PAGE 1
Prospectus for the T. Rowe Price Spectrum Fund, Inc., dated
December 18, 1996 should be inserted here.
Prospectus
T. Rowe Price Spectrum Funds
T. Rowe Price
Spectrum Fund, Inc.
December 18, 1996
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.
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price
Spectrum Fund, Inc.
December 18, 1996
This prospectus contains information you should know about the fund before
investing. Please keep it for future reference. A Statement of Additional
Information about the fund, dated December 18, 1996, has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
prospectus. To obtain a free copy, call 1-800-638-5660.
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 fund, 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 and, to a
lesser extent, international bond funds.
Risk/Reward
Spectrum Income Fund: The potential for investors to achieve high current
income with modest share price appreciation through diversification of assets.
Spectrum Growth Fund: The potential for investors to achieve long-term capital
appreciation and growth of income through diversification.
Spectrum International Fund: The potential for investors 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
will experience the least volatility and Spectrum International Fund the most
of all 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 international investing.
Investors in each fund should be prepared to accept the possibility of share
price declines. 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 $92 billion for over three and a half million
individual and institutional investor accounts as of September 30, 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 $27 billion in foreign
stocks and bonds through its offices in Baltimore, London, Tokyo, and Hong
Kong as of September 30, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents
1 About the Funds
Transaction and Fund Expenses 2
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 Requirements16
3 More About the Funds
Organization and Management 19
Understanding Performance Information 25
Special Risks and Considerations 26
Description of Underlying Price Funds 28
Investment Policies of the Spectrum Funds 35
Investment Policies and Practices of
Underlying Funds 38
4 Investing With T. Rowe Price
Account Requirements and Transaction Information40
Opening a New Account 40
Purchasing Additional Shares 41
Exchanging and Redeeming 42
Shareholder Services 43
Discount Brokerage 45
Investment Information 46
1 About the Funds
Transaction and Fund Expenses
__________________________________________________________________________
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. The Spectrum Funds will indirectly
bear their pro-rata share of the expenses of the underlying funds.
In Table 1 below, "Shareholder Transaction Expenses" shows that you pay no
sales charges. All the money you invest in a Spectrum Fund goes to work for
you. Shown below are all expenses and fees the Spectrum Income and Spectrum
Growth Funds incurred during their fiscal year (expenses and fees for the
Spectrum International Fund are estimated). More information about these
expenses may be found below and under "Management Fees of Underlying Funds"
and in the Statement of Additional Information under "Management Fee and
Expenses."
Spectrum Spectrum Spectrum
Income Growth International
Fund Fund Fund
Shareholder Transaction Expenses
Sales charge "load" on purchasesNone None None
Sales charge "load" on
reinvested dividends None None None
Redemption fees None None None
Exchange fees None None None
Annual Fund Expenses
Management fee None None None
Marketing fees (12b-1) None None None
Total other expenses
(shareholder servicing,
custodial, auditing, etc.) None None None
Total fund expenses None None None
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
applicable (see "Small Account Fee" under "Transaction Procedures and Special
Requirements").
Table 1
The Spectrum Funds will operate at a zero expense level (see "Expenses" for an
explanation of the Special Servicing Agreements under "Organization and
Management"). However, the Spectrum Funds will indirectly bear their pro-rata
share of fees and expenses incurred by the underlying funds and the investment
returns of the Spectrum Funds will be net of the expenses of the underlying
funds. The following chart provides the expense ratios for each of the
underlying funds in which each Spectrum Fund will invest (based on information
as of September 30, 1996). Where applicable, expense ratios are restated to
reflect current fees.
Spectrum Income Fund Expense Ratio
Prime Reserve Fund 0.67%
Equity Income Fund 0.82
Short-Term Bond Fund 0.74
International Bond Fund 0.88
GNMA Fund 0.76
High Yield Fund 0.85
New Income Fund 0.77
Spectrum Growth Fund Expense Ratio
Prime Reserve Fund 0.67%
Equity Income Fund 0.82
Growth & Income Fund 0.83
International Stock Fund 0.88
New Era Fund 0.77
New Horizons Fund 0.91
Growth Stock Fund 0.78
Spectrum International Fund Expense Ratio
Prime Reserve Fund 0.67%
International Stock Fund 0.88
Emerging Markets Stock Fund 1.75(a)
International Discovery Fund 1.44
International Bond Fund 0.88
New Asia Fund 1.11
Japan Fund 1.32
European Stock Fund 1.12
Emerging Markets Bond Fund 1.25(b)
Latin America Fund 1.66
a 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 agreed to
extend 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 expense ratio paid would have been 2.05%.
b 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 as of December 31, 1996, Price-Fleming has
agreed to extend 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 expense ratio paid
would have been 2.34%.
Table 2
Based on the foregoing, the range of the average weighted expense ratio is
expected to be 0.75% to 0.82% for the Spectrum Income Fund, 0.77% to 0.85% for
the Spectrum Growth Fund, and 0.83% to 1.33% for the Spectrum International
Fund. A range is provided since the average assets invested in each of the
underlying funds will fluctuate.
o Hypothetical example: Using the midpoint of the above ranges, the
following example illustrates the expenses you would incur on a $1,000
investment, assuming you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account
at the end of the time periods shown. Your expenses would be:
__________________________________________________________________________
THE TABLE AT RIGHT IS JUST AN EXAMPLE; ACTUAL EXPENSES CAN BE HIGHER OR LOWER
THAN THOSE SHOWN.
Fund 1 year 3 years 5 years 10 years
Spectrum Income $ 8 $25 $44 $ 98
Spectrum Growth $ 8 $26 $45 $100
Spectrum International$11 $34 $60 $132
Table 3
Financial Highlights
The following table provides information about the Spectrum Income and
Spectrum Growth Funds' financial history. It is based on a single share
outstanding throughout each fiscal year (which ends on the last day of
December), and for the six months ended June 30, 1996. The table is part of
the Spectrum Income and Spectrum Growth Funds' audited and unaudited financial
statements which are included in T. Rowe Price Spectrum Funds' annual and
semiannual reports, respectively, which are incorporated by reference into the
Statement of Additional Information. This document is available to
shareholders upon request. The financial statements in the annual report have
been audited by Price Waterhouse LLP, independent accountants, whose
unqualified report covers the periods shown. The financial statements in the
semiannual report are unaudited.
<PAGE>
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
Investment ActivitiesDistributions End of Period
Net Ratio
Realized of Net
and Total Ratio Invest-
Net Unreal- Return of Ex- ment
Asset ized Total Net Net (Incl- penses Income
YearValue, Net Gain From Invest- Net Asset udes Net to to Port-
EndedBegin-Invest-(Loss)Invest-ment Real- Value, Rein- Assets Aver- Aver-folio
Decem-ning ment on ment In- ized Total End vested ($ age age Turn-
ber of In- Invest-Activi-come Gain Distri- of Divi- Thou- Net Net over
31 Period come ments ties (Loss)(Loss)butionsPerioddends) sands) Assets AssetsRate
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Fund
1991 $9.77$0.82 $1.03 $1.85$(0.83)$(0.06)$(0.89)$10.7319.64%$147,8590.00% 8.03% 18.8%
1992 10.73 0.76 0.05 0.81 (0.76)(0.08) (0.84) 10.70 7.84%376,435 0.00% 7.10% 14.2%
1993 10.70 0.69 0.60 1.29 (0.69)(0.19) (0.88) 11.1112.36%587,931 0.00% 6.19% 14.4%
1994 11.11 0.69 (0.90) (0.21)(0.69)(0.10) (0.79) 10.11(1.94%)624,9400.00% 6.48% 23.1%
1995 10.11 0.72 1.16 1.88 (0.72)(0.03) (0.75) 11.2419.41%986,701 0.00% 6.43% 20.2%
1996c11.24 0.35 (0.24) 0.11 (0.35)(0.01) (0.36) 10.99 1.02%1,195,1350.00%b 6.40%a21.0%a
Growth Fund
1991 $8.52$0.21 $2.33 $2.54$(0.21)$(0.32)$(0.53)$10.5329.87%$148,6610.00% 2.77% 14.6%
1992 10.53 0.20 0.56 0.76 (0.20)(0.55) (0.75) 10.54 7.24%355,134 0.00% 2.15% 7.9%
1993 10.54 0.16 2.05 2.21 (0.16)(0.72) (0.88) 11.8720.98%584,876 0.00% 1.57% 7.0%
1994 11.87 0.17 (0.01) 0.16 (0.17)(0.73) (0.90) 11.13 1.40%879,366 0.00% 1.60% 20.7%
1995 11.13 0.21 3.12 3.33 (0.21)(0.76) (0.97) 13.4929.96%1,358,3440.00% 1.81% 7.4%
1996c13.49 0.05 1.27 1.32 -- -- -- 14.81 9.79%1,803,7650.00%d 0.74%a 1.7%a
a Annualized.
b The annualized weighted average expense ratio of the underlying funds was 0.79% for the six months ended
June 30, 1996.
c Unaudited figures for the six months ended June 30, 1996.
d The annualized weighted average expense ratio of the underlying funds was 0.83% for the six months ended
June 30, 1996.
Table 4
<PAGE>
Fund, Market, and Risk Characteristics: What to Expect
__________________________________________________________________________
THESE FUNDS SHOULD NOT BE RELIED UPON AS A COMPLETE INVESTMENT PROGRAM, NOR BE
USED FOR SHORT-TERM TRADING PURPOSES.
To help you decide whether the funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.
What are the 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.
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 will allocate 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 will invest and the amounts
which they may allocate to each underlying fund are set forth in the Table 5.
The Spectrum Growth and Income Funds will not purchase shares of any
underlying fund that would result in their owning more than 30% of an
underlying fund's outstanding voting shares. This restriction does not apply
to the Spectrum International Fund.
__________________________________________________________________________
FOR DETAILS ABOUT THE FUNDS' INVESTMENT PROGRAMS AND PRACTICES, PLEASE SEE THE
"INVESTMENT POLICIES AND PRACTICES" SECTION.
ASSET ALLOCATION RANGES FOR UNDERLYING FUNDS
Spectrum
Spectrum InvestmentSpectrum InvestmentInterna- Investment
Income Fund Range Growth Fund Range tional Fund Range
Short-Term Prime Reserve International
Bond Fund 0-15% Fund 0-25% Stock Fund 35-65%
GNMA Fund 5-20% Equity Income International
Fund 5-20% Discovery Fd0-20%
International Growth & Income Emerging Markets
Bond Fund 5-20% Fund 5-20% Stock Fund 0-20%
Equity Income International Japan Fund 0-30%
Fund 10-25% Stock Fund 5-20% New Asia
High Yield New Era Fund 10-25% Fund 0-20%
Fund 10-25% European
Prime Reserve New Horizons Stock Fund 0-30%
Fund 5-30% Fund 10-25% Latin
New Income Growth Stock America Fund0-15%
Fund 15-30% Fund 15-30% International
Bond Fund 0-20%
Emerging Markets
Bond Fund 0-15%
Prime Reserve
Fund 0-25%
Table 5
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.
__________________________________________________________________________
FOR SPECTRUM INCOME, A RISE IN INTEREST RATES IS AN IMPORTANT SOURCE OF RISK.
