<PAGE>
PROSPECTUS
May 1, 1998
Spectrum Funds
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.
T. Rowe Price
RAM LOGO<PAGE>
FACTS AT A GLANCE
Spectrum Funds
Investment Goals
Spectrum Income Fund seeks a high level of current income consistent with
moderate share price fluctuation.
Spectrum Growth Fund seeks long-term capital appreciation and growth of income,
with current income a secondary objective.
Spectrum International Fund seeks long-term capital appreciation.
As with any mutual fund, there is no guarantee the funds will achieve their
goals.
Strategy
Each fund diversifies its assets within set limits among specific underlying T.
Rowe Price funds. Allocation decisions reflect Spectrum Fund managers' outlook
for the relative valuations of the underlying funds and for the various
economies and financial markets.
Spectrum Income Fund invests primarily in domestic bond funds and also in two
foreign bond funds, but it may allocate up to 25% of assets to a stock fund.
Spectrum Growth Fund invests primarily in domestic stock funds and also in a
foreign stock fund.
Spectrum International Fund invests primarily in international stock funds and,
to a lesser extent, international bond funds.
Risk/Reward
Spectrum Income Fund offers the potential for investors to achieve high current
income with modest share price appreciation through diversification of assets.
Spectrum Growth Fund offers investors the potential to achieve long-term
capital appreciation and growth of income through diversification. Investors in
the Spectrum International Fund have the potential to achieve long-term capital
appreciation through diversification among international markets.
Investors in each fund should be prepared for share price volatility and the
possibility of losing money. Under normal conditions, Spectrum Income Fund is
expected to experience the least volatility and Spectrum International Fund the
most of the three funds. Before investing, you should carefully consider the
risks explained in more detail in Fund, Market, and Risk Characteristics.
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.
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 among T. Rowe Price
funds.
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 $124 billion for over six million individual and
institutional investor accounts as of December 31, 1997.
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. As of December 31, 1997, Price-Fleming managed
$30 billion in foreign stocks and bonds through its offices in Baltimore,
London, Tokyo, Singapore, Hong Kong, and Buenos Aires.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
T. Rowe Price Spectrum Fund,Inc.
Prospectus
May 1, 1998
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUNDS
Transaction and Fund Expenses 3
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Financial Highlights 4
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Fund, Market, and Risk Characteristics 6
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds 13
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Distributions and Taxes 14
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Transaction Procedures and Special 18
Requirements
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3 MORE ABOUT THE FUNDS
Organization and Management 21
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Understanding Performance Information 25
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Special Risks and Considerations 26
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Description of Underlying Funds 28
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Investment Policies of the Spectrum Funds 29
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Investment Policies and Practices of 32
theUnderlying Funds
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4 INVESTING WITH T. ROWE PRICE
Account Requirements and Transaction 34
Information
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Opening a New Account 34
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Purchasing Additional Shares 36
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Exchanging and Redeeming 37
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Rights Reserved by the Funds 38
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Shareholder Services 39
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Discount Brokerage 42
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Investment Information 43
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</TABLE>
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated May 1, 1998, 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.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
<PAGE>
ABOUT THE FUNDS 1
TRANSACTION AND FUND EXPENSES
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o Like all T. Rowe Price funds, these funds are 100% no load.
These tables should help you understand the kinds of expenses you will bear
indirectly as a Spectrum Fund shareholder. While the Spectrum Funds
themselves impose no fees or charges, they will indirectly bear their
pro-rata share of the expenses of the underlying funds in which they invest.
Since each Spectrum Fund's returns are net of these expenses, the end result
to the shareholder is very much the same as if the fund had an explicit
expense ratio.
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 provides the range of average weighted expense ratios for each
Spectrum Fund. A range is given instead of a single number because the
pro-rata share of expenses fluctuates along with changes in the average
assets invested in each of the underlying funds. For further information on
expense ratios and management fees of the underlying funds, please refer to
the Statement of Additional Information.
<TABLE>
Table 1 Range of Average Weighted Expense Ratios as of
December 31, 1997
<CAPTION>
<S> <C> <C>
Spectrum Income Spectrum Growth Spectrum International
0.66% to 0.84% 0.71% to 0.92% 0.76% to 1.28%
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</TABLE>
. Hypothetical example Using the midpoint of the above ranges, the following
example illustrates the expenses you would incur on a $1,000 investment,
assuming you invest $1,000, the fund returns 5% annually, expense ratios
remain as listed previously, and you close your account at the end of the
time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
Fund 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Spectrum Income $ 8 $24 $42 $ 93
Spectrum Growth 8 26 45 101
Spectrum International 10 32 56 125
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
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Table 3, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the financial statements, which are included
in its annual report and are incorporated by reference into the Statement of
Additional Information (available upon request). The financial statements in
each fund's annual report were audited by Price Waterhouse LLP, the funds'
independent accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Total Value,
Beginning Income Gain (Loss) on Activities Income Gain Distributions End of Period
of Period Investments
Income Fund
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <S>
1990/a/ $10.00 $0.44 $(0.18) $ 0.26 $(0.44) $(0.05) $(0.49) $ 9.77
- ------------------------------------------------------------------------------------------------------------------
1991 9.77 0.82 1.03 1.85 (0.83) (0.06) (0.89) 10.73
- ------------------------------------------------------------------------------------------------------------------
1992 10.73 0.76 0.05 0.81 (0.76) (0.08) (0.84) 10.70
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1993 10.70 0.69 0.60 1.29 (0.69) (0.19) (0.88) 11.11
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1994 11.11 0.69 (0.90) (0.21) (0.69) (0.10) (0.79) 10.11
- ------------------------------------------------------------------------------------------------------------------
1995 10.11 0.72 1.16 1.88 (0.72) (0.03) (0.75) 11.24
- ------------------------------------------------------------------------------------------------------------------
1996 11.24 0.71 0.11 0.82 (0.71) (0.15) (0.86) 11.20
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1997 11.20 0.71 0.61 1.32 (0.71) (0.15) (0.86) 11.66
Growth Fund
1990/a/ $10.00 $0.20 $(1.21) $(1.01) $(0.19) $(0.28) $(0.47) $ 8.52
