, resulting in a slightly higher position in high-grade bonds. They
remain our highest concentration by far.
OUTLOOK
The conditions underlying the financial markets should stay pretty much the
same in 1997: low unemployment, relatively benign inflation, and moderate
economic growth, on the order of 2.5%. The U.S. stock market should continue to
advance, but at a slower pace than the past two years.
The domestic bond market should also provide moderate returns. Until growth
slows significantly or inflation picks up, we expect long-term Treasury yields
to fluctuate in a range of 6% to 7%. In this environment, bond returns should
come mostly from income rather than capital appreciation.
As mentioned, foreign stocks appear to offer better value right now than
their U.S. counterparts. Many foreign countries are in earlier stages of
economic recovery and hold the potential for more sustainable growth in
corporate earnings. However, returns on foreign bonds may be hampered by
continued strength in the dollar and the possibility that interest rates in many
countries may not fall further.
As always, the Spectrum Funds will remain well diversified in an effort to
capture good long-term returns with less volatility than more concentrated
portfolios. Thanks to all our shareholders for your support.
Respectfully submitted,
[Signature]
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
January 20, 1997
<PAGE>
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Spectrum International Fund
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We are pleased to introduce a new member of the Spectrum family, Spectrum
International Fund. Like its sister funds, Spectrum International seeks broad
diversification by investing in up to 10 underlying T. Rowe Price funds
(including seven foreign stock funds, two foreign bond funds, and one U.S. money
market fund). The fund was launched on January 1. Please request a prospectus
and read it carefully before you invest.
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Sticking To Your Game Plan
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In our report to you one year ago, we mentioned the possibility of a modest
decline in stock prices. In fact, from May to July 1996, the broad market (as
measured by the Standard & Poor's 500 Stock Index) fell around 7%. However, the
bull market resumed its charge to post a robust 23% gain for the year.
Some believe the market is poised for a significant downturn. We do not
expect a major drop in stock prices in 1997, although another modest pullback is
possible. On balance, we expect stocks to advance at a much slower pace.
How should you prepare for a potential market pullback? As always, our
advice is to diversify your investments and focus on the long term. If you've
implemented a sound investment strategy, stay the course. Stocks have
historically overcome periods of volatility to provide better returns than most
other investments. Market corrections can even have a silver lining because they
result in good buying opportunities.
Furthermore, the volatility of stock market returns has diminished
significantly over longer time frames. The chart shows the best and worst
annualized returns on stocks over various rolling time periods between 1950 and
1996. (For instance, there were 37 rolling 10-year periods: 1950-1960,
1951-1961, etc.) Investors who held stocks for only one year could have had as
much as a 52.6% gain, or as little as a 26.5% loss N a spread of 79 percentage
points. However, investors who held stocks for 10-year periods or longer always
overcame interim volatility to post gains for the entire period.
In addition, a well-diversified portfolio can weather volatility better
than a more concentrated portfolio over the long term and particularly during
market corrections. For example, during last summer's correction, small-company
stocks fell nearly 16% while large-company issues dropped 7.3%. However, a
portfolio diversified among large U.S. companies (30% of assets), small U.S.
companies (15%), foreign companies (15%), intermediate-term Treasury bonds
(30%), and Treasury bills (10%) would have lost a smaller 5.2% of its value.{1}
Above all, remember that investing is a long-distance race, not a sprint.
{1} Ned Davis Research.