With Spectrum Income Fund, the risks are generally the same as with many
income funds:
o Interest rate or market risk: the decline in bond prices that
accompanies a rise in the overall level of interest rates.
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, whose issuers are more
vulnerable to business setbacks and to economic changes, such as a
recession, that may impair their ability to make timely interest and
principal payments.
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
securities that were originally purchased at a price above par.
o Currency risk: the risk that weak foreign currencies versus the U.S.
dollar could result in losses for U.S. investors.
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).
__________________________________________________________________________
FOR SPECTRUM GROWTH, A DECLINE IN STOCK PRICES IS AN IMPORTANT SOURCE OF RISK.
With Spectrum Growth Fund, the major risk is the same inherent in all stock
funds. Since economic growth has been punctuated by declines, share prices of
even the best-managed, most profitable companies are subject to market risk.
Swings in investor psychology and significant trading by large institutions
can result in price declines. For this reason, equity investors should have a
long-term investment horizon and be willing to wait out bear markets.
A significant portion of the total assets of each underlying fund, other than
Prime Reserve Fund, may also be exposed to the risks of foreign investing,
including currency risk, as previously defined. The economies, markets, and
political structures of some countries in which the underlying funds can
invest do not compare favorably with the U.S. and other mature economies in
terms of wealth and stability. Therefore, investments in these countries will
be riskier and more subject to erratic and abrupt price movements. See
Spectrum International Fund, below, for more information on the risks of
foreign investing.
__________________________________________________________________________
FOR SPECTRUM INTERNATIONAL, VOLATILITY OF FOREIGN CURRENCY MARKETS IS AN
IMPORTANT SOURCE OF RISK.
In addition to the risks associated with stock investing, Spectrum
International Fund has 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 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 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 a very efficient way
for individuals to invest abroad, but the overall expense ratios of
international funds are usually somewhat 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 countries are grappling with severe inflation and
high levels of national debt. 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 U.S. markets,
resulting in less liquidity and more volatility than experienced in the
U.S.
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 underlying
funds, and consequently of Spectrum International, may be significantly
affected by trading on days when shareholders cannot make transactions.
o The risks discussed can be significantly magnified for investments in
emerging markets. Additionally, to the extent the fund invests in
International Bond Fund and Emerging Markets Bond Fund, it will be
subject to risks associated with international fixed income investing.
See the risks associated with Spectrum Income Fund.
__________________________________________________________________________
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 funds?
For a full description of the underlying funds, please see "Description of
Underlying Funds" in Section 3.
The major characteristics of the underlying T. Rowe Price funds are as
follows:
Relative Fixed
Fixed Income Income Risk Objective/Program
Prime Reserve Fund Lowest Stable share price and
liquidity while
generating current
income
Short-Term Bond FundLow High income
with limited share
price fluctuation
GNMA Fund Moderate High income consistent
with maximum credit
protection and
moderate share price
fluctuation
New Income Fund Moderate High income with
moderate share price
fluctuation
High Yield Fund High High income and
capital appreciation
through investments in
high-yield ("junk") bonds
Relative
Equity Equity Risk Objective/Program
Equity Income Fund Low Substantial
dividend income and
capital appreciation
Growth & Income Low Capital appreciation
and reasonable
dividend income
Growth Stock Fund Moderate Capital appreciation
and increasing income
through investments in
growth stocks
New Era Fund Moderate Capital appreciation
through investments in
natural resource stocks
New Horizons Fund High Aggressive
capital appreciation
through investments in
small-company stocks
Relative
International International RiskObjective/Program
International Bond Moderate High income and
Fund(a) capital appreciation
through investments in
high-quality foreign bonds
International Stock Moderate Capital appreciation
Fund through investments in
stocks of established
foreign companies
International High Capital appreciation
Discovery through investments in
Fund small- and medium-
sized non-U.S. companies
European Stock Fund High Capital appreciation
through investments
primarily in companies
domiciled in Europe
Japan Fund High Capital appreciation
through investments in
companies operating in
Japan
New Asia Fund High Capital appreciation
through investments in
companies operating in
Asia, excluding Japan
Emerging Markets Very High Capital appreciation
Stock Fund through investments in
companies in emerging
markets
Latin America Fund Very High Capital appreciation
through investments
primarily in companies
located in Latin America
Emerging Markets Very High High current income
Bond Fund and capital
appreciation through
investments primarily
in high-yielding and
high-risk government
and corporate debt
securities of less-
developed countries
a International Bond Fund is considered to have relatively high risk
compared with other funds in the Spectrum Income portfolio, but moderate
risk relative to funds in the Spectrum International portfolio.
Table 6
How can I decide if one of these funds is right for me?
Consider your investment goals, your time horizon for achieving them, and your
tolerance for risk.
If you would like a one-stop approach to broad diversification and can accept
the possibility of moderate share price declines in an effort to achieve
relatively high income, Spectrum Income Fund could be an appropriate part of
your overall investment strategy.
If you seek one-stop diversification and can accept the possibility of greater
share price declines in an effort to achieve long-term capital appreciation,
Spectrum Growth Fund could be an appropriate part of your overall investment
strategy.
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 can
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 review "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.
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in a T. Rowe Price
fund.
How and when shares are priced
__________________________________________________________________________
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.
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.
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
__________________________________________________________________________
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 ACH transfer or bank wire. Proceeds sent by ACH transfer
should be credited the second day after the sale. ACH (Automated Clearing
House) is an automated method of initiating payments from and receiving
payments in your financial institution account. ACH is a payment system
supported by over 20,000 banks, savings banks, and credit unions, which
electronically exchanges the transactions primarily through the Federal
Reserve Banks. Proceeds sent by bank wire should be credited to your account
the next business day.
Exception:
o Under certain circumstances and when deemed to be in the funds' best
interests, your proceeds may not be sent for up to five business days
after receiving your sale or exchange request. If you were exchanging
into a bond or money fund, your new investment would not begin to earn
dividends until the sixth business day.
If for some reason we cannot accept your request to sell shares, we will
contact you.
Useful Information on Distributions and Taxes
Dividends and Other Distributions
__________________________________________________________________________
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.
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
__________________________________________________________________________
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 on the shares you sold during
the year, based on the "average cost" method. This information is not reported
to the IRS, and you do not have to use it. You may calculate the cost basis
using other methods acceptable to the IRS, such as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction (except for systematic purchases and redemptions)
you make and a year-end statement detailing all your transactions in each fund
account during the year.
__________________________________________________________________________
DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN ADDITIONAL SHARES OR RECEIVED
IN CASH.
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 fund are taxable to you
for the year in which they were paid. The only exception is that distributions
declared during the last three months of the year and paid in January are
taxed as though they were paid by December 31. You will be sent any additional
information you need to determine your taxes on fund distributions, such as
the portion of your dividend, if any, that may be exempt from state income
taxes.
Short-term capital 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.
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 a fund's record date
before investing. Of course, a 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
__________________________________________________________________________
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.)
Telephone, Tele*Access(registered trademark), 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
__________________________________________________________________________
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").
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
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 fund's 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
__________________________________________________________________________
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/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.
3 More About the Funds
Organization and Management
__________________________________________________________________________
SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 59 YEARS OF INVESTMENT MANAGEMENT
EXPERIENCE.
How are the funds organized?
The T. Rowe Price Spectrum Fund, Inc. (Spectrum Fund) is a Maryland
corporation organized in 1987 and is registered with the Commission under the
1940 Act as a nondiversified, open-end investment company, commonly known as a
"mutual fund." Mutual funds pool money received from shareholders and invest
it to try to achieve specified objectives.
Currently, Spectrum Fund consists of 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
Fund's Charter provides that the Board of Directors may issue additional
series of shares and/or additional classes of shares for each series.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o Receive a proportional interest in a fund's income and capital gain
distributions.
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 fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and do not intend to do so
except when certain matters, such as a change in a fund's fundamental
policies, are to be decided. In addition, shareholders representing at least
10% of all eligible votes 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 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?
__________________________________________________________________________
ALL DECISIONS REGARDING THE PURCHASE AND SALE OF FUND INVESTMENTS ARE MADE BY
T. ROWE PRICE -- SPECIFICALLY THE FUNDS' PORTFOLIO MANAGERS.
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 become divergent, it is
possible that a conflict of interest could arise and affect how the interested
directors and officers fulfill their fiduciary duties to that fund and the
underlying 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 could occur. 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. Moreover, for Spectrum Growth and
Spectrum Income Funds, limitations on aggregate investments in the underlying
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.
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.
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 Prime-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.
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 Rowe Price-Fleming International, 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.
__________________________________________________________________________
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,
and T. Rowe Price. A second Special Servicing Agreement (Agreement) is between
and among Spectrum Fund, on behalf of Spectrum International, the underlying
funds, Price-Fleming, and T. Rowe Price.
Each Agreement provides that, if the Board of Directors/Trustees of any
underlying fund determines that such underlying fund's share of the aggregate
expenses of Spectrum Fund is less than the estimated savings to the underlying
fund from the operation of Spectrum Fund, the underlying fund will bear those
expenses in proportion to the average daily value of its shares owned by
Spectrum Fund, provided further that no underlying 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
funds and 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 Agreement, 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.
The Management Fee. T. Rowe Price will act as the investment manager for the
Spectrum Income Fund and the Spectrum Growth Fund and Price-Fleming will act
as 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 in
which each fund invests.
T. Rowe Price will determine how Spectrum Income Fund's and Spectrum Growth
Fund's assets and Price-Fleming will determine how Spectrum International
Fund's assets will be invested in the underlying funds, pursuant to the
investment objectives and policies of each fund set forth in this prospectus
and procedures and guidelines established by the Board of Directors for the
Spectrum Fund. The Directors for Spectrum Fund will periodically monitor the
allocations made and the basis upon which such allocations were made or
maintained. Each fund, as a shareholder in any underlying fund, will
indirectly bear its proportionate share of any investment management fees and
other expenses paid by the underlying funds.
Each underlying fund pays T. Rowe Price or Price-Fleming an investment
management fee consisting of two parts: an "individual fund fee" (discussed
below) and a "group fee." The group fee, which reflects the benefits each
underlying fund derives from sharing the resources of the T. Rowe Price
investment management complex, is calculated daily based on the combined net
assets of all T. Rowe Price funds (except Equity Index and the Spectrum Funds
and any institutional or private label mutual funds). The group fee schedule
(shown below) is graduated, declining as the asset total rises, so
shareholders benefit from the overall growth in mutual fund assets.
0.480% First $1 billion 0.350% Next $2 billion
0.450% Next $1 billion 0.340% Next $5 billion
0.420% Next $1 billion 0.330% Next $10 billion
0.390% Next $1 billion 0.320% Next $10 billion
0.370% Next $1 billion 0.310% Next $16 billion
0.360% Next $2 billion 0.305% Thereafter
The underlying fund's portion of the group fee is determined by the ratio of
its daily net assets to the daily net assets of all the T. Rowe Price funds
described above. Based on the combined T. Rowe Price funds' assets of
approximately $60.3 billion at September 30, 1996, the group fee was 0.33%.
