PAGE 1
The prospectus for the T. Rowe Price Spectrum Fund, Inc., dated May 1, 1997,
should be inserted here.
<PAGE>
PROSPECTUS
May 1, 1997
Spectrum Funds
T. Rowe Price
logo
Three broadly diversified funds composed of other T. Rowe Price funds, one
investing primarily in fixed income securities, one in stocks, and one in
international securities.
<PAGE>
FACTS AT A GLANCE
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.
Spectrum International Fund seeks long-term capital appreciation.
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 specific underlying T.
Rowe Price funds. Allocation decisions reflect Spectrum Fund managers' outlook
for the relative valuations of the underlying funds and for the various
economies and financial markets.
Spectrum Income Fund invests primarily in domestic bond funds and also in a
foreign bond fund, but it may allocate up to 25% of assets to a stock fund.
Spectrum Growth Fund invests primarily in domestic stock funds and also in a
foreign stock fund.
Spectrum International Fund invests primarily in international stock funds and,
to a lesser extent, international bond funds.
Risk/Reward
Spectrum Income Fund offers the potential for investors to achieve high current
income with modest share price appreciation through diversification of assets.
Spectrum Growth Fund offers investors the potential to achieve long-term
capital appreciation and growth of income through diversification. Investors in
the Spectrum International Fund have the potential to achieve long-term capital
appreciation through diversification among international markets.
Investors in each fund should be prepared for share price volatility and the
possibility of losing money. Under normal conditions, Spectrum Income Fund is
expected to experience the least volatility and Spectrum International Fund the
most of the three funds. 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.
Spectrum International Fund Individuals seeking long-term capital appreciation
through diversification among international stock and bond funds and who are
willing to accept the special risks of interna-
<PAGE>
tional investing.
The funds are 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
Spectrum Income and Spectrum Growth Funds T. Rowe Price Associates, Inc. ("T.
Rowe Price"), founded in 1937 by the late Thomas Rowe Price, Jr., and its
affiliates managed over $99 billion for over five million individual and
institutional investor accounts as of December 31, 1996.
Spectrum International Fund Rowe Price-Fleming International, Inc.
("Price-Fleming") was founded in 1979 as a joint venture between T. Rowe Price
and Robert Fleming Holdings Ltd. Price-Fleming managed over $29 billion in
foreign stocks and bonds through its offices in Baltimore, London, Tokyo,
Singapore, and Hong Kong as of December 31, 1996.
<PAGE>
T. Rowe Price Spectrum Fund, Inc.
Prospectus
May 1, 1997
1 About the Funds
Transaction and
Fund Expenses 3
Financial Highlights 4
Fund, Market, and
Risk Characteristics 5
2 About Your Account
Pricing Shares and Receiving
Sale Proceeds 12
Distributions and Taxes 13
Transaction Procedures and
Special Requirements 16
3 More About the Funds
Organization and Management 19
Understanding Performance Information
Special Risks and Considerations 24
Description of Underlying Funds 25
Investment Policies of the
Spectrum Funds 26
Investment Policies and Practices of
Underlying Funds 28
4 Investing With T. Rowe Price
Account Requirements
and Transaction Information 30
Opening a New Account 30
Purchasing Additional Shares 32
Exchanging and Redeeming 32
Shareholder Services 34
Discount Brokerage 36
Investment Information 37
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated May 1, 1997, 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, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUNDS
1
TRANSACTION AND FUND EXPENSES
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o 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 Spectrum Fund shareholder. While the Spectrum Funds
themselves impose no fees or charges, they will indirectly bear their
pro-rata share of the expenses of the underlying funds in which they invest.
Since each Spectrum Fund's returns are net of these expenses, the end result
to the shareholder is very much the same as if the fund had an explicit
Note: The funds charge a $5 fee for wire redemptions under $5,000, subject to
change without notice, and a $10 fee is charged for small accounts when
Table 1 provides the range of average weighted expense ratios for each
Spectrum Fund. A range is given instead of a single number because the
pro-rata share of expenses fluctuates along with changes in the average
assets invested in each of the underlying funds. For further information on
expense ratios and management fees of the underlying funds, please refer to
the Statement of Additional Information.
<TABLE>
Table 1
<CAPTION>
<S> <S> <C> <C>
Range of Average Weighted Expense Ratios
Spectrum Income Spectrum Growth Spectrum International
0.74% to 0.81% 0.76% to 0.83% 0.81% to 1.30%
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</TABLE>
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:
<TABLE>
Table 2
<CAPTION>
Hypothetical Fund Expenses
Fund 1 year 3 years 5 years 10 years
<S> <S> <C> <C> <C> <C>
Spectrum Income $ 8 $25 $43 $ 97
Spectrum Growth 8 26 44 99
11 34 58 129
Spectrum International
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</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
<PAGE>
T. ROWE PRICE 4
FINANCIAL HIGHLIGHTS
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Table 3, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the financial statements which are included
in its annual report, and are incorporated by reference into the Statement of
Additional Information (available upon request). The financial statements in
the funds' annual report were audited by Price Waterhouse LLP, the funds'
independent accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Net Realized Distributions Value,
Beginning Income Gain (Loss) on Activities Income (Loss) Gain (Loss) End of Period
of Period Investments
Income Fund
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<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
1990/a/ $10.00 $0.44 $(0.18) $ 0.26 $(0.44) $(0.05) $(0.49) $ 9.77
1991 9.77 0.82 1.03 1.85 (0.83) (0.06) (0.89) 10.73
1992 10.73 0.76 0.05 0.81 (0.76) (0.08) (0.84) 10.70
1993 10.70 0.69 0.60 1.29 (0.69) (0.19) (0.88) 11.11
1994 11.11 0.69 (0.90) (0.21) (0.69) (0.10) (0.79) 10.11
1995 10.11 0.72 1.16 1.88 (0.72) (0.03) (0.75) 11.24
1996 11.24 0.71 0.11 0.82 (0.71) (0.15) (0.86) 11.20
Growth Fund
1990/a/ $10.00 $0.20 $(1.21) $(1.01) $(0.19) $(0.28) $(0.47) $ 8.52
1991 8.52 0.21 2.33 2.54 (0.21) (0.32) (0.53) 10.53
1992 10.53 0.20 0.56 0.76 (0.20) (0.55) (0.75) 10.54
1993 10.54 0.16 2.05 2.21 (0.16) (0.72) (0.88) 11.87
1994 11.87 0.17 (0.01) 0.16 (0.17) (0.73) (0.90) 11.13
1995 11.13 0.21 3.12 3.33 (0.21) (0.76) (0.97) 13.49
1996 13.49 0.20 2.57 2.77 (0.20) (0.93) (1.13) 15.13
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</TABLE>
Footnotes appear on page 5. (Table 3 continues on page 5.)
<PAGE>
ABOUT THE FUNDS 5
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio
Ended (Includes Net Assets Expenses to Investment Turnover
Reinvested ($ thousands) Average Net Income to Rate
Distributions) Assets Average Net
Assets
Income Fund
<S> <S> <C> <C> <C> <C> <C>
1990/a/ 2.70 % $ 40,082 0.00%/b/ 9.58%/b/ 36.9%/b/
1991 19.64 147,859 0.00 8.03 18.8
1992 7.84 376,435 0.00 7.10 14.2
1993 12.36 587,931 0.00 6.19 14.4
1994 (1.94 ) 624,940 0.00 6.48 23.1
1995 19.41 986,701 0.00 6.43 20.2
1996 7.64 1,355,970 0.00/d/ 6.46 17.6
Growth Fund
1990/a/ (10.10)% $ 35,387 0.00%/b/ 4.50%/b/ 33.4%/b/
1991 29.87 148,661 0.00 2.77 14.6
1992 7.24 355,134 0.00 2.15 7.9
1993 20.98 584,876 0.00 1.57 7.0
1994 1.40 879,366 0.00 1.60 20.7
1995 29.96 1,358,344 0.00 1.81 7.4
1996 20.53 2,104,094 0.00/c/ 1.58 2.9
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</TABLE>
a For the period June 29, 1990 (commencement of operations) to December 31,
1990.
b Annualized.
c The annualized weighted average expense ratio of the underlying funds was
0.83% for the year ended December 31, 1996.
d The annualized weighted average expense ratio of the underlying funds was
0.78% for the year ended December 31, 1996.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
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To help you decide whether the funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.
o These funds should not be relied upon as a complete investment program, nor
be used for short-term trading purposes.
What are the Spectrum Funds' objectives?
o The objective of Spectrum Income Fund is to provide a high level of current
income with moderate share price fluctuation.
o The objective of Spectrum Growth Fund is to provide long-term capital
appreciation and growth of income, with current income a secondary objective.
o The objective of Spectrum International Fund is to provide long-term capital
appreciation.
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T. ROWE PRICE 6
What are the Spectrum Funds' investment programs?
o 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.
o Spectrum Growth Fund will allocate its assets among a diversified group of
seven underlying T. Rowe Price funds that invest primarily in stocks.
o Spectrum International Fund allocates its assets among a group of 10 T. Rowe
Price funds that invest primarily in international stocks and, to a lesser
degree, international bonds.
Each Spectrum Fund will diversify within set limits based on the managers'
outlook for the domestic and international economies, financial markets, and
relative market valuations of each underlying fund and, in the case of
Spectrum International Fund, additional factors inherent in international
investing.