<PAGE>
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Portfolio Highlights
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TARGET ALLOCATIONS for Underlying funds
Minimum- Target at
Maximum 12/31/96
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Spectrum Growth Fund
Prime Reserve ................................ 0-25% 0.0%
Equity Income ................................ 5-20 14.0
Growth & Income .............................. 5-20 14.5
Growth Stock ................................. 15-30 23.0
New Era ...................................... 10-25 12.0
International Stock .......................... 5-20 20.0
New Horizons ................................. 10-25 16.5
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Spectrum Income Fund
Prime Reserve ................................ 5-30 5.0
Short-Term Bond .............................. 0-15 3.5
GNMA ......................................... 5-20 20.0
New Income ................................... 15-30 30.0
High Yield ................................... 10-25 19.5
International Bond ........................... 5-20 7.0
Equity Income ................................ 10-25 15.0
================================================================================
<PAGE>
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Portfolio Highlights
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TEN LARGEST HOLDINGS
Percent of
(Of the combined underlying funds at 12/31/96) Net Assets
12/31/96
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Spectrum Growth Fund
Royal Dutch Petroleum ................................................... 1.1%
GE 0.8
Corning ................................................................. 0.7
Atlantic Richfield ...................................................... 0.6
Freddie Mac 0.5
Cooper Cameron .......................................................... 0.5
Kimberly-Clark .......................................................... 0.5
Mobil ................................................................... 0.5
U.S. Treasury Bonds0.5
Wolters Kluwer .......................................................... 0.4
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Total 6.1%
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Key statistics
6/30/96 12/31/96
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Spectrum Income Fund
Price Per Share $10.99 $11.20
Capital Gains Per Share Short-Term - 0.02
Long-Term 0.01 0.12
Dividends Per Share
For 6 months 0.35 0.36
For 12 months 0.71 0.71
Dividend Yield *
For 6 months 6.49% 6.47%
For 12 months 6.64 6.59
Weighted Average Maturity (years)** 8.3 8.0
Weighted Average Effective Duration (years)** 3.9 4.2
Weighted Average Quality *** AA- AA-
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* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** Excludes Equity Income Fund.
*** Based on T. Rowe Price research; excludes Equity Income Fund.
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<PAGE>
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Performance Comparison
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These charts show the value of a hypothetical $10,000 investment in each
fund over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
[SEC Chart for Spectrum Growth Fund]
[SEC Chart for Spectrum Income Fund]
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Average Annual Compound Total Return
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This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
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Since Inception
Periods Ended 12/31/96 1 Year 5 Years Inception Date
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Spectrum Growth Fund 20.53% 15.56% 14.95% 6/29/90
Spectrum Income Fund 7.64 8.84 10.15 6/29/90
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Investment return represents past performance and will vary. Shares of the
bond funds may be worth more or less at redemption than at original purchase.
================================================================================
<PAGE>
<TABLE>
T. Rowe Price Spectrum Growth Fund
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
<CAPTION>
Year
Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period ..................... $ 13.49 $ 11.13 $ 11.87 $ 10.54 $ 10.53
Investment activities
Income distributions received ......... 0.20 0.21 0.17 0.16 0.20
Net realized and
unrealized gain (loss) ................ 2.57 3.12 (0.01) 2.05 0.56
Total from
investment activities ................. 2.77 3.33 0.16 2.21 0.76
Distributions
Income ................................ (0.20) (0.21) (0.17) (0.16) (0.20)
Net realized gain ..................... (0.93) (0.76) (0.73) (0.72) (0.55)
Total distributions ................... (1.13) (0.97) (0.90) (0.88) (0.75)
NET ASSET VALUE
End of period ........................... $ 15.13 $ 13.49 $ 11.13 $ 11.87 $ 10.54
Ratios/Supplemental Data
Total return ............................ 20.53% 29.96% 1.40% 20.98% 7.24%
Ratio of expenses to
average net assets ...................... 0.00% * 0.00% 0.00% 0.00% 0.00%
Ratio of net investment
income to average
net assets .............................. 1.58% 1.81% 1.60% 1.57% 2.15%
Portfolio turnover rate ................. 2.9% 7.4% 20.7% 7.0% 7.9%
Net assets, end of period
(in millions) ........................... $ 2,104 $ 1,358 $ 879 $ 585 $ 355