- ------------------------------------------------------------------------------------------------------------------
1991 8.52 0.21 2.33 2.54 (0.21) (0.32) (0.53) 10.53
- ------------------------------------------------------------------------------------------------------------------
1992 10.53 0.20 0.56 0.76 (0.20) (0.55) (0.75) 10.54
- ------------------------------------------------------------------------------------------------------------------
1993 10.54 0.16 2.05 2.21 (0.16) (0.72) (0.88) 11.87
- ------------------------------------------------------------------------------------------------------------------
1994 11.87 0.17 (0.01) 0.16 (0.17) (0.73) (0.90) 11.13
- ------------------------------------------------------------------------------------------------------------------
1995 11.13 0.21 3.12 3.33 (0.21) (0.76) (0.97) 13.49
- ------------------------------------------------------------------------------------------------------------------
1996 13.49 0.20 2.57 2.77 (0.20) (0.93) (1.13) 15.13
- -----------------------------------------------------------------------------------------------------------------------
1997 15.13 0.20 2.40 2.60 (0.20) (1.60) (1.80) 15.93
International Fund
1997 $10.00 $0.15 $ 0.09/e/ $ 0.24 $(0.15) $(0.35) $(0.50) $ 9.74
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</TABLE>
Footnotes appear on next page. (continued on next page)
<PAGE>
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net
Ended (Includes Net Assets Expenses to Investment Portfolio
Reinvested ($ Thousands) Average Net Income to Turnover
Distributions) Assets Average Net Rate
Assets
Income Fund
<S> <C> <C> <C> <C> <C> <S>
1990/a/ 2.70% $ 40,082 0.00 %/b/ 9.58%/b/ 36.9%/b/
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1991 19.64 147,859 0.00 8.03 18.8
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1992 7.84 376,435 0.00 7.10 14.2
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1993 12.36 587,931 0.00 6.19 14.4
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1994 (1.94) 624,940 0.00 6.48 23.1
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1995 19.41 986,701 0.00 6.43 20.2
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1996 7.64 1,355,970 0.00// 6.46 17.6
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1997 12.18 2,022,227 0.00///c/ 6.21 14.1
Growth Fund
1990/a/ (10.10)% $ 35,387 0.00 %/b/ 4.50%/b/ 33.4%/b/
- ------------------------------------------------------------------------------
1991 29.87 148,661 0.00 2.77 14.6
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1992 7.24 355,134 0.00 2.15 7.9
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1993 20.98 584,876 0.00 1.57 7.0
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1994 1.40 879,366 0.00 1.60 20.7
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1995 29.96 1,358,344 0.00 1.81 7.4
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1996 20.53 2,104,094 0.00 1.58 2.9
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1997 17.40 2,605,265 0.00/d/ 1.26 20.4
International Fund
1997 2.42% $ 51,050 0.00 %/f/ 2.23% 20.0%
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</TABLE>
/a/For the period June 29, 1990 (commencement of operations) to December 31,
1990.
/b/Annualized.
/c/The annualized weighted average expense ratio of the underlying funds was
0.75% for the year ended December 31, 1997.
/d/The annualized weighted average expense ratio of the underlying funds was
0.81% for the year ended December 31, 1997.
/e/The amount presented is calculated pursuant to a methodology prescribed by
the Securities and Exchange Commission for a share outstanding throughout the
period. This amount is inconsistent with the fund's aggregate gains and losses
because of the timing of sales and redemptions of fund shares in relation to
fluctuating market values for the investment portfolio.
/f/The annualized weighted average expense ratio of the underlying funds was
1.01% for the year ended December 31, 1997.
<PAGE>
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
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To help you decide whether these funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.
o The fund or funds you select should not represent your complete investment
program nor be used for short-term trading purposes.
What are the Spectrum Funds' objectives?
. The objective of Spectrum Income Fund is a high level of current income 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's objective is long-term capital appreciation.
What are the Spectrum Funds' investment programs?
. Spectrum Income Fund will allocate its assets among a diversified group of
underlying T. Rowe Price funds that invest primarily in fixed income
securities, but may invest up to 25% in an income-oriented stock fund.
. Spectrum Growth Fund will allocate its assets among a diversified group of
eight underlying T. Rowe Price domestic stock funds and one international
stock fund.
. Spectrum International Fund allocates its assets among a group of underlying
T. Rowe Price funds that invest primarily in international stocks and, to a
lesser degree, international bonds.
Each Spectrum Fund will diversify within set limits based on the managers'
outlook for the domestic and international economies, financial markets, and
relative market valuations of each underlying fund and, in the case of
Spectrum International Fund, additional factors inherent in international
investing.
The underlying funds in which each Spectrum Fund may invest and the
percentage of total assets they may allocate to each fund are shown in Table
4.
o For details about the funds' investment programs and practices, please see
Investment Policies and Practices and the Statement of Additional
Information.
<PAGE>
<TABLE>
Table 4 Asset Allocation Ranges for Underlying Funds
<CAPTION>
<S> <C> <S> <C>
Spectrum Investment Spectrum Investment
Income Fund Range Growth Fund Range
Emerging Markets Bond 0-10% Mid-Cap Value 0-15%
Short-Term Bond 0-15 New Era 0-15
U.S. Treasury Long-Term 0-15 Blue Chip Growth 5-20
GNMA 5-20 Growth Stock 5-20
International Bond 5-20 Summit Cash Reserves 0-25
Summit Cash Reserves 0-25 Equity Income 7.5-22.5
Equity Income 10-25 Growth & Income 7.5-22.5
High Yield 10-25 International Stock 10-25
New Income 15-30 New Horizons 10-25
<CAPTION>
<S> <C>
Spectrum Investment Range
International Fund
Emerging Markets Bond 0-15%
Latin America 0-15
Emerging Markets Stock 0-20
International Bond 0-20
International Discovery 0-20
New Asia 0-20
Summit Cash Reserves 0-25
European Stock 0-30
Japan 0-30
International Stock 35-65
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</TABLE>
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.
o For Spectrum Income, a rise in U.S. interest rates is an important source
of risk even if foreign rates behave differently.
Spectrum Income Fund: The risks are generally the same as with many income
funds:
. Interest rate or market risk The fund's share price will generally move in
the opposite direction of interest rates. For example, as interest rates
rise, share price will likely decline. Rising rates provide the opportunity
for the fund's income to increase, but it is unlikely that the higher income
by itself will entirely offset the fall in price.
The maturity and type of securities in the underlying funds' portfolios
determine just how much the share price rises or falls when rates change.
Generally, when rates fall, long-term securities rise more in price than
short-term securities, and vice versa.
. 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.
. Risks of high-yield investing The total return and yield of lower-quality
(high-yield, high-risk) bonds, commonly referred to as "junk" bonds, can be
expected to fluctuate more than the total return and yield of higher-quality
bonds. Junk
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Successful
investment in low- and lower-medium-quality bonds involves greater investment
risk and is highly dependent on T. Rowe Price's credit analysis. A real or
perceived economic downturn or higher rates could cause a decline in
high-yield bond prices because such events could lessen the ability of
issuers to make principal and interest payments. In addition, the entire junk
bond market can experience sudden and sharp price swings due to a variety of
factors. Spectrum Income can invest as much as 25% of its assets in the High
Yield Fund.