The underlying funds in which each Spectrum Fund may invest and the
percentage of total assets which they may allocate to each underlying fund
are set forth in Table 4.
o For details about the funds' investment programs and practices, please see
the Investment Policies and Practices section.
<TABLE>
Table 4
<CAPTION>
<S> <S> <C> <C> <C> <C> <C>
Asset Allocation Ranges for Underlying Funds
Spectrum Investment Spectrum Investment Spectrum Investment
Income Fund Range Growth Fund Range International Fund Range
Short-Term Bond Fund 0-15% Prime Reserve Fund 0-25% Int'l. Stock Fund 35-65%
GNMA Fund 5-20 Equity Income Fund 5-20 Int'l. Discovery Fund 0-20
Growth & Income Emerging Markets
Int'l. Bond Fund 5-20 Fund 5-20 Stock Fund 0-20
Equity Income Fund 10-25 Int'l. Stock Fund 5-20 Japan Fund 0-30
High Yield Fund 10-25 New Era Fund 10-25 New Asia Fund 0-20
European Stock Fund
Prime Reserve Fund 5-30 New Horizons Fund 10-25 0-30
New Income Fund 15-30 Growth Stock Fund 15-30 Latin America Fund 0-15
Int'l. Bond Fund 0-20
Emerging Markets Bond
Fund 0-15
Prime Reserve Fund 0-25
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</TABLE>
<PAGE>
ABOUT THE FUNDS 7
What are some of the funds' potential risks?
Each Spectrum Fund's share price will fluctuate as the share prices of the
underlying funds rise or fall with changing market conditions.
With Spectrum Income Fund, the risks are generally the same as with many
income funds:
o For Spectrum Income, a rise in U.S. interest rates is an important source of
risk even if foreign rates behave differently.
o Interest rate or market risk The fund's share price will generally move in
the opposite direction of interest rates. For example, as interest rates
rise, share price will likely decline. Rising rates provide the opportunity
for the fund's income to increase, but it is unlikely that the higher income
by itself will entirely offset the fall in price.
The maturity and type of securities in the underlying funds' portfolios
determine just how much the share price rises or falls when rates change.
Generally, when rates fall, long-term securities rise more in price than
short-term securities, and vice versa.
o Credit risk The chance that holdings of the underlying funds will have their
credit ratings downgraded or will default, potentially reducing the
underlying fund's share price and income level. This risk is even greater
with high-yield ("junk") bonds.
o Risks of high-yield investing 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 predominately 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. Spectrum Income can invest as much as 25% of its assets in the High
Yield Fund.
o 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-backed
securities that were originally purchased at a price above par. Also, because
of prepayments, mortgage-backed securities would not be expected to rise as
much in price as Treasury or corporate bonds.
<PAGE>
T. ROWE PRICE 8
o Risks of foreign investing To the extent its underlying funds invest in
foreign securities, the Spectrum Income Fund will be subject to the unique
risks of international investing. See Spectrum International for an
explanation of these risks.
Also, Spectrum Income Fund's maximum 25% exposure to the Equity Income Fund
subjects that portion of assets to the risks associated with stocks
(discussed next).
o For Spectrum Growth, a decline in U.S. stock prices is an important source
of risk even if foreign stocks behave differently.
o Stock market risk With Spectrum Growth Fund, the major risk is the same as
in all stock funds. Economic growth has been punctuated by periods of
stagnation and recession. Share prices of all companies, even the best
managed and most profitable, can fall for any number of reasons, ranging from
lower-than-expected earnings to changes in investor psychology. Significant
trading by large institutional investors also can lead to price declines.
Since 1950, the U.S. stock market has experienced 10 negative years as well
as steep drops of shorter duration. Its worst calendar quarter return in
recent years was -22.5% in 1987's fourth quarter.
o Small-company investing Since Spectrum Growth can invest up to 25% of its
assets in the New Horizons Fund, it is subject to the risks of small-company
investing. Smaller companies are generally riskier than their larger
counterparts because they may have limited product lines, capital, and
managerial resources. Their securities may trade less frequently and with
greater price swings.
o Risks of foreign investing To the extent its underlying funds invest in
foreign securities, the Spectrum Growth Fund will be subject to the unique
risks of international investing. See Spectrum International for an
explanation of these risks.
o For Spectrum International, volatility of foreign currency markets is an
additional source of risk.
In addition to the risks associated with stock and bond investing, Spectrum
International Fund is subject to the unique risks of international investing:
o Currency risk The risk that weakening foreign currencies versus the U.S.
dollar could result in losses for U.S. investors. Transactions in foreign
markets are conducted in local currencies, so dollars are exchanged for
foreign currency when a security is bought or sold or a dividend is paid.
Likewise, share price quotations and total return information reflect
conversion into U.S. dollars. Fluctuations in foreign exchange rates can
significantly increase or decrease the dollar value of a foreign investment,
boosting or offsetting its local market return. For example, if a French
security rose 10% in price during a year, but the U.S. dollar gained 5%
against the French franc during that time, the U.S. investor's return would
be reduced to 5%. This is because the franc would "buy" fewer dollars at the
<PAGE>
ABOUT THE FUNDS 9
end of the year than at the beginning, or, conversely, a dollar would cost
more francs.
o Increased costs It is more expensive for U.S. investors to trade in foreign
markets than in the U.S. Mutual funds offer an efficient way for individuals
to invest abroad, but the overall expense ratios of international funds are
usually higher than those of typical domestic funds.
o Political and economic factors The economies, markets, and political
structures of a number of the 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 subject to more erratic and abrupt price movements. This is
especially true for emerging markets. However, even investments in countries
with highly developed economies are subject to risk.
Some economies are less developed, heavily dependent on particular
industries, and more vulnerable to the ebb and flow of international trade,
trade barriers, and other protectionist or retaliatory measures. This makes
investment in such markets significantly riskier than in other countries.
Some emerging market countries have high levels of national debt, legacies of
hyperinflation, and currency devaluations versus the dollar (which adversely
affects returns to U.S. investors). Investments in countries that have been
moving away from central planning and state-owned industries toward free
markets should be regarded as speculative.
Certain areas have histories of instability and upheaval with respect to
their internal politics that could cause their governments to act in a
detrimental or hostile manner toward private enterprise or foreign
investment. Actions such as nationalizing a company or industry,
expropriating assets, or imposing punitive taxes could have a severe effect
on security prices and impair an underlying fund's ability to repatriate
capital or income. Significant external risks, including war, currently
affect some countries. Governments in many emerging market countries
participate to a significant degree in their economies and securities
markets.
o Legal, regulatory, and operational Certain countries lack uniform
accounting, auditing, and financial reporting standards, have less
governmental supervision of financial markets than in the U.S., do not honor
legal rights enjoyed in the U.S., and have settlement practices, such as
delays, which could subject the underlying funds to risks of loss not
customary in the U.S. In addition, securities markets in some countries have
substantially lower trading volumes than in U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S.
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T. ROWE PRICE 10
o Pricing Portfolio securities of the underlying funds may be listed on
foreign exchanges that are open on days when prices are not computed for the
underlying funds. As a result, the net asset value of the underlying funds,
and consequently of Spectrum International, may be significantly affected by
trading on days when shareholders cannot make transactions.
The risks discussed can be significantly magnified for investments in
emerging markets. Additionally, to the extent the fund invests in the
International Bond Fund and Emerging Markets Bond Fund, it will be subject to
risks associated with international fixed income investing. See Spectrum
Income Fund for information on the risks associated with fixed income
investing.
o The funds' share prices will fluctuate; when you sell your shares, you may
lose money.
What are some of the Spectrum Funds' potential rewards?
The Spectrum Funds offer a professionally managed allocation of assets among
a broad range of underlying funds. Because they invest in a variety of
underlying funds, each Spectrum Fund's performance could benefit from
diversification.
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 the Spectrum Funds is the potential for attractive long-term
returns with reduced volatility.
For example, Spectrum Income Fund invests in funds holding high-quality
domestic and foreign bonds, high-yield bonds, short- and long-term
securities, and dividend-paying stocks.
Spectrum Growth Fund invests in underlying funds holding domestic and foreign
stocks, small- and large-cap stocks, and growth and value stocks.
Spectrum International Fund invests in stock and, to a lesser degree, bond
funds, which, in turn, have holdings in many different foreign countries,
industrialized as well as emerging markets, and large and small companies.
What are the characteristics of the underlying Price funds?
For details, please see Description of Underlying Funds in Section 3.
How can I decide if one or more of the funds is right for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk.
<PAGE>
ABOUT THE FUNDS 11
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.
If your goal is long-term capital appreciation with a one-stop approach to
diversification across the international markets, and you can accept the
possibility of significant share price declines, Spectrum International Fund
could be an appropriate part of your overall investing strategy.
For an IRA, retirement plan, or other long-term investment, the funds offer
investment programs that seek to combine attractive returns with the benefits
of broad diversification.
Is there additional information about the Spectrum Funds to help me decide if
they are appropriate for me?
Be sure to read Special Risks and Considerations, Description of Underlying
Funds, Investment Policies of the Spectrum Funds, and Investment Policies and
Practices of Underlying Funds in Section 3 for further discussion of the
funds' policies.