The individual fund fees and total management fees of the underlying funds as
of September 30, 1996, are as follows:
Individual Fee Total
as a % of Fund Management
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 0.45 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 as of December 31, 1996, Price-Fleming has
agreed to extend 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%.
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 agreed to
extend 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%.
Table 7
The total combined management fee for each of the underlying funds was an
annual rate as shown above.
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
__________________________________________________________________________
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.
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the
period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
Yield (Spectrum Income Fund)
__________________________________________________________________________
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 average
price during the given period. For example, a fund providing $5 of annual
income per share and a price of $50 has a current yield of 10%. Yields can be
calculated for any time period.
The advertised or "SEC" yield is found by determining the net income per share
(as defined by the SEC) earned by 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
__________________________________________________________________________
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.
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 a matter of fundamental policy, Spectrum Income and Growth Funds must
allocate their investments among the underlying funds within certain
ranges. As a result, they do not have the same flexibility to invest as
a mutual fund without such constraints. Spectrum International Fund
allocates its assets among the underlying funds pursuant to an operating
policy which may be changed without shareholder approval.
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.
o In addition to their principal investments, certain underlying funds
may: invest a portion or all of their assets in foreign securities;
enter into forward currency transactions; lend their portfolio
securities; enter into stock index, interest rate, and currency futures
contracts, and options on such contracts; engage in options
transactions; make short sales; purchase zero coupon bonds and payment-
in-kind bonds; and engage in various other investment practices.
o Events affecting the values of portfolio securities of the underlying
international funds that occur between the time their prices are
determined and the time such underlying funds' net asset values are
calculated will not be reflected in the underlying international funds'
net asset values unless Price-Fleming, under the supervision of the
underlying international funds' Board of Directors, determines that the
particular event should be taken into account in computing the funds'
net asset values.
o The officers, interested directors, and the investment managers of the
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.
o Spectrum Income Fund must invest at least 10% and can invest as much as
25% of its assets in the T. Rowe Price High Yield Fund. As a result,
Spectrum Income Fund will be subject to some of the risks resulting from
high-yield investing.
o Each of the funds may invest in underlying funds which invest in medium-
grade bonds. If these bonds are downgraded, the funds will consider
whether to increase or decrease their investment in the affected
underlying fund.
o Spectrum Income Fund may invest in underlying funds which concentrate
their assets in certain industries. Under certain unusual circumstances,
this could result in the Spectrum Income Fund being indirectly
concentrated in these industries. If this were to occur, the Spectrum
Income Fund would consider whether to maintain or change its investments
in such underlying funds.
o Spectrum Income Fund must invest at least 5% and can invest as much as
20% of its assets in the International Bond Fund, which invests
primarily in foreign fixed income securities; the Spectrum Growth Fund
must invest at least 5% and can invest as much as 20% of its assets in
the International Stock Fund, which invests primarily in foreign equity
securities. These investments will subject the funds to risks associated
with investing in foreign securities.
o Spectrum International Fund's underlying funds can invest in securities
of emerging markets. Most emerging market countries are experiencing
substantial economic and political changes, such as moving from one-
party rule to a multi-party democracy, from agrarian to industrialized
economies, and from nationalized to free market, privatized industries.
Investors should be prepared for the substantial price volatility that
can result from investing in emerging market countries.
Description of Underlying Funds
The following is a brief description of the principal investment programs of
the underlying funds. Additional investment practices are described under
"Special Risks and Considerations," the Statement of Additional Information,
and in the prospectuses for each of the underlying funds.
Underlying Fund of Each Spectrum Fund
o T. Rowe Price Prime Reserve Fund is a money market fund which is managed
to maintain a stable share price of $1.00. This policy has been
maintained since its inception; however, the $1.00 price is neither
insured by the U.S. government, nor is its yield fixed. The fund invests
at least 95% of its total assets in prime money market instruments, that
is, securities receiving the highest credit rating. The dollar-weighted
average maturity of the fund will not exceed 90 days. Since the fund is
managed to maintain a constant share price, its total return should be
composed entirely of income.
Underlying Fund of Both the Spectrum Income and Spectrum Growth Funds
o T. Rowe Price Equity Income Fund's objective is to provide substantial
dividend income as well as long-term capital appreciation through
investments in common stocks of established companies. Under normal
circumstances, the fund will invest at least 65% of total assets in the
common stocks of established companies paying above-average dividends.
These companies are expected to have favorable prospects for dividend
growth and capital appreciation, according to T. Rowe Price.
Underlying Fund of Both the Spectrum Growth and Spectrum International Funds
o T. Rowe Price International Stock Fund's objective is to seek long-term
growth of capital through investments primarily in common stocks of
established, non-U.S. companies. The fund expects to invest
substantially all of its assets outside the U.S. and to diversify
broadly among countries throughout the world in developed, newly
industrialized, and emerging economies.
Underlying Fund of Both the Spectrum Income and Spectrum International Funds
o T. Rowe Price International Bond Fund's objective is to provide high
current income and capital appreciation by investing in high-quality,
nondollar-denominated government and corporate bonds outside the U.S.
The fund also seeks to moderate price fluctuation by actively managing
its maturity structure and currency exposure. The fund will invest at
least 65% of its assets in high-quality bonds, but may invest up to 20%
of assets in below-investment-grade, high-risk bonds, including bonds in
default or those with the lowest rating.
Although the fund expects to maintain an intermediate to long weighted
average maturity, it has no maturity restrictions on the overall
portfolio or on individual securities. Normally, the fund does not hedge
its foreign currency exposure back to the dollar, nor involve more than
50% of total assets in cross hedging transactions. Therefore, changes in
foreign interest rates and currency exchange rates are likely to have a
significant impact on total return and the market value of portfolio
securities.
Spectrum Income Fund. Each of the underlying funds in the Spectrum Income Fund
seeks the highest level of income consistent with its individual investment
program.
o T. Rowe Price Short-Term Bond Fund's objective is to provide a high
level of income consistent with minimum fluctuation in principal value
and liquidity. The fund will invest in a diversified portfolio of short-
and intermediate-term corporate, government, and mortgage debt
securities. Under normal circumstances, at least 65% of total assets
will be invested in short-term bonds. The fund's dollar-weighted average
effective maturity will not exceed three years. Securities purchased by
the fund will be rated within the four highest credit categories.
o T. Rowe Price GNMA Fund's objective is to provide a high level of
current income consistent with maximum credit protection and moderate
price fluctuation by investing exclusively in securities backed by the
full faith and credit of the U.S. government and instruments involving
these securities. The fund invests primarily in mortgage-backed
securities issued and guaranteed by the Government National Mortgage
Association (GNMA). The GNMA guarantee does not apply in any way to the
price of GNMA securities or to the fund, both of which will fluctuate
with market conditions.
Mortgage-Backed Securities. Mortgage lenders pool individual home
mortgages with similar characteristics to back a certificate or bond,
which is then sold to investors. Interest and principal payments
generated by the underlying mortgages are passed through to the
investor. There is a risk of homeowner prepayments; that is, when
interest rates are falling, homeowners may accelerate principal payments
on the mortgages that underlie the GNMA securities. Prepayments cause a
loss to investors, such as this fund, on mortgages that were originally
purchased at a premium (price above par).
o T. Rowe Price High Yield Fund has high current income and, secondarily,
capital appreciation as its objective. Under normal conditions, the fund
expects to invest at least 80% of its total assets in a widely
diversified portfolio of high-yield bonds (so-called "junk" bonds) and
income-producing convertible securities and preferred stocks. The fund's
longer average maturity (expected to be in the 8- to 12-year range)
makes its price more sensitive to broad changes in interest rate
movements than shorter-term bond funds. The portfolio manager buys
defaulted bonds only if significant potential for capital appreciation
is expected.
Special Risks of High-Yield Investing. This fund is expected to have
greater price swings than are associated with most bond funds
emphasizing high-quality investments. The total return and yield of
lower-quality (high-yield/high-risk) bonds, commonly referred to as
"junk" bonds, can be expected to fluctuate more than the total return
and yield of higher-quality bonds. Junk bonds are regarded as
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.
The High Yield Fund imposes a redemption fee of 1% on all redemptions
(including exchanges) of shares held in the fund for less than one year.
The redemption fee is paid to the High Yield Fund. Spectrum Fund is
subject to this fee if it redeems shares held in the High Yield Fund for
less than one year.
o T. Rowe Price New Income Fund's objective is to provide the highest
level of income over time consistent with the preservation of capital
through investment primarily in marketable debt securities. At least 80%
of total assets will be invested in income-producing, investment-grade
instruments, including (but not limited to) U.S. government and agency
obligations, mortgage-backed securities, corporate debt securities,
asset-backed securities, bank obligations, CMOs, commercial paper,
foreign securities, and others. There are no maturity restrictions on
securities purchased by the fund, but the fund's dollar-weighted average
maturity is generally expected to be between 4 and 15 years.
__________________________________________________________________________
FOR MORE INFORMATION ABOUT AN UNDERLYING FUND, CALL:
1-800-638-5660
1-410-547-2308
SUMMARY OF PROGRAMS
Share
price Expected
Credit fluctuation average
Fund quality Yield (NAV) maturity
Prime Reserve 2 highest Lowest Maintain $1.00 No more
possible (not guaranteed) than 90
days
Short-Term Bond4 highest Moderate Moderate Not greater
than 3 years
GNMA Highest Moderate Moderate Varies,
3-10 years
New Income 4 highest High High No restriction
International Primarily 4 High High Intermediate
Bond highest to long
(up to 20% below
4 highest)
High Yield BB or lower Highest Highest Normally
8-12 years
Table 8
Spectrum Growth Fund. Each of the underlying funds in the Spectrum Growth Fund
seeks long-term growth of capital as its primary objective.
o T. Rowe Price Growth & Income Fund's objective is to provide long-term
capital growth, a reasonable level of current income, and increasing
future income through investments primarily in dividend-paying stocks.
The fund can focus on companies whose earnings are expected by T. Rowe
Price to grow at an above-average rate and can support a growing
dividend payment as well as stocks that do not pay dividends currently
but offer prospects of appreciation and future income.
o T. Rowe Price New Era Fund's objective is to provide long-term capital
appreciation by investing primarily in common stocks of companies that
own or develop natural resources and other basic commodities, and in the
stocks of selected nonresource growth companies. The fund's primary
focus will be on the common stocks of companies whose earnings and
tangible assets are expected to grow faster than inflation. The fund
will also invest in selected nonresource growth companies with strong
potential for earnings growth.
o T. Rowe Price New Horizons Fund's objective is to provide long-term
growth of capital by investing primarily in common stocks of small,
rapidly growing companies. The fund will invest primarily in a
diversified group of small, emerging growth companies. It will seek to
invest early in the corporate life cycle, before a company becomes
widely recognized by the investment community. The fund may also invest
in companies that offer the possibility of accelerating earnings growth
because of rejuvenated management, new products, or structural changes
in the economy.
o T. Rowe Price Growth Stock Fund's objective is to provide long-term
growth of capital and, secondarily, increasing dividend income by
investing primarily in common stocks of well-established growth
companies. The fund will invest primarily (at least 65% of total assets)
in the common stocks of a diversified group of growth companies. Though
it is not required, the companies in which the fund invests normally pay
dividends, which are generally expected to rise in future years as
earnings increase.