. Prepayment risk With mortgage-backed securities, there is a chance that,
when interest rates are falling, homeowners will accelerate principal
payments on mortgages, causing a loss to investors in mortgage-backed
securities that were originally purchased at a price above par. Also, because
of prepayments, mortgage-backed securities would not be expected to rise as
much in price as Treasury or corporate bonds.
. Risks of foreign investing To the extent its underlying funds invest in
foreign securities, the Spectrum Income Fund will be subject to the unique
risks of international investing. See Spectrum International for an
explanation of these risks.
Also, Spectrum Income Fund's maximum 25% exposure to the Equity Income Fund
subjects that portion of assets to the risks associated with stocks
(discussed next).
o For Spectrum Growth, a decline in U.S. stock prices is an important source
of risk even if foreign stocks behave differently.
Spectrum Growth Fund: The major risks are the same as in all stock funds:
. Stock market risk Economic growth has been punctuated by periods of
stagnation and recession. Share prices of all companies, even the best
managed and most profitable, can fall for any number of reasons, ranging from
lower-than-expected earnings to changes in investor psychology. Significant
trading by large institutional investors also can lead to price declines.
Since 1950, the U.S. stock market has experienced 10 negative years, as well
as steep drops of shorter duration. Its worst calendar quarter return in
recent years was -22.5% in 1987's fourth quarter.
. Small-company investing Since Spectrum Growth can invest up to 25% of its
assets in the New Horizons Fund, it is subject to the risks of small-company
investing. Smaller companies are generally riskier than their larger
counterparts because they may have limited product lines, capital, and
managerial resources. Their securities may trade less frequently and with
greater price swings.
. Risks of foreign investing To the extent its underlying funds invest in
foreign securities, the Spectrum Growth Fund will be subject to the unique
risks of international investing. See Spectrum International for an
explanation of these risks.
o For Spectrum International, volatility of foreign currency markets is an
additional source of risk.
Spectrum International Fund: In addition to the risks associated with stock
and bond investing, the fund is subject to the unique risks of international
investing:
. Currency risk The risk that weakening foreign currencies versus the U.S.
dollar could result in losses for U.S. investors. Transactions in foreign
markets are conducted in local currencies, so dollars are exchanged for
foreign currency when a security is bought or sold or a dividend is paid.
Likewise, share price quotations and total return information reflect
conversion into U.S. dollars. Fluctuations in foreign exchange rates can
significantly increase or decrease the dollar value of a foreign investment,
boosting or offsetting its local market return. For example, if a French
security rose 10% in price during a year, but the U.S. dollar gained 5%
against the French franc during that time, the U.S. investor's return would
be reduced to 5%. This is because the franc would "buy" fewer dollars at the
end of the year than at the beginning, or, conversely, a dollar would cost
more francs. The fund's total return will be affected by currency
fluctuations. The exact amount of the impact depends on the currencies
represented in the portfolio and how each one appreciates or depreciates in
relationship to the U.S. dollar.
. Increased costs It is more expensive for U.S. investors to trade in foreign
markets than in the U.S. Mutual funds offer an efficient way for individuals
to invest abroad, but the overall expense ratios of international funds are
usually higher than those of typical domestic funds.
. 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.
Many countries have legacies and the risk of hyperinflation and currency
devaluations versus the dollar (which adversely affects returns to U.S.
investors), and may be overly dependent on foreign capital (a risk that is
exacerbated by big currency movements). Invest-
ments in countries that have recently begun 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 capital controls, 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.
. Legal, regulatory, and operational Certain countries lack uniform
accounting, auditing, and financial reporting standards, have less
governmental supervision of financial markets than in the U.S., do not honor
legal rights enjoyed in the U.S., and have settlement practices, such as
delays, which could subject the underlying funds to risks of loss not
customary in the U.S. In addition, securities markets in some countries have
substantially lower trading volumes than in U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S.
. Pricing Portfolio securities of the underlying funds may be listed on
foreign exchanges that are open on days when prices are not computed for the
underlying funds. As a result, the net asset value of the underlying funds,
and consequently of Spectrum International, may be significantly affected by
trading on days when shareholders cannot make transactions.
The risks discussed can be significantly magnified for investments in
emerging markets. Additionally, to the extent the fund invests in the
International Bond Fund and Emerging Markets Bond Fund, it will be subject to
risks associated with international fixed income investing. See Spectrum
Income Fund for information on the risks associated with fixed income
investing.
o Each fund's share price 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 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 in both large and small
companies.
What are the characteristics of the underlying Price funds?
For details, please see Description of Underlying Funds in Section 3.
How can I decide which fund is most appropriate 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 offer
investment programs that seek to combine attractive returns with the benefits
of broad diversification.
Is there other information I need to review before making a decision?
Be sure to read Special Risks and Considerations, Description of Underlying
Funds, Investment Policies of the Spectrum Funds, and Investment Policies and
Practices of Underlying Funds in Section 3 for further discussion of the
funds' policies.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries,
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, 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. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
<PAGE>
Income dividends
Spectrum Income Fund dividends
. The fund declares income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.
. The fund pays dividends on the first business day of each month.
. Fund shares will earn dividends through the date of redemption; also, shares
redeemed on a Friday or prior to a holiday will continue to earn dividends
until the next business day. Generally, if you redeem all of your shares at
any time during the month, you will also receive all dividends earned through
the date of redemption in the same check. When you redeem only a portion of
your shares, all dividends accrued on those shares will be reinvested, or
paid in cash, on the next dividend payment date.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Spectrum Growth Fund dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Spectrum International Fund dividends
. The fund declares and pays dividends (if any) annually.
. 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)
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
<PAGE>
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 new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category 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 you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o 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 distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. 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.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. 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 net capital gain
distribution received.
You will not be able to claim a credit or deduction for any foreign taxes
paid by the underlying funds.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
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 a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may 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, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. (The 10-day hold
does not apply to the following: pur-
chases paid for by bank wire; cashier's, certified, or treasurer's checks; or
automatic purchases through your paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone 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 fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if 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 this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
<PAGE>
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
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
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
MORE ABOUT THE FUNDS 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How are the funds organized?
The T. Rowe Price Spectrum Fund, Inc. (Spectrum Fund) is a Maryland
corporation organized in 1987 and is registered with the Commission under the
1940 Act as a nondiversified, open-end investment company, commonly known as
a "mutual fund." Mutual funds pool money received from shareholders and
invest it to try to achieve specified objectives.