<PAGE>
ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
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Here are some procedures you should know when investing in a T. Rowe Price
fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o 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 your purchase, sale, or exchange price is determined
If we receive your request in correct form by 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.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving 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 Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH 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.
<PAGE>
ABOUT YOUR ACCOUNT 13
o Exception: Under certain circumstances and when deemed to be in the fund's
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.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
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Dividends and Other Distributions
o All net investment income and realized capital gains are distributed to
shareholders.
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, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund.
Income dividends
Spectrum Income Fund dividends
o 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.
o The fund pays dividends on the first business day of each month.
o 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.
<PAGE>
T. ROWE PRICE 14
o A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Spectrum Growth Fund dividends
o The fund declares and pays dividends (if any) annually.
o A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Spectrum International Fund dividends
o The fund declares and pays dividends (if any) annually.
o The dividends of the fund will not be eligible for the 70% deduction for
dividends received by corporations, if, as expected, none of the fund's
income consists of dividends paid by U.S. corporations.
Capital gains (all funds)
o A capital gain or loss is the difference between the purchase and sale price
of a security.
o If the 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. If a second
distribution is necessary, it is usually declared and paid during the first
quarter of the following year.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
o You sell fund shares, including an exchange from one fund to another.
o The fund makes a distribution to your account.
Taxes on 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."
<PAGE>
ABOUT YOUR ACCOUNT 15
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (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 the funds 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 a calendar 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 gain distributions are taxable as ordinary income and
long-term gain distributions 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. To the extent the
underlying funds may make long-term capital gain distributions, such amounts
will be distributed to the Spectrum Funds' shareholders as long-term capital
gains.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.
You will not be able to claim a credit or deduction for any foreign taxes
paid by the underlying funds.
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 the fund's ordinary income dividend. Net foreign currency losses
may result in the 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 the 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 the
fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
<PAGE>
T. ROWE PRICE 16
Tax effect of buying shares before a capital gain or dividend 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 also wish to find out the fund's record
date before investing. Of course, the fund's share price may, at any time,
reflect undistributed capital gains or income and unrealized appreciation.
When these amounts are eventually distributed, they are taxable.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
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>
ABOUT YOUR ACCOUNT 17
Telephone, Tele*Access/(R)/, and personal computer 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. The 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 the 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.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. 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).
<PAGE>
T. ROWE PRICE 18
Keeping Your Account Open
Due to the relatively high cost to the funds 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.
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.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price funds
from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
o Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any person, address, or bank account not on
record.
o Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
o 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.
<PAGE>
MORE ABOUT THE FUNDS
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
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 three series, the Spectrum Income Fund,
the Spectrum Growth Fund, and the Spectrum International Fund (collectively
referred to as "the funds"), each of which represents a separate class of
shares and has different objectives and investment policies. The Spectrum
Income and Spectrum Growth Funds were established in 1990, and the Spectrum
International Fund was established in 1996. The Spectrum Fund's charter
provides that the Board of Directors may issue additional series of 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
o 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 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 of a fund 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
<PAGE>
T. ROWE PRICE 20
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.
Who runs the funds?
General Oversight
Spectrum Fund is 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 the Board members will be independent of T. Rowe Price and
Price-Fleming and that none of the independent directors will be directors of
any underlying fund. In exercising their responsibilities, the Board, among
other things, will refer to the Special Servicing Agreements 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 and
Price-Fleming also serve in similar positions with most of the underlying
funds. Thus, if the interests of a Spectrum Fund and the underlying funds
were ever to diverge, 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 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 a Spectrum Fund
could be adverse to the interests of an underlying fund, or the reverse. If
such a possibility arises, the directors and officers of the affected funds
and T. Rowe Price or Price-Fleming, as applicable, will carefully analyze the
situation and take all steps they believe reasonable to minimize and, where
possible, eliminate the potential conflict.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price-specifically by the fund's portfolio managers.
Portfolio Management: Spectrum Income and Spectrum Growth Funds
Spectrum Income and Spectrum Growth 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 Spectrum Income and Spectrum Growth Funds and works with the
committee in developing and executing these 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.
<PAGE>
MORE ABOUT THE FUNDS 21
Portfolio Management: Spectrum International Fund
Spectrum International has an Investment Advisory Committee composed of the
following members: John R. Ford, Chairman, M. David Testa, Martin G. Wade,
and David J. L. Warren. The committee chairman has day-to-day responsibility
for managing this fund and works with the committee in developing and
executing the fund's investment program. Mr. Ford joined Price-Fleming in
1982 and has 15 years of experience in managing investments.
Management of the Underlying Funds
T. Rowe Price serves as investment manager to all of the underlying domestic
funds. Price-Fleming serves as investment manager to all of the underlying
international funds. Each manager is responsible for selection and management
of the underlying 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.
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 a subsidiary of 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.
<PAGE>
T. ROWE PRICE 22
How are fund expenses determined?
Each Spectrum 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
funds in which they invest. The payment of each fund's operational expenses
is subject to a Special Servicing Agreement (described below) as well as
certain undertakings made by T. Rowe Price and Price-Fleming under their
respective Investment Management Agreements with each Spectrum 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.
o Here is some information regarding the Special Servicing Agreements.
One Special Servicing Agreement (Agreement) is between and among Spectrum
Fund on behalf of Spectrum Income and Spectrum Growth Funds, the underlying
funds in which they invest, and T. Rowe Price. A second Special Servicing
Agreement (Agreement) is between and among Spectrum Fund, on behalf of
Spectrum International, the underlying funds in which it invests,
Price-Fleming, and T. Rowe Price.
The Agreements provide that the expenses of each Spectrum Fund will be paid
by the underlying funds in which they invest subject to the following: If the
Board of Directors or Trustees of any underlying fund determines that the
estimated savings to the underlying fund from the operation of Spectrum Fund
exceeds the underlying fund's share of the aggregate expenses of Spectrum
Fund, the underlying fund will bear those expenses in proportion to the
average daily value of its shares owned by Spectrum Fund. No underlying fund
will bear expenses in excess of the estimated savings to it. The 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 funds and from the resulting reduction in shareholder servicing
costs. Although such cost savings are not certain, the estimated savings to
the underlying 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 Agreements with the funds, and the Special
Servicing Agreements, T. Rowe Price has agreed to bear any expenses of the
Spectrum Growth and Spectrum Income Funds and Price-Fleming has agreed to
bear any expenses of the Spectrum International Fund which exceed the
estimated savings to each of the underlying funds. Thus, the Spectrum Funds
will operate at a zero expense ratio. Of course, shareholders of the Spectrum
Funds will still indirectly bear their fair and proportionate share of the
cost of operating the underlying funds owned by each Spectrum Fund.
<PAGE>
MORE ABOUT THE FUNDS 23
Management Fee
T. Rowe Price is the investment manager for the Spectrum Income Fund and the
Spectrum Growth Fund, and Price-Fleming is investment manager for the
Spectrum International Fund. Neither will be paid a management fee for
performing such services. However, T. Rowe Price and Price-Fleming receive
management fees from managing the underlying funds.
T. Rowe Price will determine how Spectrum Income Fund's and Spectrum Growth
Fund's assets are invested and Price-Fleming will determine how the Spectrum
International Fund's assets will be invested consistent with the investment
objectives and policies of each fund described 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 and the basis upon which such allocations were made or
maintained. Each fund, as a shareholder in any underlying fund, will
indirectly bear its proportionate share of any investment management fees and
other expenses paid by the underlying funds. The total management fee paid by
each fund varies. See the underlying funds' Statements of Additional
Information for specific fees.
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
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.
o 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.
<PAGE>
T. ROWE PRICE 24
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.
Yield (Spectrum Income Fund)
o You will see frequent references to a fund's yield in our reports, in
advertisements, in media stories, and so on.
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 fund's net
asset value. 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 a 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:
o The investments of each Spectrum Fund are concentrated in the underlying
funds, so each fund's investment performance is directly related to the
investment performance of these underlying funds.
o
As an operating policy, the Spectrum Income and Spectrum Growth Funds will not
redeem more than 1% of any underlying fund's assets during any period 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 funds as efficiently and rapidly as would be the case in the
absence of this constraint. This limitation does not apply to Spectrum
International Fund.
<PAGE>
MORE ABOUT THE FUNDS 25
o Further information on these investment policies and practices can be found
under Investment Policies of the Underlying Funds and in the Statement of
Additional Information, as well as in the prospectuses of each of the
underlying funds.
o The officers, interested directors, and investment managers of Spectrum
Funds presently serve as officers, interested directors, and investment
managers of the underlying funds. Therefore, conflicts may arise as these
persons fulfill their fiduciary responsibilities to the Spectrum Funds and
the underlying funds.
DESCRIPTION OF UNDERLYING FUNDS
----------------------------------------------------------
Table 5 gives a brief description of the principal investment programs of the
underlying funds. Additional investment practices are described under Special
Risks and Considerations, in the Statement of Additional Information, and in
the prospectuses for each of the underlying funds.
o For more information about an underlying fund, call: 1-800-638-5660
1-410-547-2308
The major characteristics of the underlying T. Rowe Price funds are as
follows:
<TABLE>
Table 5
<CAPTION>
<S> <S> <C>
Fixed Income Objective/Program
Prime Reserve Fund Stable share price and liquidity while generating
current income. Invests at least 95% of its total
assets in prime money market securities receiving
the highest credit rating.