Spectrum International Fund. Each of the underlying stock funds in the
Spectrum International Fund seeks long-term growth of capital, while the
underlying bond funds seek high income and capital appreciation.
o International Discovery Fund. This fund's objective is 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 often overlooked or undervalued by investors. 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 European Stock Fund. T. Rowe Price European Stock Fund's objective is
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, United Kingdom.
Others: Austria, Belgium, Denmark, Finland, Ireland, Luxembourg, Norway,
Portugal, Czech Republic, Greece, Hungary, Poland, Slovakia, Turkey,
Russia.
o New Asia Fund. T. Rowe Price New Asia Fund's objective is 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: Australia, Hong Kong, India, Indonesia,
Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, and
Thailand.
Economic growth in the Southeast Asian economies has outstripped that in
both Europe and Japan in recent years, and the region's rising
prosperity has been reflected in periods of strong investment returns.
o Japan Fund. T. Rowe Price Japan Fund's objective is 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). While a single-country fund may normally be
considered more risky than a multi-country fund, Japan has a highly
developed and diverse economy which accounts for approximately 17% of
the world's output.
o Emerging Markets Stock Fund. T. Rowe Price Emerging Markets Stock Fund's
objective is 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), 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 Mideast.
Countries in which the fund may invest are listed below and others will
be added as opportunities develop.
Asia: China, Hong Kong, Korea, India, Indonesia, Malaysia, Mauritius,
Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand.
Latin America: Argentina, Belize, Brazil, Chile, Colombia, Mexico, Peru,
Venezuela.
Europe: Austria, Czech Republic, Estonia, Greece, Hungary, Latvia,
Lithuania, Poland, Portugal, Russia, Slovakia, Turkey.
Africa and the Middle East: Botswana, Egypt, Israel, Jordan, Morocco,
Nigeria, South Africa, Tunisia, Zimbabwe.
Many emerging countries are experiencing substantial economic and
political restructurings, and their developing financial markets offer
the potential for significant capital appreciation. Many of these
countries are moving from one-party rule to a multi-party democracy;
from agrarian to industrialized economies; and from nationalized to free
market, privatized industries. These transitions are proceeding smoothly
in some markets but not in others. There is no guarantee favorable
trends will continue. Companies in emerging markets that successfully
navigate these changes offer investors the prospect for earnings growth
more rapid than that typically generated by companies in more mature,
developed markets. Investors in this fund, however, should be
comfortable with the risks of international investing and be prepared
for substantial share price volatility.
o T. Rowe Price Latin America Fund's objective is long-term growth of
capital through investment primarily in common stocks of companies
domiciled, or with primary operations, in Latin America. Initially the
fund will focus on Mexico, Brazil, Chile, Argentina, and Venezuela, and
the portfolio is normally expected to invest in at least four countries.
Other countries will be added as opportunities arise and conditions
permit.
__________________________________________________________________________
THE LATIN AMERICA FUND IS REGISTERED AS "NONDIVERSIFIED." THIS MEANS IT MAY
INVEST A GREATER PORTION OF ASSETS IN A SINGLE COMPANY AND OWN MORE OF THE
COMPANY'S VOTING SECURITIES THAN IS PERMISSIBLE FOR A "DIVERSIFIED" FUND.
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.
The Latin American countries in general have less developed economies
than other regions in which Price-Fleming invests and may continue to be
subject to the effects of unpredictable political and economic
conditions. A number of countries have legacies of political
instability, hyperinflation, and currency devaluations versus the dollar
(which would adversely affect returns to U.S. investors).
o T. Rowe Price Emerging Markets Bond Fund's objective is 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.
Note: The International Discovery, Emerging Markets Stock, and Latin America
Funds each impose a redemption fee of 2% on all redemptions (including
exchanges) of shares held in the funds for less than one year. The redemption
fee is paid to the fund. Spectrum International Fund is subject to this fee if
it redeems shares held in one of these funds for less than one year.
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.
__________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash Position. While the Spectrum Income Fund will remain primarily invested
in bonds, and 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 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; additionally, as a fundamental policy, Spectrum
Income and Spectrum Growth Funds cannot (iv) change the selection of the
underlying funds in which they can invest; or (v) change the percentage ranges
which may be allocated to the underlying funds. These last two restrictions
are operating policies for Spectrum International Fund and may be changed by
the Board of Directors. However, 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, provided that each fund will not
invest more than 5% of its net assets in restricted securities (other than
securities eligible for resale under Rule 144A of the Securities Act of 1933);
and (iii) redeem securities from any underlying 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.
The Spectrum Growth and Income Funds may not purchase shares of any underlying
fund if, as a result of such purchase, they would own more than 30% of the
outstanding voting securities of the underlying fund. This is an operating
policy and may be changed by the Board of Directors. The 30% restriction does
not apply to the Spectrum International Fund which can own an unlimited amount
of each underlying fund in which it invests. The ability of the Spectrum Funds
to invest these amounts in the underlying funds could subject the funds to
greater risk due to the resulting concentration. However, each of the
underlying funds invests in a broad portfolio, which would tend to mitigate
this risk to some degree.
If a Spectrum Fund reaches a percentage investment limit with any underlying
fund, the Directors will have to determine whether to increase the limit, stop
sales of shares of that fund, or take other suitable steps.
Portfolio Turnover. Each 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; (ii) change the percentages of each
fund's assets invested in each of the underlying funds in response to market
conditions; and (iii) 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 following chart
sets forth the Spectrum Income and Spectrum Growth Funds' portfolio turnover
rates for the years ended December 31, 1995, December 31, 1994, and December
31, 1993, and the annualized portfolio turnover rate for the period ended June
30, 1996.
1996 1995 1994 1993
Spectrum Income Fund21.0% 20.2% 23.1% 14.4%
Spectrum Growth Fund 1.7 7.4 20.7 7.0
Table 9
Investment Policies and Practices of Underlying Funds
__________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUNDS ACHIEVE THEIR
OBJECTIVES.
In pursuing their investment objectives and programs, each of the underlying
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.
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. (See
also "Fund, Market, and Risk Characteristics" in Section 1 of this
prospectus.)
Foreign Securities. (See also "Fund, Market, and Risk Characteristics" in
Section 1 of this prospectus.) The Spectrum Funds will each invest in certain
underlying funds that invest all or a portion of their assets in foreign
securities. These investments in foreign securities include nondollar-
denominated securities traded outside of the U.S. and dollar-denominated
securities of foreign issuers. Such investments increase a portfolio's
diversification and may enhance return, but they also involve some special
risks such as exposure to potentially adverse local, political, and economic
developments; nationalization and exchange controls; potentially lower
liquidity and high volatility; possible problems arising from accounting,
disclosure, settlement, and regulatory practices that differ from U.S.
standards; and the chance that fluctuations in foreign exchange rates will
decrease the investment's value (favorable changes can increase its value). To
the extent the underlying funds invest in developing countries, these risks
are increased.
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 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.
__________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
4 Investing With T. Rowe Price
Account Requirements and Transaction Information
__________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES PROMPTLY.
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.
Employer-Sponsored Retirement Plans and Institutional Accounts
Transaction procedures in the following sections may not apply to employer-
sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
__________________________________________________________________________
T. ROWE PRICE TRUST COMPANY
1-800-492-7670
1-410-625-6585
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
appropriate address below. We do not accept third party checks, except for
IRA Rollover checks that are properly endorsed, to open new accounts.
__________________________________________________________________________
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
o Call Investor Services for an account number and give the following wire
address to your bank:
Morgan Guaranty Trust Co. of New York
ABA# 021000238
T. Rowe Price [fund name]
AC-00153938
account name(s), and account number
o 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. (See explanation of "Excessive Trading" under
"Transaction Procedures.")
In Person
Drop off your New Account Form at any location listed under "Contacting T.
Rowe Price" and obtain a receipt.
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
o Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
o 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.
o Remember to provide your account number and the fund name on 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."
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:For employer-sponsored retirement
accounts:
T. Rowe Price Account Services
P.O. Box 89000
Baltimore, MD 21289-0220
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
_____________________________________________________________________________
FOR MAILGRAM, EXPRESS, REGISTERED, OR CERTIFIED MAIL, SEE ADDRESSES UNDER
"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 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
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically and others you must authorize on the New Account Form.
By signing up for services on the New Account Form rather than later on, you
avoid having to complete a separate form and obtain a signature guarantee.
This section reviews some of the principal services currently offered. Our
Services Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide
with our Welcome Kit.
Note: Corporate and other entity accounts require an original or certified
resolution to establish services and to redeem by mail. For more information,
call Investor Services.
__________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
Retirement Plans
We offer a wide range of plans for individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs, Keoghs (profit sharing and money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call
Investor Services. For information on all other retirement plans, please call
our Trust Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges
are purchases and sales for tax purposes. (Exchanges into a state tax-free
fund are limited to investors living in states where the funds are
registered.) Some of the T. Rowe Price funds may impose a redemption fee of
.50% to 2%, payable to such funds, on shares held for less than one year, or
in some funds, six months.
Automated Services
__________________________________________________________________________
TELE*ACCESS
1-800-638-2587
Tele*Access. 24-hour service via toll-free number provides information on fund
yields and prices, dividends, account balances, and your latest transaction,
as well as the ability to request prospectuses, account and tax forms,
duplicate statements, and checks, and to initiate purchase, redemption and
exchange orders in your accounts (see "Electronic Transfers" below).
T. Rowe Price OnLine. 24-hour service via dial-up modem provides the same
information as Tele*Access, but on a personal computer. Please call Investor
Services to order 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
below.
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 also be conducted via bank wire. There is
currently a $5 fee for wire redemptions under $5,000, and your bank may charge
for incoming or outgoing wire transfers regardless of size.
Checkwriting (not available for equity funds, or the High Yield Fund or
Emerging Markets Bond Fund)
You may write an unlimited number of free checks on any money market fund, and
most bond funds, with a minimum of $500 per check. Keep in mind, however,
that a check results in a redemption; a check written on a bond fund will
create a taxable event which you and we must report to the IRS.
Automatic Investing ($50 minimum)
You can invest automatically in several different ways, including:
Automatic Asset Builder. You instruct us to move $50 or more 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
__________________________________________________________________________
DISCOUNT BROKERAGE IS A DIVISION OF T. ROWE PRICE INVESTMENT SERVICES, INC.,
MEMBER NASD/SIPC.
This additional service gives you the opportunity to easily consolidate all
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. We also provide a wide range of services,
including:
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.
__________________________________________________________________________
TO OPEN AN ACCOUNT:
1-800-638-5660
FOR EXISTING DISCOUNT BROKERAGE INVESTORS:
1-800-225-7720
Investor Information. A variety of informative reports, such as our Brokerage
Insights series, S&P Market Month Newsletter, and optional 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.
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, MD 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, and Retirement Planning Kit.
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(registered trademark)
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
http://www.troweprice.com
Invest With Confidence
To help you achieve your financial goals. T. Rowe Price offers a wide range of
stock, bond, and money market investments, a well as convenient services and
timely, informative reports.