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* See Note 4. The annualized weighted average expense ratio of the underlying funds was 0.83% for the year ended December 31,
1996.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
T. Rowe Price Spectrum Income Fund
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
<CAPTION>
Year
Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period ..................... $ 11.24 $ 10.11 $ 11.11 $ 10.70 $ 10.73
Investment activities
Income distributions received ..... 0.71 0.72 0.69 0.69 0.76
Net realized and
unrealized gain (loss) ............ 0.11 1.16 (0.90) 0.60 0.05
Total from
investment activities ............. 0.82 1.88 (0.21) 1.29 0.81
Distributions
Income ............................ (0.71) (0.72) (0.69) (0.69) (0.76)
Net realized gain ................. (0.15) (0.03) (0.10) (0.19) (0.08)
Total distributions ............... (0.86) (0.75) (0.79) (0.88) (0.84)
NET ASSET VALUE
End of period ........................... $ 11.20 $ 11.24 $ 10.11 $ 11.11 $ 10.70
Ratios/Supplemental Data
Total return ............................ 7.64% 19.41% (1.94)% 12.36% 7.84%
Ratio of expenses to
average net assets ...................... 0.00% * 0.00% 0.00% 0.00% 0.00%
Ratio of net investment
income to average
net assets .............................. 6.46% 6.43% 6.48% 6.19% 7.10%
Portfolio turnover rate ................. 17.6% 20.2% 23.1% 14.4% 14.2%
Net assets, end of period
(in millions) ........................... $ 1,356 $ 987 $ 625 $ 588 $ 376
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* See Note 4. The annualized weighted average expense ratio of the underlying funds was 0.78% for the year ended December 31,
1996.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum Growth Fund December 31, 1996
================================================================================
Statement of Net Assets
Shares/Par Value
In thousands
- --------------------------------------------------------------------------------
T. Rowe Price Growth Stock Fund ............... 18,387,078 $481,374
T. Rowe Price International Stock Fund ........ 30,776,399 424,714
T. Rowe Price New Horizons Fund ............... 15,963,635 347,528
T. Rowe Price Growth & Income Fund ............ 13,424,180 303,789
T. Rowe Price Equity Income Fund .............. 12,998,464 292,986
T. Rowe Price New Era Fund .................... 9,725,845 253,456
T. Rowe Price Prime Reserve Fund .............. 3,596,256 3,596
Total Investments
100.2% of Net Assets (Cost $1,718,006) .......................... $ 2,107,443
Other Assets Less Liabilities ................................... (3,349)
NET ASSETS ...................................................... $ 2,104,094
Net Assets Consist of:
Net unrealized gain (loss) ...................................... $ 389,437
Paid-in-capital applicable to 139,026,534 shares of $0.01
par value capital stock outstanding; 1,000,000,000 shares of
Spectrum authorized ............................................. 1,714,657
NET ASSETS ...................................................... $ 2,104,094
NET ASSET VALUE PER SHARE ....................................... $ 15.13
The accompanying notes are an integral part of these financial statements
<PAGE>
T. Rowe Price Spectrum Income Fund December 31, 1996
================================================================================
Statement of Net Assets
Shares/Par Value
In thousands
T. Rowe Price New Income Fund .................... 45,602,308 $405,405
T. Rowe Price GNMA Fund .......................... 28,818,798 270,032
T. Rowe Price High Yield Fund .................... 31,518,134 262,861
T. Rowe Price Equity Income Fund ................. 9,019,641 203,303
T. Rowe Price International Bond Fund ............ 9,130,419 95,504
T. Rowe Price Prime Reserve Fund ................. 73,499,781 73,500
T. Rowe Price Short-Term Bond Fund ............... 10,166,629 47,478
Total Investments
100.2% of Net Assets (Cost $1,311,605) ........................... $ 1,358,083
Other Assets Less Liabilities .................................... (2,113)
NET ASSETS ....................................................... $ 1,355,970
Net Assets Consist of:
Accumulated net investment income - net of distributions ......... $ (266)
Net unrealized gain (loss) ....................................... 46,478
Paid-in-capital applicable to 121,046,760 shares of $0.01
par value capital stock outstanding; 1,000,000,000 shares of
Spectrum authorized .............................................. 1,309,758
NET ASSETS ....................................................... $ 1,355,970
NET ASSET VALUE PER SHARE ........................................ $ 11.20
The accompanying notes are an integral part of these financial statements
<PAGE>
================================================================================
Statement of Operations
Growth Fund Income Fund
In thousands
Year Year
Ended Ended
12/31/96 12/31/96
- --------------------------------------------------------------------------------
Investment Income
Income distributions from Underlying Funds .... $ 25,566 $ 78,017
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Sale of Underlying Funds ...................... 8,187 7,867
Capital gain distributions
from Underlying Funds ......................... 109,465 8,444