Short-Term Bond Fund High income with limited share price fluctuation.
Normally invests at least 65% of assets in
short-term bonds, primarily short- and
intermediate-term corporate, government, and
mortgage debt securities. Securities purchased will
be rated within the four highest credit
categories.The fund's dollar-weighted average
effective maturity will not exceed three years.
GNMA Fund High income consistent with maximum credit
protection and moderate share price fluctuation.
Invests exclusively in securities backed by the full
faith and credit of the U.S. government (this
guarantee does not apply to the fund's share price,
which will fluctuate). Average maturity generally
expected to be between 3 and 10 years.
New Income Fund High income with moderate share price fluctuation.
Invests at least 80% of total assets in
investment-grade instruments, principally in U.S.
government and agency obligations, mortgage-backed
securities, and corporate debt securities. Average
maturity expected to be between 4 and 15 years.
- -------------------------------------------------------------------------------
(Table 5 continues on page 26.)
</TABLE>
<PAGE>
T. ROWE PRICE 26
<TABLE>
Table 5 (continued)
<CAPTION>
<S> <S> <C>
Equity Objective/Program
Equity Income Fund Substantial dividend income and capital
appreciation through investments primarily in the
common stocks of established companies paying
above-average
dividends.
Growth & Income Fund Capital appreciation and reasonable dividend
income through investments in growth stocks.
Invests principally in large-cap U.S.-based
companies.
Growth Stock Fund Capital appreciation and increasing income through
investments in growth stocks. Invests principally
in large-cap U.S.-based companies.
New Era Fund Capital appreciation through investments in U.S.
and foreign natural resource stocks whose earnings
are expected to grow faster than inflation.
New Horizons Fund Aggressive capital appreciation through
investments in small-company stocks. Invests
primarily in emerging growth companies, early in
their corporate life cycles.
International Objective/Program
International Bond High income and capital appreciation through
Fund investments primarily in high-quality foreign
bonds. May invest up to 20% of assets in
below-investment-grade, high-risk bonds, including
bonds in default or those with the lowest rating.
The fund has no maturity restrictions on the
overall portfolio or on individual securities, but
expects to maintain an intermediate to long
weighted average maturity. The fund is normally
heavily exposed to fluctuations in foreign
currencies.
International Stock Capital appreciation through investments in stocks
Fund of established foreign
companies.
International Capital appreciation through investments in small-
Discovery Fund and medium-sized non-U.S. companies.
European Stock Fund Capital appreciation through investments primarily
in companies domiciled in Europe.
Japan Fund Capital appreciation through investments in
companies operating in Japan.
New Asia Fund Capital appreciation through investments in
companies operating in Asia, excluding Japan.
Emerging Markets Stock Capital appreciation through investments in
Fund companies in emerging markets.
Latin America Fund Capital appreciation through investments primarily
in companies located in Latin America.
Emerging Markets Bond High current income and capital appreciation
Fund through investments primarily in high-yielding and
high-risk government and corporate debt securities
of less-
developed countries.
- -------------------------------------------------------------------------------
</TABLE>
INVESTMENT POLICIES OF THE SPECTRUM FUNDS
----------------------------------------------------------
Each Spectrum 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. Shareholders will be notified of any material change in such
investment programs.
<PAGE>
MORE ABOUT THE FUNDS 27
Cash Position
While the Spectrum Income Fund will remain primarily invested in bonds, the
Spectrum Growth Fund in stocks, and the Spectrum International Fund in
international 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.
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 funds themselves are diversified investment
companies (with the exception of the T. Rowe Price International Bond Fund,
Emerging Markets Bond Fund, and Latin America 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
Spectrum 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.
Operating policies Each Spectrum Fund cannot (i) change the selection of the
underlying funds in which they can invest; or (ii) change the percentage
ranges which may be allocated to the underlying funds unless authorized to do
so by the Board of Directors. Shareholders will be informed of any such
changes.
Other Investment Restrictions
As a matter of operating policy, each Spectrum 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; or (iii) redeem securities from any underlying fund at a
rate in excess of 1% of the underlying fund's assets in any period of less
than 15 days, except where necessary to meet shareholder redemption requests.
This last limitation does not apply to Spectrum International Fund.
<PAGE>
T. ROWE PRICE 28
Portfolio Turnover
Each Spectrum Fund's portfolio turnover is expected to be low. The Spectrum
Funds will purchase or sell securities to: (i) accommodate purchases and
sales of each fund's shares; and (ii) maintain or modify the allocation of
each fund's assets among the underlying funds within the percentage limits
described earlier. During the Spectrum International Fund's initial period of
operations, its portfolio turnover rate is not expected to exceed 50%. The
Spectrum Income Fund's and Spectrum Growth Fund's portfolio turnover rates
for the previous three fiscal periods are shown in Table 6.
<TABLE>
Table 6
<CAPTION>
Portfolio Turnover Rates 1996 1995 1994
<S> <S> <C> <C> <C>
Spectrum Income Fund 17.6% 20.2% 23.1%
Spectrum Growth Fund 2.9 7.4 20.7
- -------------------------------------------------------------------
</TABLE>
INVESTMENT POLICIES AND PRACTICES OF UNDERLYING FUNDS
----------------------------------------------------------
In pursuing their investment objectives and programs, each of the underlying
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 funds is contained in the Statement of
Additional Information as well as in the prospectuses of such funds. Because
each fund invests in the underlying 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.
o Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help the funds achieve their
objectives.
Lending of Portfolio Securities
Like other mutual funds, the underlying 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 funds could experience
delays in recovering securities and possibly capital losses.
Managing Foreign Currency Risk
Foreign securities in which the underlying 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
<PAGE>
MORE ABOUT THE FUNDS 29
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 a fund's total return could be reduced.
There are certain markets where it is not possible to engage in effective
foreign currency hedging. This may be true, for example, for the currencies
of various Latin American countries and other emerging markets where the
foreign exchange markets are not sufficiently developed to permit hedging
activity to take place.
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
or hedge risk, because they enable the investor to buy or sell an asset in
the future at an agreed upon price. Options (another type of potentially
high-risk derivative) give the investor the right, but not the obligation, to
buy or sell an asset at a predetermined price in the future. The underlying
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 underlying 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 funds'
initial investment in such contracts. In many foreign countries, futures and
options markets do not exist or are not sufficiently developed to be
effectively used by the funds.
<PAGE>
INVESTING WITH T. ROWE PRICE
4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
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 plans or gifts or
transfers to minors (UGMA/UTMA) accounts
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.)
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
on the next page. We do not accept third party checks to open new accounts,
except for IRA Rollover checks that are properly endorsed.
<PAGE>
INVESTING WITH T. ROWE PRICE 31
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 Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 account name and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed above.
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
Call Shareholder Services or use Tele*Access or your personal computer (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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
T. ROWE PRICE 32
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access, your personal computer, 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.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the address shown below with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
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 Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, 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.
<PAGE>
INVESTING WITH T. ROWE PRICE 33
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.
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 fund or funds you are exchanging into. Please mail
to the appropriate address below. 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 IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
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 refuse any purchase
order; 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
<PAGE>
T. ROWE PRICE 34
is sooner; to freeze any account and suspend account services when notice has
been received of a dispute between the registered or beneficial account owners
or there is reason to believe a 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 Investor Services
1-800-638-5660 1-410-547-2308
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 institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: IRAs, SIMPLE 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, including our no-load
variable annuity, please call our Trust Company at 1-800-492-7670.
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
<PAGE>
INVESTING WITH T. ROWE PRICE 35
funds may impose a redemption fee of 0.5% to 2% on shares held for less than six
months or one year, as specified in the prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access, but is designed specifically to
meet the needs of retirement plan investors.
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 or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can 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.
<PAGE>
T. ROWE PRICE 36
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more 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.
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
----------------------------------------------------------
This additional service gives you the opportunity to easily consolidate all of
your investments with one company. Through our discount brokerage, you can buy
and sell individual securities - stocks, bonds, options, and others-at
considerable commission savings over full-service brokers. We also provide a
wide range of services, including:
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
Automated telephone and on-line services
You can enter trades, access quotes, and review account information 24 hours a
day, seven days a week. Any trades executed through these programs save you an
additional 10% on commissions.
Note: Discount applies to our current commission schedule, subject to our $35
minimum commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month Newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this
service-free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment / /Services,
Inc., Member NASD/SIPC./
<PAGE>
INVESTING WITH T. ROWE PRICE 37
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
Quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Personal Strategy Planner, Retirees
Financial Guide, Retirement Planning Kit, Tax Considerations for Investors, and
Diversifying Overseas: A T. Rowe Price Guide to International Investing.
<PAGE>
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 a Mutual Fund 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, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount
Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
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
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
C08-040 5/1/97
The Statement of Additional Information for the T. Rowe Price Spectrum Fund,
Inc., should be inserted here.
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE SPECTRUM FUND, INC. ("Spectrum Fund")
Spectrum Income Fund ("Income Fund")
Spectrum Growth Fund ("Growth Fund")
Spectrum International Fund ("International 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, 1997, 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, 1997.