________________________________________________________________________
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING
AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
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 December 18, 1996, which may be obtained from T. Rowe Price
Investment Services, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202.
If you would like a prospectus for a Fund of which you are not a
shareholder, please call 1-800-638-5660. A prospectus with more
complete information, including management fees and expenses will
be sent to you. Please read it carefully.
The date of this Statement of Additional Information is
December 18, 1996.
SAI-SPC 12/18/96
PAGE 3
TABLE OF CONTENTS
Page Page
Capital Stock . . . . . . . . Investment Policies . . . . .
Code of Ethics . . . . . . . Investment Restrictions . . .
Custodian . . . . . . . . . . Legal Counsel . . . . . . . .
Distributor for the Funds . . Management of the Funds . . .
Dividends . . . . . . . . . . Net Asset Value Per Share . .
Federal and State Registration Pricing of Securities . . . .
of Shares . . . . . . . . . Principal Holders of . . . .
Independent Accountants . . . Securities . . . . . . . .
Investment Management . . . . Repurchase Agreements . . . .
Services . . . . . . . . . Special Considerations . . .
Investment Objectives Tax Status . . . . . . . . .
and Policies . . . . . . . Yield Information . . . . . .
Investment Performance . . .
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
PAGE 4
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.
InterFund Borrowing and Lending
Subject to approval by the Securities and Exchange
Commission, and certain state regulatory agencies, each Fund may
borrow funds from, and certain of the Underlying Price Funds may
make loans to and borrow funds from, other Price Funds. These
Funds have no current intention of engaging in these practices at
this time.
Repurchase Agreements
Each Fund may enter into repurchase agreements through
which investors (such as the Funds) purchases a security (the
"underlying security") from a well-established securities dealer
or a bank which is a member of the Federal Reserve System. Any
such dealer or bank will be on T. Rowe Price's approved list and
have a credit rating with respect to its short-term debt of at
least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe
Price Associates, Inc. ("T. Rowe Price"). At that time, the bank
or securities dealer agrees to repurchase the underlying security
at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less
than a week. Neither Fund will enter into a repurchase agreement
which does not provide for payment within seven days if, as a
result, more than 10% of the value of its net assets would then
be invested in such repurchase agreements. The Funds will only
enter into a repurchase agreement where (i) the underlying
securities are of the type (excluding maturity limitations) which
each Fund's investment guidelines would allow it to purchase
directly (however, the underlying securities for the Prime
Reserve Fund will either be U.S. government securities or
securities which, at the time the repurchase agreement is entered
into, are rated in the highest rating category by public rating
agencies), (ii) the market value of the underlying security,
including interest accrued, will be at all times equal to or
exceed the value of the repurchase agreement, and (iii) payment
for the underlying security is made only upon physical delivery
or evidence of book-entry transfer to the account of the
PAGE 5
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.
INVESTMENT POLICIES
The following is a description of the investment
objective and program for each of the Underlying Price Funds.
Spectrum Income Fund
T. Rowe Price Short-Term Bond Fund, Inc. seeks a high
level of income consistent with minimum fluctuation in principal
value and liquidity. The Fund will invest in a diversified
portfolio of short- and intermediate-term corporate, government,
and mortgage securities. The fund may also invest in other types
of securities such as bank obligations, collateralized mortgage-
obligations (CMOs), foreign securities, hybrids, and futures and
options. Under normal circumstances, at least 65% of the Fund's
total assets will be invested in short-term bonds. In this
regard, the dollar-weighted average effective maturity will not
exceed three years, and the Fund will not purchase any security
whose effective maturity, average life or tender date, measured
from the date of settlement, exceeds seven years. The Fund will
purchase securities rated within the four highest credit
categories by at least one established public rating agency (or,
if unrated, a T. Rowe Price equivalent). Short and intermediate-
term securities typically yield more than money market
securities, but less than longer term securities. Also, share
price fluctuations should be lower than a mutual fund investing
in longer term securities.
T. Rowe Price GNMA Fund seeks to provide high level of
current income consistent with maximum credit protection and
moderate price fluctuation by investing exclusively in securities
backed by the full faith and credit of the U.S. government and
instruments involving these securities. The fund invests
primarily in mortgage-backed securities issued and guaranteed by
the Government National Mortgage Association (GNMA), an agency of
the Department of Housing and Urban Development (HUD). The GNMA
guarantee does not apply in any way to the price of GNMA
securities or the fund, both of which will fluctuate with market
conditions. The fund can also purchase bills, notes and bonds
issued by the U.S. Treasury as well as related futures, other
PAGE 6
agency securities backed by the full faith and credit of the U.S.
Government; and securities involving GNMAs, such as CMO's and
stripped certificates (securities that receive only the interest
or principal portion of the underlying mortgage payments).
Mortgage-Backed Securities. Mortgage-backed securities
are securities representing an interest in a pool of mortgages.
The mortgages may be of a variety of types, including adjustable
rate, conventional 30-year fixed rate, graduated payment, and 15-
year. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the fund.
This is in contrast to traditional bonds where principal is
normally paid back at maturity in a lump sum. Unscheduled
prepayments of principal shorten the securities' weighted average
life and may lower their total return. (When a mortgage in the
underlying mortgage pool is prepaid, an unscheduled principal
prepayment is passed through to the fund. This principal is
returned to the fund at par. As result, if a mortgage security
were trading at a premium, its total return would be lowered by
prepayments, and if a mortgage security were trading at a
discount, its total return would be increased by prepayments.)
The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the federal
agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in
governmental regulation or tax policies. As a result the actual
or "effective" maturity of a mortgage-backed security is
virtually always shorter than its stated maturity.
T. Rowe Price High Yield Fund, Inc. has high current
income and, secondarily, capital appreciation as its objective.
Under normal conditions the fund expects to invest at least 80%
of its total assets in a widely diversified portfolio of high-
yield bonds (so-called "junk" bonds), and income producing
convertible securities and preferred stocks. The fund may also
invest in a variety of other securities, including foreign
securities, pay-in-kind bonds, private placements, bank loans,
hybrid instruments, futures and options. The fund's longer
average maturity (expected to be in the 8- to 12- year range),
makes its price more sensitive to broad changes in interest rate
movements than shorter-term bond funds. The portfolio manager
buys defaulted bonds only if significant potential for capital
appreciation is expected. In addition, the Fund may invest in
medium quality, investment grade securities, and, for temporary
defensive purposes, higher quality securities. The Fund may also
invest up to 20% of its net assets in non-U.S. dollar-denominated
fixed income securities.
PAGE 7
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.
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.
PAGE 8
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.
T. Rowe Price New Income Fund, Inc. seeks the highest
level of income over time consistent with the preservation of
capital through investment primarily in marketable debt
securities. The Fund invests in long, intermediate and short-
term debt securities. The Fund has no maturity restrictions, but
the average portfolio maturity is generally expected to be
between four and 15 years although it may vary significantly. At
least 80% of the Fund's total assets will be invested in income-
producing, investment-grade instruments, including (but not
limited to) U.S. Government and agency obligations, mortgage-
backed securities, corporate debt securities, asset-backed
securities, bank obligations, CMO's, commercial paper, foreign
securities, and others. The Fund will purchase securities rated
investment grade by at least one of the established public rating
agencies (e.g., AAA, AA, A, or BBB by Standard & Poor's
Corporation (S&P) or Aaa, Aa, A, or Baa by Moody's investors
Services, Inc. (Moody's)) or, if unrated, are of equivalent
investment quality as determined by the Fund's investment
manager, T. Rowe Price. Debt securities within the top two
PAGE 9
credit categories comprise what are generally known as high-grade
bonds. Medium-grade bonds (e.g., BBB by S&P) are more
susceptible to adverse economic conditions or changing
circumstances than higher grade bonds. The Fund may invest up to
5% of net assets in securities rated at the time of purchase
within T. Rowe Price top four credit categories without regard to
the public agency ratings. Without regard to quality, the Fund
may invest up to 25% of its total assets (not including cash) in
preferred and common stocks and convertible securities,
convertible into or which carry warrants for common stocks or
other equity securities. The Fund may also invest up to 20% of
its net assets in non-U.S. dollar-denominated fixed income
securities.
Spectrum Growth Fund
T. Rowe Price Growth & Income Fund, Inc. seeks long-
term capital growth, a reasonable level of current income, and
increasing future income through investments primarily in
dividend-paying stocks with prospects for appreciation and
increasing dividends. The Fund's assets are invested primarily
in common stocks of companies whose earnings are expected by T.
Rowe Price to grow at a rate in excess of that of common stocks
in general and are adequate to support a growing dividend. To
further its objectives, the Fund may also purchase common stocks
which do not provide current income, but which offer prospects
for capital appreciation and future income. Relative value
(based on a company's asset value or projected earnings growth),
dividend yield, and potential for dividend and earnings growth
are the predominant considerations in evaluating prospective Fund
holdings.
In seeking to achieve its investment objective, the
Fund may invest in companies which are believed to be undervalued
or out of favor in the eyes of the investment community. An
undervalued company is generally one where (1) the stock/bond
price is low in relation to the general market, industry
standards or a company's historical record based on an evaluation
of various financial measures such as earnings, cash flow, book
value and dividends; or (2) potential value exists because of a)
a company's assets, such as real estate, which are carried on a
company's books at lower than market value, or b) intangibles,
such as franchise value, a dominant market share in the industry
or a well-known brand name.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (25% of total assets), convertible
securities and warrants, when considered consistent with the
Fund's investment objectives and program. The Fund may also
PAGE 10
engage in a variety of investment management practices, such as
buying and selling futures and options. The Fund's investments
in convertible securities, preferred stocks and debt securities
are limited to 30% of the Fund's total assets. The Fund's
investments in non-investment grade debt securities are limited
to 10% of total assets.
T. Rowe Price New Era Fund, Inc. seeks long-term
capital appreciation by investing primarily in common stocks of
companies that own or develop natural resources and other basic
commodities, as well as through investment in stocks of selected,
non-resource growth companies. Current income is not a factor in
the selection of stocks for investment by the Fund. The Fund
invests in a diversified group of companies whose earnings and/or
value of tangible assets are expected to grow faster than the
rate of inflation over the long term. T. Rowe Price believes the
most attractive opportunities which satisfy the Fund's objective
are in companies which own or develop natural resources and in
companies where management has the flexibility to adjust prices
or the ability to control operating costs. The percentage of the
Fund's assets invested in natural resource and related businesses
versus the percentage invested in non-resource companies may vary
greatly depending upon economic and monetary conditions and the
outlook for inflation. The earnings of natural resource
companies may be expected to follow irregular patterns, because
these companies are particularly influenced by the forces of
nature and international politics. Companies which own or
develop real estate might also be subject to irregular
fluctuations of earnings, because these companies are affected by
changes in the availability of money, interest rates, and other
factors.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (35% of total assets), convertible
securities and warrants, when considered consistent with the
Fund's investment objective and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options. The Fund's investments
in non-investment grade debt securities are limited to 10% of
total assets.