Net realized gain (loss) ...................... 117,652 16,311
Change in net unrealized gain or loss ......... 185,985 (1,749)
Net realized and unrealized gain (loss) ............. 303,637 14,562
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS .............................. $329,203 $ 92,579
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
========================================================================================
Statement of Changes in Net Assets
<CAPTION>
In thousands Growth Fund Income Fund
Year Year
Ended Ended
12/31/96 12/31/95 12/31/96 12/31/95
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations
Income distributions ..... $ 25,566 $ 20,218 $ 78,017 $ 55,762
Net realized gain (loss) . 117,652 69,661 16,311 4,798
Change in net unrealized
gain or loss ............. 185,985 201,914 (1,749) 86,560
Increase (decrease) in
net assets from operations 329,203 291,793 92,579 147,120
Distributions to shareholders
Net investment income .... (25,866) (19,785) (78,017) (56,016)
Net realized gain ........ (120,141) (71,595) (17,756) (4,681)
Decrease in net assets
from distributions ....... (146,007) (91,380) (95,773) (60,697)
Capital share transactions *
Shares sold .............. 698,161 361,400 651,254 396,188
Distributions reinvested . 144,024 88,268 88,084 54,428
Shares redeemed .......... (279,631) (171,103) (366,875) (175,278)
Increase (decrease) in
net assets from capital
share transactions ....... 562,554 278,565 372,463 275,338
Net Assets
Increase (decrease)
during period ............... 745,750 478,978 369,269 361,761
Beginning of period ......... 1,358,344 879,366 986,701 624,940
End of period ............... $ 2,104,094 $ 1,358,344 $ 1,355,970 $ 986,701
*Share information
Shares sold ................. 47,726 28,680 58,403 37,162
Distributions reinvested .... 9,513 6,614 7,910 5,021
Shares redeeemed ............ (18,899) (13,597) (33,027) (16,229)
Increase (decrease)
in shares outstanding ....... 38,340 21,697 33,286 25,954
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
T. Rowe Price Spectrum Fund, Inc. (Spectrum) is registered under the
Investment Company Act of 1940. Spectrum Growth Fund (the Growth Fund) and
Spectrum Income Fund (the Income Fund), non-diversified, open-end management
investment companies, are two of the portfolios established by Spectrum and
commenced operations on June 29, 1990.
The Growth and Income Funds invest in other mutual funds (the underlying
funds) sponsored and managed by T. Rowe Price Associates, Inc.
Valuation
Investments in the underlying funds are valued at the closing net asset
value per share of each underlying fund on the day of valuation.
Other
Income is recorded on the accrual basis. Purchases and sales of the
underlying funds are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Distributions from the underlying
funds and distributions to Spectrum's shareholders are recorded on the
ex-dividend date. Capital gain distributions are determined in accordance with
federal income tax regulations and may differ from those determined in
accordance with generally accepted accounting principles.
NOTE 2 - UNDERLYING FUNDS TRANSACTIONS
- --------------------------------------------------------------------------------
Purchases and sales of the underlying funds for the year ended December 31,
1996, were as follows:
================================================================================
Growth Fund Income Fund
- --------------------------------------------------------------------------------
Purchases $614,851,000 $580,102,000
Sales 50,157,000 213,169,000
================================================================================
<PAGE>
NOTE 3 - FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
No provision for federal income taxes is required since each fund intends
to continue to qualify as a regulated investment company and distribute all of
its taxable income.
In order for each fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended December 31, 1996. The results
of operations and net assets were not affected by the reclassifications.
================================================================================
Growth Fund Income Fund
- --------------------------------------------------------------------------------
Undistributed net investment income $(132,000) $(266,000)
Undistributed net realized gain 348,000 266,000
Paid-in-capital (216,000) --
================================================================================
At December 31, 1996, the aggregate costs of the underlying funds held by
the Growth and Income Funds for federal income tax and financial reporting
purposes were $1,718,006,000 and $1,311,605,000, respectively. Net unrealized
gain (loss) of the underlying funds was as follows:
================================================================================
Growth Fund Income Fund
- --------------------------------------------------------------------------------
Appreciated investments $389,437,000 $ 52,145,000
Depreciated investments -- (5,667,000)
Net unrealized gain (loss) $389,437,000 $ 46,478,000
================================================================================
NOTE 4 - INVESTMENT MANAGER
- --------------------------------------------------------------------------------
The Growth and Income Funds are managed by T. Rowe Price Associates, Inc.