PAGE 2
TABLE OF CONTENTS
Page Page
Capital Stock. . . . . . . . . . . . 30 Investment Policies . . . . . 3
Code of Ethics . . . . . . . . . . . 26 Investment Restrictions . . . . . 16
Custodian. . . . . . . . . . . . . . 26 Legal Counsel . . . . . . . 31
Distributor for the Funds. . . . . . 25 Management of the Funds . . . . . 19
Dividends. . . . . . . . . . . . . . 27 Net Asset Value Per Share . . . . 27
Federal Registration of Shares . . . 31 Pricing of Securities . . . . . .26
Independent Accountants. . . . . . . 31 Principal Holders of Securities .21
Investment Management Services . . ..22 Repurchase Agreements . . . . . . 13
Investment Objectives and Policies . .2 Shareholder Services. . . . . . . 26
Investment Performance . . . . . . . 29 Special Considerations. . . . . . 15
Tax Status . . . . . . . . . . 27
Yield Information. . . . . 28
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, the Spectrum
Income Fund, the Spectrum International Fund, or a combination of any of
these, 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.
PAGE 3
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 minimal fluctuation in principal value and liquidity. The Fund
will invest in a diversified portfolio of short- and intermediate-term
corporate, government, and mortgage-backed 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. The Fund's 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).
An investment-grade security can range from the highest rated (AAA) to medium
quality (BBB). Securities in the BBB category may be more susceptible to
adverse economic conditions or changing circumstances, and the securities at
the lower end of the BBB category have certain speculative characteristics.
The Fund may retain a security that is downgraded to a noninvestment-grade
level after purchase.
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 will seek
to fulfill its objective by investing primarily in mortgage-backed securities
issued by the Government National Mortgage Association (GNMA), an agency of
the Department of Housing and Urban Development (HUD). GNMA, in turn,
guarantees the timely payment of interest and principal on its securities, a
guarantee backed by the U.S. Treasury. The GNMA guarantee does not apply in
any way to the price of GNMA securities or the Fund's share price, 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 collateralized mortgage obligations (CMOs) and stripped certificates
(securities that receive only the interest or principal portion of the
underlying mortgage payments).
Mortgage-backed securities are securities representing an interest in a
pool of mortgages. Mortgage lenders pool individual home mortgages to back a
certificate or bond, which is then sold to investors. The mortgages may be of
a variety of types, including adjustable rate, conventional 30-year and 15-year
fixed rate, and graduated payment. Interest and principal payments
generated by the underlying mortgages are passed through to the investors.
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.
PAGE 4
T. Rowe Price New Income Fund, Inc. seeks to provide the highest level
of income consistent with the preservation of capital over time through
investment primarily in marketable debt securities. 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, CMOs, commercial paper, foreign
securities, and others. Their 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. Securities purchased by the
Fund will be rated within the four highest credit categories by at least one
established public rating agency (or, if unrated, a T. Rowe Price equivalent)
and the Fund will not purchase any security that is rated below investment
grade by Standard & Poor's, Moody's, or Fitch Investor Services. An
investment-grade security can range from the highest rating (AAA) to medium
quality (BBB). Securities in the BBB category are more susceptible to adverse
economic conditions or changing circumstances and the securities at the lower
end of the BBB category have certain speculative characteristics. The Fund may
retain a security that is downgraded to a noninvestment-grade level after
purchase.
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.
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 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.
PAGE 5
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 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.
Spectrum Growth Fund
T. Rowe Price Growth & Income Fund, Inc. seeks 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
focuses on companies whose earnings are expected by T. Rowe Price to grow 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.
Most of the assets will be invested in U.S. common stocks. However, the
Fund may also purchase other types of securities, for example, foreign
securities, convertible stocks and bonds, and warrants, when considered
consistent with the Fund's investment objective and program. The portfolio
manager may also engage in a variety of investment management practices, such
as buying and selling futures and options.
T. Rowe Price New Era Fund, Inc. seeks 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 could
benefit from accelerating inflation. T. Rowe Price believes that natural
resource companies with the flexibility to adjust prices or control operating
costs offer attractive opportunities for capital growth when inflation is
rising. Income is not a consideration in the selection of securities.
PAGE 6
At least half of Fund assets will be invested in U.S. securities,
principally common stocks, and the Fund may also invest up to 50% of its
assets in foreign securities. In addition to common stocks, the Fund may also
purchase other types of securities, for example, convertible stocks and bonds,
and warrants, when considered consistent with the Fund's investment objective.
The Fund may also engage in a variety of investment management practices, such
as buying and selling futures and options.
T. Rowe Price Growth Stock Fund, Inc. seeks 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 at
least 65% of total assets in the common stocks of a diversified group of
growth companies. The companies in which the Fund invests normally (but not
always) pay dividends, that are generally expected to rise in future years as
earnings increase. Most of the assets will be invested in U.S. common stocks.
However, the Fund may also purchase other types of securities, for example,
foreign securities, 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.
T. Rowe Price New Horizons Fund, Inc. seeks 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 which offer the possibility of
accelerating earnings growth because of rejuvenated management, new products,
or structural changes in the economy. Total return will consist primarily of
capital appreciation or depreciation.
Most of the assets will be invested in U.S. common stocks. However, the
Fund may also purchase other types of securities, for example, foreign
securities, 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.
Spectrum International Fund
International Discovery Fund seeks to provide long-term growth of
capital through investments primarily in common stocks of rapidly growing,
small to medium-sized non-U.S. companies. Such companies may be found in both
developed and emerging markets. Traditionally, they are more dynamic and offer
greater growth potential than larger companies, but they are generally riskier
because they may have limited product lines, capital, and managerial
resources. Their securities may trade less frequently and with greater price
swings. Depending on conditions, the Fund's portfolio should be composed of at
least 10 countries and 100 different companies.
European Stock Fund seeks to provide long-term growth of capital through
investments primarily in common stocks of both large and small European
companies. Current income is a secondary objective. The Fund seeks to take
advantage of opportunities arising from such trends as privatization, the
reduction of trade barriers, and the potential growth of the emerging
economies of Eastern Europe. Normally, at least five countries will be
represented in the portfolio, and investments may be made in any of the
countries listed below, as well as others as their markets develop.
Primary Emphasis: France, Germany, Netherlands, Italy, Spain, Sweden,
Switzerland, and United Kingdom.
PAGE 7
Others: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, Greece,
Hungary, Ireland, Israel, Latvia, Lithuania, Luxembourg, Norway, Poland,
Portugal, Russia, Slovakia, and Turkey.
New Asia Fund seeks to provide long-term growth of capital through
investment in large and small companies domiciled or with primary operations
in Asia, excluding Japan. The Fund may also invest in Pacific Rim countries
such as Australia and New Zealand.
Countries in which the Fund may invest include those in the following
list as well as others in the region, such as China and Pakistan, as their
markets become more accessible. Investments will represent a minimum of five
countries.
Primary Emphasis: Australia, Hong Kong, Indonesia, India, Malaysia, New
Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam.
Japan Fund seeks to provide long-term growth of capital through
investments in common stocks of large and small companies domiciled or with
primary operations in Japan. Assets will normally be invested across a wide
range of industries and companies (both small and large). Investors in a
single-country fund are fully exposed to that country's economic and stock
market cycles, which could increase both its risks and its potential rewards
compared with a fund invested in several countries or regions.
Emerging Markets Stock Fund seeks to provide long-term growth of capital
through investment primarily in common stocks of large and small companies
domiciled, or with primary operations, in emerging markets. An emerging market
includes any country defined as emerging or developing by the International
Bank for Reconstruction and Development (World Bank), the International
Finance Corporation, or the United Nations. The Fund's investments are
expected to be diversified geographically across emerging markets in Latin
America, Asia, Europe, Africa, and the Middle East.
Countries in which the Fund may invest are listed below and others will
be added as opportunities develop:
Asia: China, Hong Kong, Indonesia, India, Korea, Malaysia, Mauritius,
Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam.
Latin America: Argentina, Belize, Brazil, Chile, Colombia, Mexico, Panama,
Peru, and Venezuela.
Europe: Austria, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania,
Poland, Portugal, Russia, Slovakia, and Turkey.
Africa and the Middle East: Botswana, Egypt, Israel, Jordan, Morocco, Nigeria,
South Africa, Tunisia, and Zimbabwe.
Emerging market investments rank high on the potential risk and reward
spectrum because a developing country, much like an emerging-growth company,
often advances in fits and starts toward developed status, and may or may not
successfully achieve that status. Investors in this Fund should be comfortable
with the risks of international investing and be prepared for substantial
share price volatility.
PAGE 8
Latin America Fund seeks to provide long-term growth of capital through
investment primarily in common stocks of companies domiciled, or with primary
operations, in Latin America. The Fund expects to invest primarily in Mexico,
Brazil, Chile, Argentina, Venezuela, and other markets as opportunities arise
and conditions permit, including, but not limited to Belize, Colombia, Peru,
Ecuador, and Guatemala. The portfolio is normally expected to invest in at
least four countries.
The Fund expects to make substantial investments (at times more than 25%
of total assets) in the telephone companies of various Latin American
countries. These utilities play a critical role in a country's economic
development, but their stocks could be adversely affected if trends favoring
development were to be reversed.
Because Latin America includes many less-developed countries with
legacies of political instability, investors should read the section on major
risks of international investing, particularly the discussion of "political
and economic factors."
Emerging Markets Bond Fund seeks to provide high income and capital
appreciation. The Fund invests at least 65% (and potentially all) of its total
assets in the government and corporate debt securities of emerging nations.