T. Rowe Price Growth Stock Fund, Inc. seeks long-term
growth of capital and increasing dividend income through
investment primarily in common stocks of well-established growth
companies. The fund will invest primarily in the common stocks
of a diversified group of growth companies. A growth company is
defined as one which: (1) has demonstrated historical growth of
earnings faster than the growth of inflation and the economy in
general; and (2) has indications of being able to continue this
PAGE 11
growth pattern in the future. While current dividend income is
not a prerequisite in the selection of a growth company, the
companies in which the Fund will invest normally have a record of
paying dividends and are generally expected to increase the
amounts of such dividends in future years as earnings increase.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (30% of total assets), convertible
securities and warrants, when considered consistent with the
Fund's investment objectives and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options.
T. Rowe Price New Horizons Fund, Inc. seeks long-term
growth of capital through investment primarily in common stocks
of small, rapidly growing companies. The fund will invest
primarily in a diversified group of small, emerging growth
companies. It seeks to invest early in the corporate life cycle
and before a company becomes widely-recognized by the investment
community. The Fund may also invest in companies which offer the
possibility of accelerating earnings growth because of
rejuvenated management, new products, or structural changes in
the economy. Current income is not a factor in the selection of
stocks.
Investors should realize that the very nature of
investing in small companies involves greater risk than is
customarily associated with more established companies. The Fund
is designed for long-term investors who are willing to accept
greater investment risks in search of substantial long-term
rewards. Small companies often have limited product lines,
markets, or financial resources, and they may be dependent upon a
small group of inexperienced managers. The securities of small
companies may have limited marketability and may be subject to
more abrupt or erratic market movements than securities of larger
companies or the market averages in general. However, small
companies may offer greater opportunities for capital
appreciation than larger, more established companies. In
addition, small companies are often overlooked by the investment
community. Therefore, these securities may be undervalued and
provide the potential for significant capital appreciation.
Although the Fund will invest primarily in U.S. common
stocks, it may also purchase other types of securities, for
example, foreign securities (10% of total assets), convertible
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.
PAGE 12
Spectrum International Fund
International Discovery Fund. This fund's objective is
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
often overlooked or undervalued by investors. 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.
European Stock Fund. The fund's objective is 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, United Kingdom.
Others: Austria, Belgium, Denmark, Finland, Ireland, Luxembourg,
Norway, Portugal, Czech Republic, Greece, Hungary, Poland,
Slovakia, Turkey, Russia.
New Asia Fund. The fund's objective is 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:
Australia, Hong Kong, Indonesia, India, Malaysia, New Zealand,
Philippines, Singapore, South Korea, Taiwan,and Thailand.
Economic growth in the Southeast Asian economies has
outstripped that in both Europe and Japan in recent years, and
the region's rising prosperity has been reflected in periods of
strong investment returns.
PAGE 13
Japan Fund. This fund's objective is 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). While a
single-country fund may normally be considered more risky than a
multi-country fund, Japan has a highly developed and diverse
economy which accounts for approximately 17% of the world's
output.
Emerging Markets Stock Fund. The fund's objective is
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), 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 Mid 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.
Latin America: Argentina, Belize, Brazil, Chile, Colombia,
Mexico, Peru, Venezuela.
Europe: Austria, Czech Republic, Estonia, Greece, Hungary,
Latvia, Lithuania, Poland, Portugal, Russia, Slovakia, Turkey,
Africa.
The Middle East: Botswana, Egypt, Israel, Jordan, Morocco,
Nigeria, South Africa, Tunisia, Zimbabwe.
Many emerging countries are experiencing substantial
economic and political restructurings, and their developing
financial markets offer the potential for significant capital
appreciation. Many of these countries are moving from one-party
rule to a multi-party democracy; from agrarian to industrialized
economies; and from nationalized to free market, privatized
industries. These transitions are proceeding smoothly in some
markets but not in others. There is no guarantee favorable trends
will continue. Companies in emerging markets that successfully
navigate these changes offer investors the prospect for earnings
PAGE 14
growth more rapid than that typically generated by companies in
more mature, developed markets. Investors in this fund, however,
should be comfortable with the risks of international investing
and be prepared for substantial share price volatility.
Latin America Fund. The fund's objective is long-term
growth of capital through investment primarily in common stocks
of companies domiciled, or with primary operations, in Latin
America. Initially the fund will focus on Mexico, Brazil, Chile,
Argentina, and Venezuela, and the portfolio is normally expected
to invest in at least four countries. Other countries will be
added as opportunities arise and conditions permit.
The Latin America Fund is registered as
"non-diversified." This means it may invest a greater portion of
assets in a single company and own more of the company's voting
securities than is permissible for a "diversified" fund.
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.
The Latin American countries in general have less
developed economies than other regions in which Price-Fleming
invests and may continue to be subject to the effects of
unpredictable political and economic conditions. A number of
countries have legacies of political instability, hyperinflation,
and currency devaluations versus the dollar (which would
adversely affect returns to U.S. investors).
Emerging Markets Bond Fund. The fund's objective is 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
PAGE 15
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. is a money
market fund which maintain a stable share price of $1.00. This
policy has been maintained since its inception; however, the
$1.00 price is not guaranteed or insured by the U.S. government,
nor is its yield fixed. The Fund generally purchases securities
which mature in 13 months or less, although the Fund may purchase
U.S. government securities with a maturity of up to 25 months.
The dollar-weighted average maturity of the Fund will not exceed
90 days.
The objectives of the Fund are preservation of capital,
liquidity, and, consistent with these objectives, the highest
possible current income through investments primarily in high-
quality money market securities. To achieve its objectives, the
Fund invests in a diversified portfolio of domestic and foreign
U.S. dollar-denominated money market securities rated within the
two highest credit categories assigned by established rating
agencies or, if not rated, of equivalent investment quality as
determined by the Fund's investment manager, T. Rowe Price.
The Fund will invest at least 95% of its total assets
in prime money market instruments--that is, securities which are
rated within the highest credit category assigned by at least two
established rating agencies (or one rating agency if the security
is rated by only one, or, if not rated, T. Rowe Price's
equivalent). A security is considered rated if the security
itself, the issuer, or a comparable security of the issuer is
rated. T. Rowe Price subjects all securities eligible for
investment to its own credit analysis and considers all Fund's
securities may have adjustable rates of interest with periodic
demand features.
Income and International Funds
T. Rowe Price International Bond Fund seeks a high
level of current income and capital appreciation by investing in
a diversified portfolio of high-quality nondollar-denominated,
government and corporate bonds outside the U.S. The Fund also
seeks to moderate price fluctuation by actively managing its
maturity structure and currency exposure.
PAGE 16
The Fund will invest primarily (at least 65% of assets)
in debt securities that are considered high quality at the time
of purchase. The Fund may also invest up to 20% of its total
assets in below investment grade, high-risk ("junk") bonds,
including bonds in default or those which have received the
lowest rating.
Rowe Price-Fleming International, Inc. ("Price-
Fleming"), the Fund's investment manager, will base its
investment decisions on fundamental market attractiveness,
currency trends, local market factors and credit quality. The
Fund will generally invest in countries where the combination of
fixed income market returns and currency exchange rate movements
is attractive, or, if the currency trend is unfavorable, where
the currency risk can be minimized through hedging.
Although the fund expects to maintain an intermediate
to long weighted average maturity, it has no maturity
restrictions on the overall portfolio or on individual
securities. Normally, the fund does not hedge its foreign
currency exposure back to the dollar, nor involve more than 50%
of total assets in cross hedging transactions. Therefore, changes
in foreign interest rates and currency exchange rates are likely
to have a significant impact on total return and the market value
of portfolio securities. Such changes provide greater
opportunities for capital gains and greater risks of capital
loss. Price-Fleming attempts to reduce these risks through
diversification among foreign securities and active management of
maturities and currency exposures.
The Fund will normally not hedge its foreign currency
exposure back to the dollar and will normally have no more than
50% of the value of its total assets involved in cross hedging
transactions. Therefore, its total return, and, in particular,
the principal value of its foreign-currency-denominated debt
securities, is likely to be significantly affected by changes in
foreign interest rate levels and foreign currency exchange rates.
These changes provide greater opportunity for capital gains as
well as greater risks of capital loss. Exchange rate movements
can be large and endure for extended periods of time. Price-
Fleming will attempt to reduce the risks associated with
investments in international fixed income securities through
portfolio diversification and active management of the Fund's
maturity structure and currency exposure.
Because Price-Fleming currently expects to invest a
large percentage of assets in foreign government securities in
order to maintain liquidity and to reduce credit risk, the Fund
has registered as a "non-diversified" investment company. The
PAGE 17
Fund may, for temporary defensive purposes, invest, without
limitation, in U.S. dollar-denominated debt securities.
Income and Growth Funds
T. Rowe Price Equity Income Fund seeks to provide
substantial dividend income as well as long-term capital
appreciation by investing primarily in dividend-paying common
stocks of established companies. In pursuing its objective, the
Fund emphasizes companies with favorable prospects for increasing
dividend income, and secondarily, capital appreciation. Over
time, the income component (dividends and interest earned) of the
Fund's investments is expected to be a significant contributor to
the Fund's total return. The Fund's income yield is expected to
be significantly above that of the Standard & Poor's 500 Stock
Index.
To achieve its objective, the Fund will, under normal
circumstances, invest at least 65% of its assets in income-
producing common stocks, whose prospects for dividend growth and
capital appreciation are considered favorable by T. Rowe Price.
To enhance capital appreciation potential, the Fund also uses a
value-oriented approach, which means it invests in stocks it
believes are currently undervalued. The Fund's investments will
generally be made in companies which share some of the following
characteristics:
o established operating histories;
o above-average current dividend yields relative to
the S&P 500;
o low price/earnings ratios relative to the S&P 500;
o sound balance sheets and other financial
characteristics; and
o low stock price relative to company's underlying
value as measured by assets, earnings, cash flow or
business franchises.
The Fund may also invest its assets in fixed income
securities (corporate, government, and municipal bonds of various
maturities). The Fund would invest in municipal bonds when the
expected total return from such bonds appears to exceed the total
returns obtainable from corporate or government bonds of similar
credit quality. Interest earned on municipal bonds purchased by
the Fund will be taxable income to Fund shareholders. Although
the Fund will invest primarily in U.S. common stocks, it may also
purchase other types of securities, for example, foreign
securities (25% of total assets), convertible securities and
warrants, when considered consistent with the Fund's investment
objective and program. The Fund may also engage in a variety of
PAGE 18
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 intends to diversify investments broadly among
countries and to normally have at least three different countries
represented in the portfolio. The Fund may invest in countries
of the Far East and Europe as well as Africa, Australia, Canada,
and other areas (including newly industrialized and emerging
countries).
The Fund expects to invest substantially all of its
assets in common stocks. However, the Fund may also invest in a
variety of other equity related securities, such as preferred
stocks, warrants and convertible securities, as well as corporate
and governmental debt securities, when considered consistent with
the Fund's investment objective and program. The Fund may also
engage in a variety of investment management practices, such as
buying and selling futures and options. The Fund's investments
in securities other than common stocks is, under normal market
conditions, limited to no more than 35% of total assets.
However, for temporary defensive purposes, the Fund may invest
all or a significant portion of its assets in U.S. government and
corporate debt obligations. The Fund will not purchase any debt
security which at the time of purchase is rated below investment
grade. This would not prevent the Fund from retaining a security
downgraded to below investment grade after purchase.