(the manager). Each fund operates at a zero expense ratio by virtue of a special
servicing agreement (the agreement) between and among Spectrum, the underlying
funds, the manager, and T. Rowe Price Services, Inc. The agreement provides that
each underlying fund will bear expenses associated with the operation of
Spectrum in proportion to the average daily value of its shares owned by
Spectrum.
<PAGE>
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Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Spectrum Fund, Inc.
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Spectrum Growth Fund and Spectrum Income Fund (two of the portfolios
constituting T. Rowe Price Spectrum Fund, Inc., hereafter referred to as the
"Funds") at December 31, 1996, and the results of each of their operations, the
changes in each of their net assets and the financial highlights for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
transfer agent and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 20, 1997
<PAGE>
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T. Rowe Price Shareholder Services
================================================================================
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Investment Services And Information
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Knowledgeable Service Representatives
- --------------------------------------------------------------------------------
By Phone
Shareholder service representatives are available from 8 a.m. to 10 p.m. ET
Monday through Friday and from 8:30 a.m. to 5 p.m. ET on weekends. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
In Person
Visit one of our investor center locations to meet with a representative
who will be able to assist you with your accounts. You can also drop off
applications or obtain prospectuses and other literature at these centers.
Automated 24-Hour Services
- --------------------------------------------------------------------------------
Tele*Access [Registration Mark]
Call 1-800-638-2587 to obtain information such as account balance, date and
amount of your last transaction, latest dividend payment, fund prices, and
yields. Additionally, you have the ability to request prospectuses, statements,
and account and tax forms; to reorder checks; and to initiate purchase,
redemption, and exchange orders for identically registered accounts.
T.Rowe Price OnLine
Through a personal computer via dial-up modem, you can replicate all the
services available on Tele*Access plus conduct transactions in your Discount
Brokerage and Variable Annuity Accounts.
Account Services
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Checking
Write checks for $500 or more on any money market and most bond fund
accounts (except the High Yield and Emerging Markets Bond Funds).
Automatic Investing
Build your account over time by investing directly from your bank account
or paycheck with Automatic Asset Builder. Additionally, Automatic Exchange
enables you to set up systematic investments from one fund account into another,
such as from a money fund into a stock fund. A $50 minimum makes it easy to get
started.
<PAGE>
Automatic Withdrawal
If you need money from your fund account on a regular basis, you can
establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options
Reinvest all or some of your distributions, or take them in cash. We give
you maximum flexibility and convenience.
DISCOUNT BROKERAGE*
- --------------------------------------------------------------------------------
Investments Available
You can trade stocks, bonds, options, precious metals, and other securities
at a savings over regular commission rates.
To Open an Account
Call a shareholder service representative for more information.
Investment Information
- --------------------------------------------------------------------------------
Combined Statement
A comprehensive overview of your T. Rowe Price accounts is provided. The
summary page gives you earnings by tax category, provides total portfolio value,
and lists your investments by typeNstock, bond, and money market. Detail pages
itemize account transactions by fund.
Shareholder Reports
Portfolio managers review the performance of the funds in plain language
and discuss T. Rowe Price's economic outlook.
T. Rowe Price Report
This is a quarterly newsletter with relevant articles on market trends,
personal financial planning, and T. Rowe Price's economic perspective.
Performance Update
This quarterly report reviews recent market developments and provides
comprehensive performance information for every T. Rowe Price fund.
Insights
This library of information includes reports on mutual fund tax issues,
investment strategies, and financial markets.
<PAGE>
Detailed Investment Guides
Our widely acclaimed Asset Mix Worksheet, College Planning Kit, Retirees
Financial Guide, and Retirement Planning Kit (also available on disk for PC use)
can help you determine and reach your investment goals.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
================================================================================
T. Rowe Price Mutual Funds
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Mutual Funds
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Stock Funds
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Domestic
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Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
<PAGE>
International/Global
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European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
Bond Funds
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Domestic Taxable
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Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-free
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California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
<PAGE>
International/Global
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Global Government Bond
Emerging Markets Bond
International Bond
Money Market
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Taxable
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Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
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California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
Blended Asset
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Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
T. Rowe Price No-Load Variable Annuity
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Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Closed to new investors.
Please call for a prospectus. Read it carefully before you invest or send
money.
<PAGE>
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Spectrum Funds.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
<PAGE>
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor.
RPRTSPC 12/31/96