Currently, Spectrum Fund consists of three series, the Spectrum Income Fund,
the Spectrum Growth Fund, and the Spectrum International Fund (collectively
referred to as "the funds"), each of which represents a separate class of
shares and has different objectives and investment policies. The Spectrum
Income and Spectrum Growth Funds were established in 1990, and the Spectrum
International Fund was established in 1996.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, do not intend to do so except when certain
matters, such as a change in a fund's fundamental policies, must be decided.
In addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund direc-
tor 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?
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 are independent of T. Rowe Price and
Price-Fleming and that none of the independent directors will be directors of
any underlying fund. In exercising their responsibilities, the Board, among
other things, will refer to the Special Servicing Agreements and policies and
guidelines included in the Exemptive Order ("Order") issued by the Securities
and Exchange Commission in connection with the operation of the funds. The
interested directors and the officers of Spectrum Fund and T. Rowe Price and
Price-Fleming also serve in similar positions with most of the underlying
funds. Thus, if the interests of a Spectrum Fund and the underlying funds
were ever to diverge, it is possible that a conflict of interest could arise
and affect how the interested directors and officers fulfill their fiduciary
duties to that fund and the underlying funds. The directors of Spectrum Fund
believe they have structured each fund to avoid these concerns. However,
conceivably, a situation could occur where proper action for a Spectrum Fund
could be adverse to the interests of an underlying fund, or the reverse. If
such a possibility arises, the directors and officers of the affected funds
and T. Rowe Price or Price-Fleming, as applicable, will carefully analyze the
situation and take all steps they believe reasonable to minimize and, where
possible, eliminate the potential conflict.
Portfolio Management: Spectrum Income and Spectrum Growth Funds
Spectrum Income and Spectrum Growth Funds have an Investment Advisory
Committee with the following members: Peter Van Dyke, Chairman, Stephen W.
Boesel, John H. Laporte, Edmund M. Notzon III, William T. Reynolds, Brian C.
Rogers, 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 with the
following members: John R. Ford, Chairman, M. David Testa, Martin G. Wade,
and David J. L. Warren. The committee chairman has day-to-day responsibility
for managing this fund and works with the committee in developing and
executing the
fund's investment program. Mr. Ford joined Price-Fleming in 1982 and has 18
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 a subsidiary of
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 each
fund's 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 next) as well as
certain undertakings made by T. Rowe Price and Price-Fleming under their
respective Investment
Management Agreements with each Spectrum Fund. Fund expenses include:
shareholder servicing fees and expenses; custodian and accounting fees and
expenses; legal and auditing fees; expenses of preparing and printing
prospectuses and shareholder reports; registration fees and expenses; proxy
and annual meeting expenses, if any; and directors' fees and expenses.
o Here is some information regarding the Special Servicing Agreements.
The Special Servicing Agreements provide that each underlying fund in which a
Spectrum Fund invests will bear a proportionate share of the expenses of that
Spectrum Fund if, and to the extent that, the underlying fund's savings from
the operation of Spectrum Fund exceed these expenses.
Such savings are expected to result primarily from the elimination of
numerous separate shareholder accounts which are or would have been invested
directly in the underlying Price Funds and the resulting reduction in
shareholder servicing costs. Although such cost savings are not certain, the
estimated savings to the underlying Price Funds generated by the operation of
Spectrum Fund are expected to be sufficient to offset most, if not all, of
the expenses incurred by Spectrum Fund.
Under the Investment Management Agreements with the Spectrum Fund, and the
Special Servicing Agreements, T. Rowe Price has agreed to bear any expenses
of the Spectrum Growth and Spectrum Income Funds and Price-Fleming has agreed
to bear any expenses of the Spectrum International Fund which exceed the
estimated savings to each of the underlying funds. Thus, the Spectrum Funds
will operate at a zero expense ratio. Of course, shareholders of the Spectrum
Funds will still indirectly bear their fair and proportionate share of the
cost of operating the underlying funds owned by each Spectrum Fund.
The Management Fee
T. Rowe Price is the investment manager for the Spectrum Income Fund and the
Spectrum Growth Fund, and Price-Fleming is investment manager for the
Spectrum International Fund. Neither will be paid a management fee for
performing such services. However, T. Rowe Price and Price-Fleming receive
management fees from managing the underlying funds. See the underlying funds'
Statements of Additional Information for specific fees.
T. Rowe Price will determine how Spectrum Income Fund's and Spectrum Growth
Fund's assets are invested and Price-Fleming will determine how the Spectrum
International Fund's assets will be invested consistent with the investment
objectives and policies of each fund described in this prospectus and
procedures and guidelines established by the Board of Directors for the
Spectrum Fund. The Directors for Spectrum Fund will periodically monitor the
allocations and the basis upon which such allocations were made or
maintained.
<PAGE>
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
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. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in each fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
Yield (Spectrum Income Fund)
o You will see frequent references to a fund's yield in our reports, in
advertisements, in media stories, and so on.
The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the fund's net
asset value.
<PAGE>
For example, a fund providing $5 of annual income per share and a price of
$50 has a current yield of 10%. Yields can be calculated for any time period.
The advertised or "SEC" yield is found by determining the net income per
share (as defined by the SEC) earned by a fund during a 30-day base period
and dividing this amount by the per share price on the last day of the base
period. The SEC yield may differ from the dividend yield.
SPECIAL RISKS AND CONSIDERATIONS
----------------------------------------------------------
Prospective investors should consider the following factors:
. 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.
. 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 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.
. For Spectrum International Fund, each underlying fund's portfolio securities
usually are valued on the basis of the most recent closing market prices at 4
p.m. ET when each fund calculates its NAV. Most of the securities in which
the underlying funds invest, however, are traded in markets that close before
that time. For securities primarily traded in the Far East, for example, the
most recent closing prices may be as much as 15 hours old at 4 p.m. Normally,
developments that could affect the values of portfolio securities that occur
between the close of the foreign market and 4 p.m. ET will not be reflected
in the funds' NAVs. However, if a fund determines that such developments are
so significant that they will clearly and materially affect the value of the
fund's securities, the fund may adjust the previous closing prices to reflect
fair value or use the next available opening market prices to value its
portfolio securities.
. The officers, interested directors, and investment managers of Spectrum
Funds presently serve as officers, interested directors, and investment
managers of the
underlying funds. Therefore, conflicts may arise as these persons fulfill
their fiduciary responsibilities to the Spectrum Funds and the underlying
funds.