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
PAGE 19
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.
(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
PAGE 20
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.
(4) High-Yield/High-Risk Securities. While investments
in high-yield, lower-quality securities offer the
opportunity for substantial income and capital
appreciation, there are significant risks
associated with such investments, including, (1)
greater credit risk -- companies and governments
issuing lower rated bonds are not as strong
financially as those with higher credit ratings
and their bonds are often viewed as speculative
investments. Such issuers are more vulnerable to
real or perceived business setbacks and to changes
in the economy, such as a recession, that might
impair their ability to make timely interest and
principal payments. Certain less developed
governments have in the past defaulted on payment
of interest and principal on debt they have
issued. As a result, your fund manager relies
heavily on proprietary Price-Fleming research when
selecting these investments; (2) reduced market
liquidity -- high-yielding emerging market bonds
are generally less "liquid" than higher-quality
bonds issued by companies and governments in
developed countries. Consequently large purchases
or sales of certain high-yield, emerging market
debt issues may cause significant changes in their
prices. Because many of these bonds do not trade
frequently, when they do trade, their price may be
substantially higher or lower than had been
expected. A lack of liquidity also means that
judgment may play a bigger role when seeking to
establish the fair value of the securities; and
(3) other factors -- the major factor influencing
prices of high-quality bonds is changes in
interest rate levels; but this is only one of
several factors affecting prices of lower-quality
bonds. Because the credit quality of the issuer is
lower, such bonds are more sensitive to
developments affecting the issuer's underlying
fundamentals, such as changes in financial
condition, or a given country's economy in
PAGE 21
general. In addition, the entire bond market in an
emerging market can experience sudden and sharp
price swings due to a variety of factors,
including changes in economic forecasts, stock
market activity, large or sustained sales by such
investors, a high-profile default, a political
upheaval of some kind or just a change in the
market's psychology. This type of volatility is
usually associated more with stocks than bonds,
but investors in lower-quality bonds should also
anticipate it. Since mutual funds can be a major
source of demand in certain markets, substantial
cash flows into and out of these funds can affect
high-yield bond prices. If, for example, a
significant number of funds were to sell bonds to
meet shareholder redemptions, both bond prices and
a fund's share price could fall more than
underlying fundamentals might justify.
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.
General. Investors should understand that all
investments have a risk factor. There can be no guarantee
against loss resulting from an investment in the international
funds, and there can be no assurance that the funds' investment
policies will be successful, or that its investment objectives
will be attained. The funds are designed for individual and
institutional investors seeking to diversify beyond the United
States in actively researched and managed portfolios, and are
intended for long-term investors who can accept the risks
entailed when investing in foreign securities.
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
PAGE 22
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 funds' 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 Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit and at times 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
PAGE 23
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. 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.
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.
PAGE 24
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.
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,
PAGE 25
political or social instability, or diplomatic developments which
could affect investments by U.S. persons in those countries.
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
PAGE 26
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. Japan's principal
export markets are the U.S., Canada, the United Kingdom, the
Federal Republic of Germany, Australia, Korea, Taiwan, Hong Kong
and the People's Republic of China. The principal sources of its
imports are the U.S., Southeast Asia and the Middle East.
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., where the trade imbalance is the greatest.
It is possible trade sanctions or other protectionist measures
could impact Japan adversely in both the short term and long
term.
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:
PAGE 27
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 fund's
prospectus, the fund may invest in the following:
PAGE 28
Types of Securities
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
PAGE 29
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 fund's 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.
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
PAGE 30
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.
FOR MORE INFORMATION ABOUT AN UNDERLYING PRICE FUND, CALL
1-800-638-5660 (1-410-547-2308).
INVESTMENT RESTRICTIONS
Fundamental policies of the Funds may not be changed
without the approval of the lesser of (1) 67% of the Funds'
shares present at a meeting of shareholders if the holders of
more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the Funds' outstanding shares.
Other restrictions, in the form of operating policies, are
subject to change by Spectrum Fund's Board of Directors without
shareholder approval. Any investment restriction which involves
a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, a Fund.
Fundamental Policies
As a matter of fundamental policy, each Fund may not:
(1) Borrowing. Borrow money, except each Fund may
borrow from banks or other Price Funds as a
temporary measure for extraordinary or emergency
purposes, and then only in amounts not exceeding
30% of its total assets valued at market. Each
Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption
requests which might otherwise require untimely
disposition of portfolio securities (see page __
of the prospectus). Interest paid on any such
borrowings will reduce net investment income;
PAGE 31
(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.
PAGE 32
Operating Policies
As a matter of operating policy, each Fund may not:
(1) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
(2) Illiquid Securities. Purchase illiquid securities
if, as a result, more than 15% of its net assets
would be invested in such securities provided that
each Fund will not invest more than 10% of its
total assets in restricted securities;
(3) Oil and Gas Programs. Purchase participations or
other direct interests or enter into leases with
respect to, oil, gas, other mineral exploration or
development programs;
(4) Options. Invest in options;
(5) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of
any issuer if, to the knowledge of the Funds'
management, those officers and directors of
Spectrum Fund, and of its investment manager, who
each owns beneficially more than .5% of the
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
PAGE 33
issuers which at the time of purchase had been in
operation for less than three years, including
predecessors and unconditional guarantors; or
(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.
Redemptions in Kind
In the unlikely event a shareholder were to receive an
in kind redemption of portfolio securities of either Fund,
brokerage fees could be incurred by the shareholder in subsequent
sale of such securities.
PAGE 34
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
PAGE 35
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, 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.
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
GEORGE J. COLLINS, Vice President--President, President, Chief
Executive Officer, and Managing Director, T. Rowe Price;
Director, Price-Fleming, T. Rowe Price Trust Company and T. Rowe
Price Retirement Plan Services, Inc.; Chartered Investment
Counselor
JOHN R. FORD, Vice President--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--Vice President, Price-
Fleming, 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; formerly, (1972-1989) charter
member of the U.S. Senior Executive Service and Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental Protection
Agency
WILLIAM T. REYNOLDS, 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
PAGE 36
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
DAVID J. L. WARREN, Vice President--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
COMPENSATION TABLE
The Funds do not pay pension or retirement benefits to
its officers or directors. Also, any director of a Fund who is
an officer or employee of T. Rowe Price does not receive any
remuneration from the Funds.
_________________________________________________________________
Total Compensation
from Fund and
Name of Aggregate Fund Complex
Person, Compensation Paid to
Position from Fund(a) Directors(b)
_________________________________________________________________
Spectrum Income
Jeffrey H. Donahue, $7,210 $30,011
Director
A. MacDonough Plant, 7,210 29,750
Director
Spectrum Growth
Jeffrey H. Donahue, 8,840 30,011
Director
A. MacDonough Plant, 8,840 29,750
Director
PAGE 37
Spectrum International
Jeffrey H. Donahue, 0 30,011
Director(c)
A. MacDonough Plant, 0 29,750
Director(c)
(a) Amounts in this column are for the fiscal year January 1,
1995 to December 31, 1995.
(b) Amounts in this column included three funds at December 31,
1995.
(c) Spectrum International Fund commences 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 October 31, 1996, no stockholder beneficially owned
more than 5% of the outstanding shares of either Spectrum Income
Fund or Spectrum Growth Fund.
As of November 15, 1996, no stockholders owned shares of the
Spectrum International Fund.
INVESTMENT MANAGEMENT SERVICES
The business of Spectrum Fund will be conducted by its
officers, directors, and investment manager in accordance with
PAGE 38
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
PAGE 39
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.
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 and state laws;
monitoring the financial, accounting, and administrative
functions of each Fund; maintaining liaison with the agents
employed by each Fund such as the custodian and transfer agent;
assisting each Fund in the coordination of such agents'
activities; and permitting T. Rowe Price and Price-Fleming
PAGE 40
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.
Each Fund's Management Agreement provides that the Fund will
bear all expenses of its operations not specifically assumed by
T. Rowe Price or Price-Fleming. However, T. Rowe Price will
reimburse the Fund for certain expenses which in any year exceed
the limits prescribed by any state in which the Fund's shares are
qualified for sale. Presently, the most restrictive expense
ratio limitation imposed by any state is 2.5% of the first $30
million of the Fund's average daily net assets, 2% of the next
$70 million of such assets, and 1.5% of net assets in excess of
$100 million. For the purpose of determining whether the Fund is
entitled to reimbursement, the expenses of the Fund are
calculated on a monthly basis. If the Fund is entitled to
reimbursement, that month's management fee will be reduced or
postponed with any adjustment made after the end of the year.
Management Fees of Underlying Price Funds
Each Underlying Price Fund pays T. Rowe Price or Price-
Fleming a fee ("Fee") which consists of two components: a Group
Management Fee ("Group Fee") and an Individual Fund Fee ("Fund
Fee"). The Fee is paid monthly to T. Rowe Price or Price-Fleming
on the first business day of the next succeeding calendar month
and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of
the daily Group Fee accruals ("Daily Group Fee Accruals") for
each month. The Daily Group Fee Accrual for any particular day
is computed by multiplying the Price Funds' group fee accrual as
determined below ("Daily Price Funds' Group Fee Accrual") by the
ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
PAGE 41
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
_________________________________
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Next $16 billion
0.305% Thereafter
The Individual Fund Fees and total management fees of
the Underlying Price Funds are as follows:
Individual Fee Total
as a % of Fund Management
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 0.45 0.00(a)
PAGE 42
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 as
of December 31, 1996, Price-Fleming has agreed to extend
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%.
(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 agreed to extend 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
$60.3 billion at September 30, 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.
PAGE 43
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 registering and qualifying its shares under the
various state "blue sky" laws; preparing, setting in type,
printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of
confirming purchase orders. However, all such fees and expenses
are subject to the Special Servicing Agreement.
The Underwriting Agreement provides that Investment
Services will pay all fees and expenses in connection with:
printing and distributing prospectuses and reports for use in
offering and selling shares for each Fund; preparing, setting in
type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a
broker-dealer; and offering and selling shares for each Fund,
except for those fees and expenses specifically assumed by the
Funds. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of Spectrum
Fund, on behalf of the Income, Growth, and International Funds,
in connection with the sale of the shares for each Fund in all
states in which the shares are qualified and in which Investment
Services is qualified as a broker-dealer. Under the Underwriting
Agreement, Investment Services accepts orders for each Fund's
shares at net asset value. No sales charges are paid by
investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"),
under an agreement with Spectrum Fund, on behalf of the Income,
Growth, and International Funds, serves as custodian for each
fund's securities and cash, but it does not participate in the
PAGE 44
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
PAGE 45
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.
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.
PAGE 46
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.
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 September 30, 1996, the books of the
Income Fund indicated that the Fund's aggregate net assets
included net realized capital gains of $1,841,623.99 and
unrealized appreciation of $35,386,909.87. On September 30,
1996, the books of the Growth Fund indicated that the Fund's
aggregate net assets included undistributed net investment income
of $9,884,303.85, net realized capital gains of $8,059,284.33,
and unrealized appreciation of $399,193,289.04.
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
PAGE 47
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 September 30, 1996, was
6.44%.
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
PAGE 48
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.