Since these countries are less developed and their bonds carry a greater risk
of default, such bonds are typically below investment grade and are considered
junk bonds in the U.S.
The Fund may invest in the lowest-rated bonds, including those in
default. While these investments may offer significantly greater total returns
than higher-quality bonds of developed foreign markets, they entail a higher
degree of risk and are subject to sharp price declines.
There are no maturity restrictions on the Fund. Its weighted average
maturity normally ranges between 5 and 10 years, but may vary substantially
because of market conditions. Under normal circumstances, most of the Fund's
total assets are expected to be denominated in U.S. dollars, and the Fund will
not usually hedge foreign currency holdings back to U.S. dollar. Currency
fluctuations can have a significant impact on the value of the Fund's
holdings.
Income, Growth, and International Funds
T. Rowe Price Prime Reserve Fund, Inc. seeks to provide preservation of
capital, liquidity, and, consistent with these, the highest possible current
income through investments primarily in high-quality money market securities.
The Fund will invest at least 95% of its total assets in prime money market
instruments, that is, securities receiving the highest credit rating assigned
by at least two established rating agencies, by one rating agency if the
security is rated by only one, or, if unrated, the equivalent rating as
established by T. Rowe Price. The Fund's dollar-weighted average maturity will
not exceed 90 days. It will not purchase any security with a maturity of more
than 13 months. Its yield will fluctuate in response to changes in interest
rates, but the share price is managed to remain stable at $1.00. Unlike most
bank accounts or certificates of deposit, the Fund is not insured or
guaranteed by the U.S. government.
Income and International Funds
T. Rowe Price International Bond Fund seeks to provide a high level of
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. Up to 20% of the Fund's assets may be invested in Brady
bonds. Brady bonds are normally dollar denominated.
PAGE 9
Rowe Price-Fleming International, Inc. ("Price-Fleming"), the Fund's
investment manager, bases its investment decisions on fundamental market
factors, currency trends, and credit quality. The Fund generally invests in
countries where the combination of fixed income returns and currency exchange
rates appears 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 through diversification
among foreign securities and active management of maturities and currency
exposures.
Income and Growth Funds
T. Rowe Price Equity Income Fund seeks to provide substantial dividend
income as well as long-term capital appreciation through investments primarily
in common stocks of established companies. Under normal circumstances, the
Fund will invest at least 65% of its 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 as determined by T. Rowe Price.
The Fund may also purchase other types of securities, for example,
foreign securities, convertible stocks and bonds, and warrants, when
considered consistent with the Fund's investment objective and program. The
portfolio manager may also engage in a variety of investment management
practices, such as buying and selling futures and options.
Growth and International Funds
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 expects to invest substantially all of its assets outside
the U.S. and to diversify broadly among countries throughout the world --
developed, newly industrialized, and emerging.
Risk Factors of Foreign Investing
There are special risks when investing in the underlying international
funds. Some risks are inherent in any international mutual fund while others
relate more to the countries in which the funds will invest. Many of the risks
are more pronounced for investments in developing or emerging countries, such
as many of the countries of Southeast Asia, Latin America, Eastern Europe and
the Middle East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
initial stages of its industrialization cycle with a per capita gross national
product of less than $8,000.
PAGE 10
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy
in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States. For example, in 1991, the existing government in
Thailand was overthrown in a military coup. In 1992, there were two military
coup attempts in
Venezuela, and in 1992 the President of Brazil was impeached. In 1994-1995,
the Mexican peso plunged in value, setting off a severe crisis in the Mexican
economy. In addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim sovereignty of one
another and there is a demilitarized border between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
Currency Fluctuations. The international funds will invest in securities
denominated in various currencies. Accordingly, a change in the value of any
such currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the funds' assets denominated in that currency. Such
changes will also affect the funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of the fund's
securities denominated in that currency will rise. When a given currency
depreciates against the dollar (the dollar strengthens), the value of the
funds' securities denominated in that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude investment
in certain of such countries and may increase the cost and expenses of the
international funds. Investments by foreign investors are subject to a variety
of restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the international funds invest.
In addition, the repatriation of both investment income and capital from
several foreign countries is restricted and controlled under certain
regulations, including in some cases the need for certain government consents.
For example, capital invested in Chile normally cannot be repatriated for one
year.
Market Characteristics. It is contemplated that most foreign securities,
other than Latin American securities, will be purchased in over-the-counter
markets or on stock exchanges located in the countries in which the respective
principal offices of the issuers of the various securities are located, if
that is the best available market. Investments in certain markets may be made
through ADRs traded in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than, those in the
United States. While growing in volume, they usually have substantially less
volume than U.S. markets and the international funds' portfolio securities may
be less liquid and subject to more rapid and erratic price movements than
securities of comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable United States securities and
such levels may not be sustainable. Fixed commissions on foreign stock
exchanges are generally higher than negotiated commissions on United States
exchanges, although the international funds will endeavor to achieve the most
favorable net results on their portfolio transactions. There is generally less
government supervision and regulation of foreign stock exchanges, brokers, and
listed companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States
markets. Such differences may include delays beyond periods customary in the
United States and practices, such as delivery of securities prior to receipt
of payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to a Fund.
PAGE 11
Investment Funds. The international funds may invest in investment funds
which have been authorized by the governments of certain countries
specifically to permit foreign investment in securities of companies listed
and traded on the stock exchanges in these respective countries. The
international funds' investment in these funds is subject to the provisions of
the 1940 Act. If the international funds invest in such investment funds, the
international funds' shareholders will bear not only their proportionate share
of the expenses of the international funds (including operating expenses and
the fees of the investment manager), but also will bear indirectly similar
expenses of the underlying investment funds. In addition, the securities of
these investment funds may trade at a premium over their net asset value.
Information and Supervision. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing, and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. It also may be more difficult to keep currently informed of
corporate actions which affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the
international funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income available for
distribution to the international funds' shareholders. A shareholder otherwise
subject to United States federal income taxes may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal
income tax purposes for his or her proportionate share of such foreign taxes
paid by the Funds. (See "Tax Status," page 27.)
Costs. Investors should understand that the expense ratios of the
international funds can be expected to be higher than investment companies
investing in domestic securities since the cost of maintaining the custody of
foreign securities and the rate of advisory fees paid by the international
funds are higher.
Small Companies. Small companies may have less experienced management
and fewer management resources than larger firms. A smaller company may have
greater difficulty obtaining access to capital markets, and may pay more for
the capital it obtains. In addition, smaller companies are more likely to be
involved in fewer market segments, making them more vulnerable to any downturn
in a given segment. Some of these factors may also apply, to a lesser extent,
to medium size companies. Some of the smaller companies in which the
international funds will invest may be in major foreign markets; others may be
leading companies in emerging countries outside the major foreign markets.
Securities analysts generally do not follow such securities, which are seldom
held outside of their respective countries and which may have prospects for
long-term investment returns superior to the securities of well-established
and well-known companies. Direct investment in such securities may be
difficult for United States investors because, among other things, information
relating to such securities is often not readily available. Of course, there
are also risks associated with such investments, and there is no assurance
that such prospects will be realized.
Other. With respect to certain foreign countries, especially developing
and emerging ones, there is the possibility of adverse changes in investment
or exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the international
funds, political or social instability, or diplomatic developments which could
affect investments by U.S. persons in those countries.
PAGE 12
International Stock, International Discovery, European Stock, Emerging Markets
Stock, International Bond, and Emerging Market Bond Funds
Eastern Europe and Russia. Changes occurring in Eastern Europe and
Russia today could have long-term potential consequences. As restrictions
fall, this could result in rising standards of living, lower manufacturing
costs, growing consumer spending, and substantial economic growth. However,
investment in the countries of Eastern Europe and Russia is highly speculative
at this time. Political and economic reforms are too recent to establish a
definite trend away from centrally-planned economies and state owned
industries. In many of the countries of Eastern Europe and Russia, there is no
stock exchange or formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable market value
relative to the established currencies of western market economies, little or
no experience in trading in securities, no financial reporting standards, a
lack of a banking and securities infrastructure to handle such trading, and a
legal tradition which does not recognize rights in private property. In
addition, these countries may have national policies which restrict
investments in companies deemed sensitive to the country's national interest.
Further, the governments in such countries may require governmental or quasi-
governmental authorities to act as custodian of a fund's assets invested in
such countries and these authorities may not qualify as a foreign custodian
under the Investment Company Act of 1940 and exemptive relief from such Act
may be required. All of these considerations are among the factors which could
cause significant risks and uncertainties to investment in Eastern Europe and
Russia. Each fund will only invest in a company located in, or a government
of, Eastern Europe and Russia, if it believes the potential return justifies
the risk. To the extent any securities issued by companies in Eastern Europe
and Russia are considered illiquid, each fund will be required to include such
securities within its 15% restriction on investing in illiquid securities.
Japan. The Japan Fund's concentration of its investments in Japan means
the fund will be more dependent on the investment considerations discussed
above and may be more volatile than a fund which is broadly diversified
geographically. To the extent any of the other Funds also invests in Japan,
such investments will be subject to these same factors. Additional factors
relating to Japan include the following:
Japan has experienced earthquakes and tidal waves of varying degrees of
severity, and the risks of such phenomena, and damage resulting therefrom,
continue to exist. Japan also has one of the world's highest population
densities. A significant percentage of the total population of Japan is
concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya.