DESCRIPTION OF UNDERLYING FUNDS
----------------------------------------------------------
Table 5 gives a brief description of the principal investment programs of the
underlying funds. Additional investment practices are described under Special
Risks and Considerations, in the Statement of Additional Information, and in
the prospectuses for each of the underlying funds.
o For more information about an underlying fund, call: 1-800-638-5660
1-410-547-2308
The major characteristics of the underlying T. Rowe Price funds are as
follows:
<TABLE>
Table 5 Description of Underlying Funds
<CAPTION>
<S> <C>
Fixed Income Funds Objective/Program
- ----------------------------------------------------------------------------
Summit Cash Reserves Stable share price and liquidity while
generating current income. Invests at least 95%
of its total assets in prime money market
securities receiving the highest credit rating.
- ---------------------------------------------------------------------------
Short-Term Bond High income with limited share price
fluctuation. Normally invests at least 65% of
assets in short-term bonds, primarily short- and
intermediate-term corporate, government, and
mortgage debt securities. Securities purchased
will be rated within the four highest credit
categories.The fund's dollar-weighted average
effective maturity will not exceed three years.
- --------------------------------------------------------------------------
GNMA High income consistent with maximum credit
protection and moderate share price fluctuation.
Invests exclusively in securities backed by the
full faith and credit of the U.S. government and
instruments involving these securities (this
guarantee does not apply to the fund's share
price, which will fluctuate). Average maturity
generally expected to be between 3 and 12 years.
- ---------------------------------------------------------------------------
New Income High income with moderate share price
fluctuation. Invests at least 80% of total
assets in investment-grade instruments,
principally in U.S. government and agency
obligations, mortgage-backed securities, and
corporate debt securities. Average maturity
expected to be between 4 and 15 years.
- ---------------------------------------------------------------------------
U.S. Treasury Long-Term High level of income from investments in U.S.
government-backed securities, primarily
long-term U.S. Treasuries.
- ----------------------------------------------------------------------------
High Yield High income and capital appreciation through
investments in high-yield ("junk") bonds.
Average maturity expected to be in the 8- to
12-year range.
- ---------------------------------------------------------------------------
Equity Funds Objective/Program
- ---------------------------------------------------------------------------
Equity Income Substantial dividend income and capital
appreciation through investments primarily in
the common stocks of established companies
paying above-average dividends.
- -----------------------------------------------------------------------------
Growth & Income Capital appreciation and reasonable dividend
income through investments in growth stocks.
Invests principally in large-cap U.S.-based
companies.
- ---------------------------------------------------------------------------
Growth Stock Capital appreciation and increasing income
through investments in growth stocks. Invests
principally in large-cap U.S.-based companies.
- -----------------------------------------------------------------------------
New Era Capital appreciation through investments in U.S.
and foreign natural resource stocks whose
earnings are expected to grow faster than
inflation.
- ---------------------------------------------------------------------------
Blue Chip Growth Capital appreciation through investments in the
common stocks of large and medium-sized blue
chip companies with potential for above-average
earnings growth.
- -------------------------------------------------------------------------------
Mid-Cap Value Capital appreciation through investments in
midsize companies whose stocks appear
undervalued.
- -------------------------------------------------------------------------------
New Horizons Aggressive capital appreciation through
investments in small-company stocks. Invests
primarily in emerging growth companies, early in
their corporate life cycles.
- ------------------------------------------------------------------------------
International Funds Objective/Program
- -------------------------------------------------------------------------------
International Bond High income and capital appreciation through
investments primarily in high-quality foreign
bonds. May invest up to 20% of assets in
below-investment-grade, high-risk bonds,
including bonds in default or those with the
lowest rating. The fund has no maturity
restrictions on the overall portfolio or on
individual securities, but expects to maintain
an intermediate to long weighted average
maturity. The fund is normally heavily exposed
to fluctuations in foreign currencies.
- ----------------------------------------------------------------------------
International Stock Capital appreciation through investments in
stocks of established foreign companies.
- -------------------------------------------------------------------------------
International Discovery Capital appreciation through investments in
small and medium-sized non-U.S. companies.
- -------------------------------------------------------------------------------
European Stock Capital appreciation through investments
primarily in companies domiciled in Europe.
- -----------------------------------------------------------------------------
Japan Capital appreciation through investments in
companies operating in Japan.
- --------------------------------------------------------------------------------
New Asia Capital appreciation through investments in
companies operating in Asia, excluding Japan.
- -------------------------------------------------------------------------------
Emerging Markets Stock Capital appreciation through investments in
companies in emerging markets.
- -------------------------------------------------------------------------------
Latin America Capital appreciation through investments
primarily in companies located in Latin America.
- -------------------------------------------------------------------------------
Emerging Markets Bond High current income and capital appreciation
through investments primarily in high-yielding
and high-risk government and corporate debt
securities of less-developed countries.
- -----------------------------------------------------------------------------
</TABLE>
INVESTMENT POLICIES OF THE SPECTRUM FUNDS
----------------------------------------------------------
Each Spectrum Fund's investment policies and practices are subject to further
restrictions and risks which are described in the Statement of Additional
Information. The funds will not make a material change in their investment
objectives or their fundamental policies without obtaining shareholder
approval. Shareholders will be notified of any material change in such
investment programs.
Reserve Position
While the Spectrum Income Fund will remain primarily invested in bonds, the
Spectrum Growth Fund in stocks, and the Spectrum International Fund in
international stocks, each fund can hold a certain portion of its assets in
U.S. and foreign dollar-denominated money market securities, including
repurchase agreements in the two highest rating categories, maturing in one
year or less. For temporary, defensive purposes, a fund may invest without
limitation in such securities. Each fund may invest its cash reserves in the
Summit Cash Reserves
Fund. A reserve position provides flexibility in meeting redemptions,
expenses, and the timing of new investments, and serves as a short-term
defense during periods of unusual volatility.
Diversification
Spectrum Fund is a "nondiversified" investment company for purposes of the
1940 Act because it invests in the securities of a limited number of mutual
funds. However, the underlying funds themselves are diversified investment
companies (with the exception of the T. Rowe Price International Bond Fund,
Emerging Markets Bond Fund, and Latin America Fund). Spectrum Fund intends to
qualify as a diversified investment company for the purposes of Subchapter M
of the Internal Revenue Code.
Fundamental investment policies As a matter of fundamental policy, each
Spectrum Fund will not: (i) invest more than 25% of its respective total
assets in any one industry, except for investment companies which are members
of the T. Rowe Price family of funds; (ii) borrow money, except temporarily,
to facilitate redemption requests in amounts not exceeding 30% of each fund's
total assets valued at market; (iii) in any manner transfer as collateral for
indebtedness any securities owned by each fund except in connection with
permissible borrowings, which in no event will exceed 30% of each fund's
total assets valued at market.