Spectrum Income Fund
Cumulative Performance Percentage Change
1 Year 3 Years 5 Years Since Inception
Ended Ended Ended (6/29/90) to
9/30/96+ 9/30/96 9/30/96 9/30/96++
_________ ________ ________________________
Spectrum Income Fund 8.16% 23.74% 54.90% 81.03%
90-day Treasury Bill 5.22 15.34 23.47 33.57
Lehman Brothers
Govt./Corp. Bond Index4.50 14.55 44.56 68.49
Lipper General Bond 7.00 18.21 56.52 83.70
CPI 3.00 8.75 15.01 21.48
Average Annual Compound Rates of Return
1 Year 3 Years 5 Years Since Inception
Ended Ended Ended (6/29/90) to
9/30/96+ 9/30/96 9/30/96 9/30/96++
_________ ________ ________________________
Spectrum Income Fund 8.16% 7.36% 9.15% 9.95%
90-day Treasury Bill 5.22 4.87 4.31 4.73
Lehman Brothers
Govt./Corp. Bond Index4.50 4.63 7.65 8.69
Lipper General Bond 7.00 5.71 9.33 10.16
CPI 3.00 2.84 2.84 3.16
+ If you invested $1,000 at September 30, 1995, the total
return on 9/30/96 would be $8,081.60 ($1,000 x 8.16%).
++ Assumes purchase of one share of the Income Fund at the
inception price of $10.00 on 6/29/90.
PAGE 49
Spectrum Growth Fund
Cumulative Performance Percentage Change
1 Year 3 Years 5 Years Since Inception
Ended Ended Ended (6/29/90) to
9/30/96+ 9/30/96 9/30/96 9/30/96++
_________ ________ ________________________
Spectrum Growth Fund 19.61% 59.84% 106.51% 127.31%
S & P 500 20.34 61.89 103.15 129.84
Lipper Growth and Income
Fund Index 17.09 49.57 94.67 118.30
Wilshire 5000 18.92 57.43 103.80 131.96
CPI 3.00 8.75 15.01 21.48
Average Annual Compound Rates of Return
1 Year 3 Years 5 Years Since Inception
Ended Ended Ended (6/29/90) to
9/30/96+ 9/30/96 9/30/96 9/30/96++
_________ ________ ________________________
Spectrum Growth Fund19.61% 16.92% 15.61% 14.04%
S & P 500 20.34 17.42 15.23 14.24
Lipper Growth and Income
Fund Index 17.09 14.36 14.25 13.30
Wilshire 5000 18.92 16.33 15.30 14.41
CPI 3.00 2.84 2.84 3.16
+ If you invested $1,000 at September 30, 1995, the total
return on 9/30/96 would be $1,196.10 ($1,000 x 19.61%).
++ Assumes purchase of one share of the Growth Fund at the
inception price of $10.00 on 6/29/90. Over this time, stock
prices in general have risen.
Outside Sources of Information
From time to time, in reports and promotional
literature: (1) the Fund's total return performance or P/E ratio
may be compared to any one or combination of the following: (i)
the Standard & Poor's 500 Stock Index and Dow Jones Industrial
Average so that you may compare the Fund's results with those of
a group of unmanaged securities widely regarded by investors as
representative of the stock market in general; (ii) other groups
of mutual funds, including T. Rowe Price Funds tracked by: (A)
Lipper Analytical Services, a widely used independent research
firm which rates mutual funds by overall performance, investment
objective, and assets; (B) Morningstar, Inc. another widely used
independent research firm which ranks mutual funds; or (C) other
financial or business publications, such as Business Week, Money
Magazine, Forbes and Barron's, which provide similar information;
(iii) indices of stocks comparable to those in which the Fund
PAGE 50
invests; (2) the Consumer Price Index (measure for inflation) may
be used to assess the real rate of return from an investment in
the Fund; (3) other government statistics such as GNP, and net
import and export figures derived from governmental publications,
e.g. The Survey of Current Business, may be used to illustrate
investment attributes of the Fund or the general economic,
business, investment, or financial environment in which the Fund
operates; (4) various financial, economic and market statistics
developed by brokers, dealers and other persons may be used to
illustrate aspects of the Fund's performance; (5) the effect of
tax-deferred compounding on the Fund's investment returns, or on
returns in general, may be illustrated by graphs, charts, etc.
where such graphs or charts would compare, at various points in
time, the return from an investment in the Fund (or returns in
general) on a tax-deferred basis (assuming reinvestment of
capital gains and dividends and assuming one or more tax rates)
with the return on a taxable basis; and (6) the sectors or
industries in which the Fund invests may be compared to relevant
indices or surveys (e.g. S&P Industry Surveys) in order to
evaluate the Fund's historical performance or current or
potential value with respect to the particular industry or
sector. The Income Fund may also compare its performance or
yield to a variety of fixed income investments (e.g., repos, CDs,
Treasury bills) and other measures of performance set forth in
financial publications maintained by persons such as the Donoghue
Organization, Merrill Lynch, Pierce Fenner & Smith, Inc., Salomon
Brothers, Inc. etc. In connection with (5) above, information
derived from the following chart may be used:
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and
28% tax bracket.
Year Taxable Tax Deferred
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is
to accumulate personal savings for retirement. Due to the long-
term nature of the investment, even slight differences in
performance will result in significantly different assets at
retirement. Mutual funds, with their diversity of choice, can be
used for IRA investments. Generally, individuals may need to
adjust their underlying IRA investments as their time to
retirement and tolerance for risk changes.
PAGE 51
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of
Funds and may help investors achieve various long-term investment
goals, such as investing money for retirement, saving for a down
payment on a home, or paying college costs. To explain how the
Fund could be used to assist investors in planning for these
goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be made
available. These currently include: the Asset Mix Worksheet
which is designed to show shareholders how to reduce their
investment risk by developing a diversified investment plan; the
College Planning Guide which discusses various aspects of
financial planning to meet college expenses and assists parents
in projecting the costs of a college education for their
children; the Retirement Planning Kit (also available in a PC
version) includes a detailed workbook to determine how much money
you may need for retirement and suggests how you might invest to
achieve your objectives; and the Retirees Financial Guide which
includes a detailed workbook to determine how much money you can
afford to spend and still preserve your purchasing power and
suggests how you might invest to reach your goal; Tax
Considerations for Investors discusses the tax advantages of
annuities and municipal bonds and how to assess whether they are
suitable for your portfolio, reviews pros and cons of placing
assets in a gift to minors account, and summarizes the benefits
and types; Personal Strategy Planner simplifies investment
decision-making by helping investors define personal financial
goals, establish length of time the investor intends to invest,
determine risk "comfort zone" and select diversified investment
mix; and the How to Choose a Bond Fund guide which discusses how
to choose an appropriate bond fund for your portfolio. From time
to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that
such goals will be met.
To assist investors in understanding the different
returns and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown below.
PAGE 52
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/95
50 years 20 years 10 years 5 years
Small-Company Stocks 13.8% 19.6% 11.9% 24.5%
Large-Company Stocks 11.9 14.6 14.8 16.6
Foreign Stocks N/A 15.1 13.9 9.7
Long-Term Corporate Bonds 5.7 10.5 11.2 12.1
Intermediate-Term U.S.
Gov't. Bonds 5.9 9.7 9.1 8.8
Treasury Bills 4.8 7.3 5.5 4.3
U.S. Inflation 4.4 5.2 3.5 2.8
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown on the next page.
PAGE 53
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/95 $10,000
Investment
After Period
____________________ ______________________ ____________
Nominal Real Best Worst
PortfolioGrowth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.8% 6.5% 24.9% 0.1%$ 92,675
II. Moderate
Risk 60% 30% 10% 13.1% 7.9% 29.1%-1.8%$116,826
III. High
Risk 80% 20% 0% 14.3 9.1% 33.4%-5.2%$145,611
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1995 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-94 and Lehman Brothers Government/Corporate Bond
Index from 1975), and 30-day Treasury bills from January 1976
through December 1995. Past performance does not guarantee
future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is
maintained each year. This exhibit is for illustrative
purposes only and is not representative of the performance of
any T. Rowe Price fund.
** Based on inflation rate of 5.2% for the 20-year period ended
12/31/95.
Insights
From time to time, Insights, a T. Rowe Price publication of
reports on specific investment topics and strategies, may be
included in the Fund's fulfillment kit. Such reports may include
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
PAGE 54
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
CAPITAL STOCK
The Articles of Incorporation of Spectrum Fund
currently establish 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
PAGE 55
Incorporation, the By-Laws of the Corporation, or as the Board of
Directors may determine in its sole discretion. Where a separate
vote is required with respect to one or more classes or series,
then the shares of all other classes or series vote as a single
class or series, provided that, as to any matter which does not
affect the interest of a particular class or series, only the
holders of shares of the one or more affected classes or series
is entitled to vote. The preferences, rights, and other
characteristics attaching to any series of shares, including the
present series of capital stock, might be altered or eliminated,
or the series might be combined with another series, by action
approved by the vote of the holders of a majority of all the
shares of all series entitled to be voted on the proposal,
without any additional right to vote as a series by the holders
of the capital stock or of another affected series.
Shareholders are entitled to one vote for each full
share held (and fractional votes for fractional shares held) and
will vote in the election of or removal of directors (to the
extent hereinafter provided) and on other matters submitted to
the vote of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Funds, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Corporation, a special meeting of
shareholders of the Corporation shall be called by the Secretary
of the Corporation on the written request of shareholders
entitled to cast at least 10% of all the votes of the
Corporation, entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Corporation to the extent
required by Section 16(c) of the 1940 Act.
FEDERAL AND STATE REGISTRATION OF SHARES
The Funds' shares are registered for sale under the
Securities Act of 1933 and the Funds or their shares are
registered under the laws of all states which require
registration, as well as the District of Columbia and Puerto
Rico.
PAGE 56
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, whose
address is 919 Third Avenue, New York, New York 10022, is legal
counsel to the Funds.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the
Funds. The financial statements of each fund for the year ended
December 31, 1995, and the report of independent accountants are
included in the Funds' Annual Report for the year ended December
31, 1995. The financial statements for the period ended June 30,
1996 are included in the Funds' unaudited semiannual report. A
copy of the annual and semiannual reports accompany this
Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in
the Annual Report for the year ended December 31, 1995, is
incorporated into this Statement of Additional Information by
reference. The semiannual report for the period ended June 30,
1996, are also incorporated into this Statement of Additional
Information by reference:
Annual
Report Page
_____________
Report of Independent Accountants 14
Statement of Net Assets, December 31, 1995 8
Statement of Operations, year ended
December 31, 1995 9
Statement of Changes in Net Assets, years ended
December 31, 1995 and December 31, 1994 10
Notes to Financial Statements,
December 31, 1995 11
Financial Highlights 12-13
Semiannual
Report Page
_____________
Statement of Net Assets,
June 30, 1996 (unaudited) 11-12
Statement of Operations, six months ended
June 30, 1996 (unaudited) 13
Statement of Changes in Net Assets,
year ended December 31, 1995 and
six months ended June 30, 1996 (unaudited) 14
Notes to Financial Statements, June 30, 1996
(unaudited) 15-16
Financial Highlights (unaudited) 9-10
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