Energy. Japan has historically depended on oil for most of its energy
requirements. Almost all of its oil is imported, the majority from the Middle
East. In the past, oil prices have had a major impact on the domestic economy,
but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic industries to
processing and assembly type industries, has contributed to the reduction of
oil consumption. However, there is no guarantee this favorable trend will
continue.
Foreign Trade. Overseas trade is important to Japan's economy. Japan has
few natural resources and must export to pay for its imports of these basic
requirements. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors and the
large trade surpluses ensuing therefrom, Japan has had difficult relations
with its trading partners, particularly the U.S. It is possible trade
sanctions or other protectionist measures could impact Japan adversely in both
the short term and long term.
PAGE 13
Latin America. The Latin America Fund's concentration of its investments
in Latin America means the fund will be more dependent on the investment
considerations described above and can be expected to be more volatile than a
fund which is more broadly diversified geographically. To the extent any of
the other Funds also invests in Latin America, such investments will be
subject to these same factors. Additional factors relating to Latin America
include the following:
Inflation. Most Latin American countries have experienced, at one time
or another, severe and persistent levels of inflation, including, in some
cases, hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets.
Foreign Currency. Certain Latin American countries may have managed
currencies which are maintained at artificial levels to the U.S. dollar rather
than at levels determined by the market. This type of system can lead to
sudden and large adjustments in the currency which, in turn, can have a
disruptive and negative effect on foreign investors. For example, in late 1994
the value of the Mexican peso lost more than one-third of its value relative
to the dollar. Certain Latin American countries also may restrict the free
conversion of their currency into foreign currencies, including the U.S.
dollar. There is no significant foreign exchange market for certain currencies
and it would, as a result, be difficult for the Fund to engage in foreign
currency transactions designed to protect the value of the Fund's interests in
securities denominated in such currencies.
Sovereign Debt. A number of Latin American countries are among the
largest debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
In addition to the investments described in the Funds' prospectus, the
Funds may invest in the following:
Types of Securities
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 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.
PAGE 14
Hybrid Instruments
Hybrid Instruments (a type of potentially high risk derivative) have
recently been developed and combine the elements of futures contracts or
options with those of debt, preferred equity or a depository instrument
(hereinafter "Hybrid Instruments"). Often these Hybrid Instruments are indexed
to the price of a commodity, particular currency, or a domestic or foreign
debt or equity securities index. Hybrid Instruments may take a variety of
forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of
a currency or commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms related to a
particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, options, futures and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures, options, and forward contracts herein for a discussion
of these risks. Further, the prices of the Hybrid Instrument and the related
commodity or currency may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). In addition, because the purchase and sale of Hybrid
Instruments could take place in an over-the-counter market or in a private
transaction between the Fund and the seller of the Hybrid Instrument, the
creditworthiness of the contra party to the transaction would be a risk factor
which the Fund would have to consider. Hybrid Instruments also may not be
subject to regulation of the Commodities Futures Trading Commission ("CFTC"),
which generally regulates the trading of commodity futures by U.S. persons,
the SEC, which regulates the offer and sale of securities by and to U.S.
persons, or any other governmental regulatory authority.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Funds' Board of Directors. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should
be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
PAGE 15
Notwithstanding the above, the Fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. T. Rowe Price and Price-Fleming under
the supervision of the Fund's Board of Directors, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
Fund's restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not
is a question of fact. In making this determination, T. Rowe Price and Price-
Fleming will consider the trading markets for the specific security taking
into account the unregistered nature of a Rule 144A security. In addition,
Price-Fleming could consider the (1) frequency of trades and quotes, (2)
number of dealers and potential purchases, (3) dealer undertakings to make a
market, and (4) the nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers
and the mechanics of transfer). The liquidity of Rule 144A securities would be
monitored, and if as a result of changed conditions it is determined that a
Rule 144A security is no longer liquid, the Fund's holdings of illiquid
securities would be reviewed to determine what, if any, steps are required to
assure that the Fund does not invest more than 15% of its net assets in
illiquid securities. Investing in Rule 144A securities could have the effect
of increasing the amount of the Fund's assets invested in illiquid securities
if qualified institutional buyers are unwilling to purchase such securities.
Warrants
The Fund may invest in warrants. Warrants are pure speculation in that
they have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. Warrants basically are options
to purchase equity securities at a specific price valid for a specific period
of time. They do not represent ownership of the securities, but only the right
to buy them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the Fund may invest in these
securities.
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.
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 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.
PAGE 16
(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.
FOR MORE INFORMATION ABOUT AN UNDERLYING PRICE FUND, CALL
1-800-638-5660 (1-410-345-2308).
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:
PAGE 17
(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 27 of the
prospectus). Interest paid on any such borrowings will reduce net
investment income;
(2) Commodities
(a) Commodities. Spectrum Growth and Spectrum Income Funds may not
purchase or sell commodities or commodity or futures contracts.
(b) Commodities. Spectrum International may not purchase or sell
physical commodities; except that it may enter into futures
contracts and options thereon.
(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, 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.
PAGE 18
(2) Illiquid Securities. Purchase illiquid securities if, as a result,
more than 15% of its net assets would be invested in such
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 0.5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities.
(6) Futures. Spectrum Income and Spectrum Growth Funds may not invest
in futures. Spectrum International Fund, though it has no
intention at this time of investing in futures, reserves the right
to do so in the future.
(7) Forward Currency Contracts. None of the Funds has the intention of
investing in forward currency contracts at this time. However,
they all reserve the right to do so at some point in the future.
(8) 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.
(9) 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, Latin America Fund and International Bond Fund) will not
concentrate more than 25% of its total assets in any one industry. The Latin
America Fund expects to make substantial investments in the telephone
companies of various Latin American countries (at times more than 25% of total
assets). 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.
PAGE 19
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of a Fund, brokerage 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 Agreements 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, T. Rowe Price and Rowe
Price-Fleming 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, Income Fund, or International 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 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, Rowe Price-Fleming,
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, Vice-Chairman of the Board--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Trust
Company and T Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
PAGE 20
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--Managing Director, T. Rowe Price
JOHN R. FORD, Vice President--Executive Vice President, Price-Fleming
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.
GEORGE A. MURNAGHAN, Vice President--Executive Vice President, Price-Fleming;
Vice President, T. Rowe Price, T. Rowe Price Trust Company, and T. Rowe Price
Investment Services, Inc.
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price and T. Rowe
Price Trust Company
WILLIAM T. REYNOLDS, Vice President--Managing Director, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, Vice President--Managing Director, T. Rowe Price; Chartered
Financial Analyst
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice
President, Price-Fleming
M. DAVID TESTA, Vice President--Managing Director, T. Rowe Price; Director,
Equity Division; Chairman of the Board, Price-Fleming; Director and Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst
MARTIN G. WADE, Vice President--President and Director, Price-Fleming;
Director, Robert Fleming Holdings Limited and Robert Fleming Asset Management
Ltd.
DAVID J. L. WARREN, Vice President--Executive Vice President, Price-Fleming
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.
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, and T. Rowe
Price Trust Company
J. JEFFREY LANG, Assistant Vice President--Assistant Vice President, T. Rowe
Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
JUDITH B. WARD, Assistant Vice President--Employee, T. Rowe Price
PAGE 21
COMPENSATION TABLE
The Funds do not pay pension or retirement benefits to their 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, Director $6,368 $15,000
A. MacDonough Plant, Director 6,368 15,000
Spectrum Growth
Jeffrey H. Donahue, Director 8,626 15,000
A. MacDonough Plant, Director 8,626 15,000
Spectrum International
Jeffrey H. Donahue, Director (c) 0 15,000
A. MacDonough Plant, Director (c) 0 15,000
(a) Amounts in this column are for the fiscal year January 1, 1996 to
December 31, 1996.
(b) Amounts in this column included three funds at December 31, 1996.
(c) Spectrum International Fund commenced operations on December 31, 1996;
therefore there are no figures available for 1996.
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 and Rowe Price-Fleming. 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, 1997, no stockholder owned of record more than 5% of the
outstanding shares of either Spectrum International Fund or Spectrum Growth
Fund.
As of March 31, 1997, the following stockholder of record owned more
than 5% of the outstanding shares of the Spectrum Income Fund: Manulife
Financial USA, 200 Bloor Street East, NT3, Toronto, Ontario, CANADA M4W
1E5.
PAGE 22
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 Agreements described below as well as certain undertakings made by
T. Rowe Price or Price-Fleming, under their respective Investment Management
Agreements with each Spectrum 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.
Special Servicing Agreements. One Special Servicing Agreement
("Agreement") is between and among Spectrum Fund on behalf of Spectrum Income
and Spectrum Growth Funds, the underlying Funds, and T. Rowe Price. A second
Special Servicing Agreement is between and among Spectrum Fund, on behalf of
Spectrum International, the underlying Funds, Price-Fleming, and T. Rowe
Price.
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 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.
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 Agreements with the Funds, and the
Special Servicing Agreement, T. Rowe Price and Price-Fleming, respectively,
have agreed to bear any expenses of Spectrum Fund which exceed the estimated
savings to each of the Underlying Price Funds. Of course, shareholders of each
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 23
Services
Under the Management Agreement with each Fund, T. Rowe Price or Price-
Fleming as the case may be, provides each Fund with discretionary investment
services. Specifically, T. Rowe Price and Price-Fleming are 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 and
Price-Fleming are 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 and Price-Fleming provide 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 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 and Price-Fleming employees to serve as officers, directors, and
committee members of each Fund without cost to the Fund.