Operating policies Each Spectrum Fund cannot (i) change the selection of the
underlying funds in which they can invest; or (ii) change the percentage
ranges which may be allocated to the underlying funds unless authorized to do
so by the Board of Directors. Shareholders will be informed of any such
changes.
Other Investment Restrictions
As a matter of operating policy, each Spectrum Fund will not, among other
things: (i) purchase additional securities when money borrowed exceeds 5% of
the fund's total assets; (ii) invest more than 10% of its net assets in
illiquid securities; or (iii) redeem securities from any underlying fund at a
rate in excess of 1% of the underlying fund's assets in any period of less
than 15 days, except where necessary to meet shareholder redemption requests.
This last limitation does not apply to Spectrum International Fund.
Portfolio Turnover
Each Spectrum Fund's portfolio turnover is expected to be low. The Spectrum
Funds will purchase or sell securities to: (i) accommodate purchases and
sales of each fund's shares; and (ii) maintain or modify the allocation of
each fund's assets among the underlying funds within the percentage limits
described earlier. The Spectrum Income Fund's and Spectrum Growth Fund's
portfolio turnover
rates for the previous three fiscal periods, and Spectrum International
Fund's portfolio turnover rate for the previous period, are shown in Table 6.
<TABLE>
Table 6 Portfolio Turnover Rates
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Spectrum Income Fund 14.1% 17.6% 20.2%
Spectrum Growth Fund 20.4 2.9 7.4
Spectrum International Fund 20.0 /a/ /a/
- -------------------------------------------------------------------------
</TABLE>
/a/ Prior to the commencement of operations.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
INVESTMENT POLICIES AND PRACTICES OF UNDERLYING FUNDS
----------------------------------------------------------
In pursuing their investment objectives and programs, each of the underlying
funds is permitted to engage in a wide range of investment practices. Certain
of these practices 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 practices in direct proportion to the amount of
assets each fund allocates to the underlying funds pursuing such practices.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help each fund achieve its
objective.
Lending of Portfolio Securities
Like other mutual funds, the underlying funds may lend securities to
broker-dealers, other institutions, or other persons to earn additional
income. The principal risk is the potential insolvency of the broker-dealer
or other borrower. In this event, the underlying funds could experience
delays in recovering securities and possibly capital losses.
Managing Foreign Currency Risk
Foreign securities in which the underlying funds invest are subject to
currency risk, that is, the risk that the U.S. dollar value of these
securities may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations. Investors in
foreign securities may "hedge" their exposure to potentially unfavorable
currency changes by purchasing a contract 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. If an underlying fund were to engage in
foreign currency transactions, they would be used primarily to protect the
fund's foreign securities from adverse currency movements relative to the
dollar. Such transactions 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 (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), 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 and their
prices can be highly volatile. Using them could lower the funds' total
return; and the potential loss from the use of futures can exceed the funds'
initial investment in such contracts. In many foreign countries, futures and
options markets do not exist or are not sufficiently developed to be
effectively used by the funds.
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
<PAGE>
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 in the next paragraph. We do not accept third-party checks
to open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Shareholder Services). The new account will have the
same registration as the account from which you are
exchanging. Services for the new account may be carried over by telephone
request if preauthorized on the existing account. For limitations on exchanging,
see explanation of Excessive Trading under Transaction Procedures and Special
Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
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 or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, for 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 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
<PAGE>
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
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
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment Services, /
/Inc., Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results.If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A 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, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587 24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
C08-040 5/1/98
<PAGE>
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")
(collectively the "Funds" and individually the "Fund")
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate Fund prospectus dated May 1, 1998,
which may be obtained from T. Rowe Price Investment Services, Inc., 100 East
Pratt Street, Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you are not a shareholder,
please call 1-800-638-5660. A prospectus with more complete information,
including management fees and expenses, will be sent to you. Please read it
carefully.
The date of this Statement of Additional Information is May 1, 1998.
C08-043 5/1/98
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock 28 Investment Restrictions 16
- ----------------------------------- ---------------------------------------
Code of Ethics 24 Legal Counsel 29
- ----------------------------------- ---------------------------------------
Custodian 24 Management of Funds 18
- ----------------------------------- ---------------------------------------
Distributor for Fund 23 Net Asset Value Per Share 25
- ----------------------------------- ---------------------------------------
Dividends and Distributions 25 Pricing of Securities 24
- ----------------------------------- ---------------------------------------
Federal Registration of 29 Principal Holders of Securities 20
Shares
- ----------------------------------- ---------------------------------------
Independent Accountants 30 Shareholder Services 24
- ----------------------------------- ---------------------------------------
Investment Management 20 Special Considerations 15
Services
- ----------------------------------- ---------------------------------------
Investment Objectives and 2 Tax Status 25
Policies
- ----------------------------------- ---------------------------------------
Investment Performance 26 Yield Information 26
- ----------------------------------- ---------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each Fund's
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. Each Fund's operating policies are subject to change by each Board
of Directors without shareholder approval. However, shareholders will be
notified of a material change in an operating policy. Each Fund's fundamental
policies 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.
Throughout this Statement of Additional Information, "the Fund" is intended
to refer to each Fund listed on the cover page, unless otherwise indicated.
Spectrum Fund
The proliferation of mutual funds has left many investors in search of a
means of diversifying among a number of mutual funds while obtaining
professional management in determining which Funds to select, how much of
their assets to commit to each Fund, and when to make the selections. In
response to this need, the Spectrum Fund has been created as a means of
providing a simple and effective means of structuring a comprehensive mutual
fund investment program. By selecting the Spectrum Growth Fund, Spectrum
Income Fund or 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.
Described below are the underlying T. Rowe Price Funds in which the Spectrum
Funds can invest.
<PAGE>
Income Funds
T. Rowe Price Short-Term Bond Fund, Inc.
The Fund's objective is a high level of income consistent with minimal
fluctuation in principal value and liquidity.
The Fund will invest in a diversified portfolio of short- and
intermediate-term corporate, government, and mortgage-backed securities. The
Fund may also invest in other types of securities such as bank obligations,
collateralized mortgage obligations (CMOs), foreign securities, hybrids, and
futures and options. Under normal circumstances, at least 65% of total assets
will be invested in short-term bonds. The Fund's dollar-weighted average
effective maturity will not exceed three years, and the Fund will not
purchase any security whose effective maturity, average life, or tender date,
measured from the date of settlement, exceeds seven years.
Securities purchased by the Fund must be rated within the four highest credit
categories (AAA, AA, A, BBB) by a national rating agency (or, if unrated, the
T. Rowe Price equivalent). The investment-grade designation includes a range
of securities from the highest rated to medium quality. Securities in the BBB
category may be more susceptible to adverse economic conditions or changing
circumstances and securities at the lower end of the BBB category have
certain speculative characteristics.
T. Rowe Price GNMA Fund
The Fund's objective is 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 will seek to fulfill its objective by investing primarily in
mortgage-backed securities issued by the Government National Mortgage
Association (GNMA), an agency of the Department of Housing and Urban
Development (HUD). These securities represent pools of mortgage loans that
are either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. GNMA, in turn, guarantees the timely payment of
interest and principal on its securities, a guarantee backed by the U.S.
Treasury. The GNMA guarantee does not apply in any way to the price of GNMA
securities or the Fund's share price, both of which will fluctuate with
market conditions.
The Fund can also purchase bills, notes, and bonds issued by the U.S.
Treasury as well as related futures, other agency securities backed by the
full faith and credit of the U.S. government, shares of an internal money
fund, and securities involving GNMAs, such as collateralized mortgage
obligations (CMOs) and stripped certificates (securities that receive only
the interest or principal portion of the underlying mortgage payments).
. Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. Mortgage lenders pool
individual home mortgages to back a certificate or bond, which is then sold
to investors. The mortgages may be of a variety of types, including
adjustable rate, conventional 30-year and 15-year fixed rate and graduated
payment. Principal and interest payments generated by the underlying
mortgages are passed through to the investors. This is in contrast to
traditional bonds where principal is normally paid back at maturity in a lump
sum. Unscheduled prepayments of principal shorten the securities' weighted
average life and may lower their total return. (When a mortgage in the
underlying mortgage pool is prepaid, an unscheduled principal prepayment is
passed through to the Fund. This principal is returned to the Fund at par. As
a 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.
T. Rowe Price New Income Fund, Inc.
The Fund's objective is to provide the highest level of income consistent
with the preservation of capital over time through investment primarily in
marketable debt securities.
<PAGE>
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, collateralized
mortgage 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 four and 15 years.
Securities purchased by the Fund must be rated within the four highest credit
categories (AAA, AA, A, BBB) by at least one established public rating agency
(or, if unrated, must have a T. Rowe Price equivalent). The Fund will not
purchase any security rated below investment grade (i.e., below BBB) by
Standard & Poor's, Moody's, or Fitch Investor Services, except that with
respect to 15% of its total assets the Fund may invest in "split-rated
securities," which are securities that are rated within the four highest
credit categories by at least one rating agency and below investment grade by
another rating agency.
Investment-grade securities include a range from the highest rated to medium
quality. Securities in the BBB category may be more susceptible to adverse
economic conditions or changing circumstances, and securities at the lower
end of the BBB category have certain speculative characteristics.
U.S. Treasury Long-Term Fund
The Fund's investment objective is the highest level of current income
consistent with maximum credit protection. It will invest at least 85% of
total assets in U.S. Treasury securities and investments involving these
securities. The remaining assets will be invested in other securities backed
by the full faith and credit of the U.S. government and investments involving
these securities. The Fund's dollar-weighted average maturity is expected to
vary between 15 and 20 years, but may range from 10 to 30 years.
T. Rowe Price High Yield Fund, Inc.
The Fund's objective is high current income and, secondarily, capital
appreciation.
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 dollar-weighted average maturity (expected to be in the
eight- to 12-year range) makes its price more sensitive to broad changes in
interest rate movements than shorter-term bond funds. However, as explained
earlier, interest rates are not the only, or necessarily the dominant,
influence on the Fund's price.
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
<PAGE>
shareholders, the Fund may incur additional expenses to seek recovery on a
debt security on which the issuer has defaulted and to pursue litigation to
protect the interests of security holders of its portfolio companies.
. Liquidity and Valuation Because the market for lower-rated securities may be
thinner and less active than for higher-rated securities, there may be market
price volatility for these securities and limited liquidity in the resale
market. Nonrated securities are usually not as attractive to as many buyers
as rated securities are, a factor which may make nonrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the Fund and may also limit the ability of the
Fund to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market. To the extent the Fund
owns or may acquire illiquid or restricted lower-rated securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties. Changes in values of debt
securities which the Fund owns will affect its net asset value per share. If
market quotations are not readily available for the Fund's lower-rated or
nonrated securities, these securities will be valued by a method that the
Fund's Board of Directors believes accurately reflects fair value. Judgment
plays a greater role in valuing lower-rated debt securities than with respect
to securities for which more 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 Summit Cash Reserves Fund
The Fund's objectives are preservation of capital, liquidity, and, consistent
with these, the highest possible current income. The Fund invests in a
diversified portfolio of U.S. dollar-denominated money market securities
issued in the U.S. and abroad, and generally will not invest more than 5% of
its total assets in securities of any one issuer. The Fund's yield will
fluctuate in response to changes in interest rates, but the share price is
managed to remain stable at $1.00. Unlike most bank accounts or certificates
of deposit, the Fund is not insured or guaranteed by the U.S. government.
The Fund invests at least 95% of its total assets in securities receiving the
highest short-term credit rating assigned by at least two established rating
agencies, by one rating agency if the security is rated by only one, or, if
unrated, the equivalent rating as established by T. Rowe Price. The Fund's
dollar-weighted average maturity will not exceed 90 days. It will purchase
securities with maturities of 13 months or less.
Equity Funds
T. Rowe Price Growth & Income Fund, Inc.
The 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 focuses on companies whose earnings are expected by T. Rowe Price to
grow and support a growing dividend payment, as well as stocks that do not
pay dividends currently but offer prospects of appreciation and future
income.
Most of the assets will be invested in U.S. common stocks. However, the Fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered
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consistent with the Fund's investment objective and program. The portfolio
manager may also engage in a variety of investment management practices, such
as buying and selling futures and options.
T. Rowe Price New Era Fund, Inc.
The Fund's objective is long-term capital appreciation primarily through the
common stocks of companies that own or develop natural resources and other
basic commodities, and also through the stocks of selected nonresource growth
companies.
The Fund's primary focus will be on the common stocks of natural resource
companies whose earnings and tangible assets could benefit from accelerating
inflation. The Fund will also invest in selected nonresource growth companies
with strong potential for earnings growth. T. Rowe Price believes that
natural resource companies with the flexibility to adjust prices or control
operating costs offer attractive opportunities for capital growth when
inflation is rising. Income is not a consideration in the selection of
securities.