T. Rowe Price and Price-Fleming have agreed not to be paid a management
fee for performing their 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 or
Price-Fleming, its directors, officers, employees, and certain other persons
performing specific functions for the Fund will only be liable to the Fund for
losses resulting from willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty.
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:
PAGE 24
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% Next $30 billion
0.300% Thereafter
The Individual Fund Fees and total management fees of the Underlying
Price Funds are as follows:
Individual Fee Total
as a Percentage Management
Fund of Fund Net Assets Fee Paid
______________________________________________________________________________
International Bond 0.35% 0.68%
International Stock 0.35 0.68
New Horizons 0.35 0.68
High Yield 0.30 0.63
Equity Income 0.25 0.58
Growth Stock 0.25 0.58
New Era 0.25 0.58
GNMA 0.15 0.48
Growth & Income 0.25 0.58
New Income 0.15 0.48
Short-Term Bond 0.10 0.43
Prime Reserve 0.05 0.38
Emerging Markets Bond 0.43 0.00 (a)
International Discovery 0.75 1.08
Emerging Markets Stock 0.75 0.78 (b)
Japan Fund 0.50 0.83
New Asia 0.50 0.83
European Stock 0.50 0.83
Latin America 0.75 1.08
______________________________________________________________________________
(a) Price-Fleming agreed to waive management fees and bear certain expenses
in accordance with an expense limitation agreement in effect through
December 31, 1996. Effective December 31, 1996, Price-Fleming extended
this fund's current expense limitation through December 31, 1998. Had
Price-Fleming not agreed to waive a portion of its management fees,
Emerging Markets Bond's total management fee paid would have been
0.78%.
PAGE 25
(b) Price-Fleming agreed to waive management fees and bear certain expenses
in accordance with an expense limitation agreement in effect through
October 31, 1996. Effective October 31, 1996, Price-Fleming extended
this fund's current expense limitation through October 31, 1998. Had
Price-Fleming not agreed to waive a portion of its management fees,
Emerging Markets Stock's total management fee paid would have been
1.08%.
Based on combined Price Funds' assets of approximately $61 billion at
December 31, 1996, the Group Fee was 0.33%. 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
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, Growth,
and International Funds. 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, Growth, and International Funds, pursuant to an Underwriting
Agreement ("Underwriting Agreement"), which provides for each Fund to pay its
fees and expenses in connection with necessary state filings.
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.
PAGE 26
Investment Services acts as the agent of Spectrum Fund, on behalf of
the Income, Growth, and International Funds, in connection with the sale of
the shares for each Fund in the various states 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.
SHAREHOLDER SERVICES
The Fund from time to time may enter into agreements with outside
parties through which shareholders hold Fund shares. The shares would be held
by such parties in omnibus accounts. The agreements would provide for payments
by the Fund to the outside party for such shareholder services provided to
shareholders in the omnibus accounts.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), under an agreement
with Spectrum Fund, on behalf of the Income, Growth, and International Funds,
serves as custodian for each fund's securities and cash, but it does not
participate in the Funds' investment decisions. The Bank maintains shares of
the Spectrum Funds in the book entry system of such Funds' transfer agent,
T. Rowe Price Services. The domestic underlying Funds' portfolio securities
purchased in the U.S. are maintained in the custody of the Bank and may be
entered into the Federal Reserve Book Entry system, or the security depository
system of the Depository Trust Corporation. State Street Bank's main office is
at 225 Franklin Street, Boston, Massachusetts 02110. The underlying Funds of
the Spectrum International Fund have entered into a Custodian Agreement with
The Chase Manhattan Bank, London, pursuant to which portfolio securities are
maintained in the custody of various foreign branches of The Chase Manhattan
Bank and such other custodians, including foreign banks and foreign securities
depositories in accordance with regulations under the Investment Company Act
of 1940. The address for The Chase Manhattan Bank, London is Woolgate House,
Coleman Street, London, EC2P 2HD, England.
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
International Fund, short-term debt securities are valued at amortized cost,
which approximates fair 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. Also, for the International Fund, portfolio securities of
the underlying Funds may be listed on foreign exchanges that can open on days
when the underlying Funds do not compute their prices. As a result, the
underlying Funds' and consequently the Spectrum International Fund's net asset
value may be significantly affected by trading on days when shareholders
cannot make transactions.
PAGE 27
NET ASSET VALUE PER SHARE
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 the Growth and Income Funds may be
eligible for the dividends-received deduction for corporate shareholders. The
dividends of the Spectrum International Fund will not be eligible for this
deduction, if, as expected, none of the fund's income consists of dividends
paid by U.S. corporations. Capital gain distributions paid from these Funds
are never eligible for the dividends-received deduction. For tax purposes, it
does 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.
PAGE 28
At the time of your purchase, each Fund's net asset value may reflect
undistributed income (Growth and International Funds), 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 December 31, 1996, the
books of the Income Fund indicated that the Fund's aggregate net assets
included accumulated net investment income of $-0-, accumulated net realized
losses of $(265,728), and unrealized appreciation of $46,477,496. On December
31, 1996, the books of the Growth Fund indicated that the Fund's aggregate net
assets included undistributed investment income of $132,234, accumulated net
realized losses of $(348,366), and unrealized appreciation of
$389,436,750.
If, in any taxable year, any of the Funds 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, for Spectrum Income and Spectrum Growth Funds,
would qualify for the 70% deduction for dividends received by corporations.
However, for Spectrum International Fund, the dividends will not be eligible
for the 70% deduction for dividends received by corporations, if, as expected,
none of the Fund's income consists of dividends paid by U.S. 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.
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 totaled 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, 1996, was 6.28%.
PAGE 29
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.
Cumulative Performance Percentage Change
1 Year 3 Years 5 Years Since Inception
Ended Ended Ended (6/29/90) to
12/31/96 12/31/96 12/31/96 12/31/96
_________ ________ _________ _______________
Spectrum Income Fund 7.64% 26.05% 52.73% 87.59%
Spectrum Growth Fund 20.53% 58.83% 106.06% 140.62%
Average Annual Compound Rates of Return
1 Year 3 Years 5 Years Since Inception
Ended Ended Ended (6/29/90) to
12/31/96 12/31/96 12/31/96 12/31/96
_________ ________ _________ _______________
Spectrum Income Fund 7.64% 8.02% 8.84% 10.15%
Spectrum Growth Fund 20.53% 16.68% 15.56% 14.95%
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the Fund's
total return performance, ranking, or any other measure of the Fund's
performance may be compared to any one or combination of the following: (i) a
broad-based index; (ii) other groups of mutual funds, including T. Rowe Price
Funds tracked by independent research firms, ranking entities, or financial
publications;(iii) indices of stocks comparable to those in which the Fund
invests; (2) the Consumer Price Index or any other measure for inflation,
government statistics, such as GNP, may be used to illustrate investment
attributes of the Fund or the general economic, business, investment, or
financial environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and other persons
may be used to illustrate aspects of the Fund's performance; (4) the effect of
tax-deferred compounding on the Fund's investment returns, or on returns in
general in both qualified and nonqualified retirement plans or any other tax-
advantage product, may be illustrated by graphs, charts, etc.; and (5) the
sectors or industries in which the Fund invests may be compared to relevant
indices or surveys in order to evaluate the Fund's historical performance or
current or potential value with respect to the particular industry or sector.
PAGE 30
Other Publications
From time to time, in newsletters and other publications issued by
T. Rowe Price Investment Services, Inc., T. Rowe Price mutual fund portfolio
managers may discuss economic, financial and political developments in the
U.S. and abroad and how these conditions have affected or may affect
securities prices or the Fund; individual securities within the Fund's
portfolio; and their philosophy regarding the selection of individual stocks,
including why specific stocks have been added, removed, or excluded from the
Fund's portfolio.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, which include but are
not limited to, investing money for retirement, saving for a down payment on a
home, or paying college costs. To explain how the Fund could be used to assist
investors in 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.
CAPITAL STOCK
The Articles of Incorporation of Spectrum Fund currently establish three
series (i.e., the Income Fund, the Growth Fund, and the International 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.
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.
PAGE 31
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.
FEDERAL REGISTRATION OF SHARES
The Funds' shares are registered for sale under the Securities Act of
1933. Registering of the Funds' shares is not required under any state law,
but the Funds are required to make certain filings with and pay fees to the
states in order to sell their shares in the states.
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, Gateway International II, 1306 Concourse Drive,
Suite 100, Linthicum, Maryland 21090-1020, are independent accountants to the
Funds. The financial statements of each fund (except for the International
Fund) for the year ended December 31, 1996, and the report of independent
accountants are included in the Funds' Annual Report for the year ended
December 31, 1996. 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, 1996, are incorporated into this Statement of Additional
Information by reference.
Annual Report Page
Report of Independent Accountants 18
Statement of Net Assets, December 31, 1996 12-13
Statement of Operations, year ended December 31, 1996 14
Statement of Changes in Net Assets, years ended
December 31, 1996 and December 31, 1995, 15
Notes to Financial Statements, December 31, 1996 16-17
Financial Highlights 10-11