At least half of Fund assets will be invested in U.S. securities, principally
common stocks, and the Fund may also invest up to 50% of its assets in
foreign securities. In addition to common stocks, the Fund may purchase other
types of securities, for example, convertible stocks and bonds, and warrants,
when considered consistent with the Fund's investment objective. The Fund may
also engage in a variety of investment management practices, such as buying
and selling futures and options.
The rate of earnings growth and stock prices of natural resource companies
may follow irregular patterns since they are influenced strongly by the
forces of nature, economic cycles, and international politics. For example,
stock prices of mining and energy companies can be unpredictable and can fall
steeply and rapidly. Companies owning or developing real estate could also be
subject to earnings fluctuations related to the availability of money, the
level of interest rates, and other factors.
Although the Fund's foreign investments carry exposure to currency risk (the
chance that a strong dollar will decrease returns for U.S. investors), many
commodity markets are dollar-based, which cushions this risk. The Fund's
investments in companies located in emerging markets are exposed to the risk
of political and economic instability, prevalent in such countries.
T. Rowe Price Growth Stock Fund, Inc.
The Fund's objective is long-term growth of capital and, secondarily,
increasing dividend income by investing primarily in common stocks of
well-established growth companies.
The Fund will invest at least 65% of total assets in the common stocks of a
diversified group of growth companies. The companies in which the Fund
invests normally (but not always) pay dividends that are generally expected
to rise in future years as earnings increase.
Most of the assets will be invested in U.S. common stocks. However, the Fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the Fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
T. Rowe Price New Horizons Fund, Inc.
The Fund's investment objective is 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. Total return will consist primarily of
capital appreciation or depreciation.
Most of the assets will be invested in U.S. common stocks. However, the Fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered
<PAGE>
consistent with the Fund's investment objective and program. The portfolio
manager may also engage in a variety of investment management practices, such
as buying and selling futures and options.
T. Rowe Price Mid-Cap Value Fund, Inc.
The Fund's objective is to provide long-term capital appreciation by
investing primarily in mid-size companies that appear to be undervalued.
Reflecting a "value approach" to investing, the Fund will seek companies
whose current stock prices do not appear to T. Rowe Price to reflect their
underlying value as measured by assets, earnings, cash flow, or business
franchises. The Fund will invest at least 65% of its assets in companies
whose market capitalization (stock price multiplied by shares outstanding)
falls between $300 million and $5 billion.
Most of the assets will be invested in U.S. common stocks. However, the Fund
may also purchase other types of securities, for example, foreign stocks,
convertible securities, and warrants, when considered consistent with the
Fund's investment objective and program. The Fund may also engage in a
variety of investment management practices, such as buying and selling
futures and options.
T. Rowe Price Blue Chip Growth Fund, Inc.
The Fund's primary objective is long-term growth of capital. Current income
is a secondary objective, and many of the stocks in the Fund's portfolio are
expected to pay dividends.
The Fund will invest at least 65% of total assets in the common stocks of
large and medium-sized blue chip companies, as defined by T. Rowe Price.
These companies will be well established in their industries and have the
potential for above-average growth in earnings.
Most of the assets will be invested in U.S. common stocks. However, the Fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the Fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options. Investments in convertible securities, preferred
stocks, and debt securities are limited to 25% of total assets.
T. Rowe Price Equity Income Fund
The 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, as determined by T. Rowe Price.
Most of the assets will be invested in U.S. common stocks. However, the Fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the Fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
International Funds
T. Rowe Price International Discovery Fund
The 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 developed and emerging markets.
Traditionally, they are more dynamic and offer greater growth potential than
larger companies, but they are generally riskier because they may have
limited product lines, capital, and managerial resources. Their securities
may trade less frequently and with greater price swings. Depending on
conditions, the Fund's portfolio should be composed of at least 10 countries
and 100 different companies.
<PAGE>
T. Rowe Price 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, and United Kingdom.
Others Austria, Belgium, Czech Republic, Denmark, Estonia, Finland,
Greece, Hungary, Ireland, Israel, Latvia, Lithuania, Luxembourg,
Norway, Poland, Portugal, Russia, Slovakia, and Turkey.
T. Rowe Price 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, Pakistan, and Vietnam, as their
markets become more accessible. Investments will represent a minimum of five
countries.
Primary Emphasis Hong Kong, Indonesia, India, Malaysia, Philippines,
Singapore, South Korea, Taiwan, Thailand.
T. Rowe Price Japan Fund
The 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). Investors in a
single-country fund are fully exposed to that country's economic, stock
market, and currency cycles, which could increase both its risks and its
potential rewards compared with a fund invested in several countries or
regions.
T. Rowe Price 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), the International Finance
Corporation, or the United Nations. The Fund's investments are expected to be
diversified geographically across emerging markets in Latin America, Asia,
Europe, Africa, and the Middle East.
Countries in which the Fund may invest are listed below and others will be
added as opportunities develop:
Asia China, Hong Kong, Indonesia, India, Korea, Malaysia, Pakistan,
Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam.
Latin America Argentina, Belize, Brazil, Chile, Colombia, Mexico,
Panama, Peru, and Venezuela.
Europe Austria, Croatia, Czech Republic, Estonia, Greece, Hungary,
Latvia, Lithuania, Poland, Portugal, Romania, Russia, Slovakia, and
Turkey.
Africa and the Middle East Botswana, Egypt, Israel, Jordan,
Mauritius, Morocco, Nigeria, South Africa, Tunisia, and Zimbabwe.
<PAGE>
Emerging market investments rank high on the potential risk and reward
spectrum because a developing country, much like an emerging-growth company,
often advances in fits and starts toward developed status, and may or may not
successfully achieve that status.
T. Rowe Price 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. The Fund expects to invest primarily in Mexico,
Brazil, Chile, Argentina, Venezuela, Peru, and other markets as opportunities
arise and conditions permit, including, but not limited to Belize, Colombia,
Ecuador, and Guatemala. The portfolio is normally expected to invest in at
least four countries.
The Fund expects to make substantial investments (at times more than 25% of
total assets) in the telephone companies of various Latin American countries.
These utilities play a critical role in a country's economic development, but
their stocks could be adversely affected if trends favoring development were
to be reversed.
Because Latin America includes many less-developed countries with legacies of
political instability, investors should read the section on major risks of
international investing, particularly the discussion of "political and
economic factors."
T. Rowe Price International Bond Fund
The 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. Up to 20%
of the Fund's assets may be invested in foreign bonds denominated in dollars,
such as Brady and other emerging market bonds.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), the Fund's
investment manager, bases its investment decisions on fundamental market
factors, currency trends, and credit quality. The Fund generally invests in
countries where the combination of fixed income returns and currency exchange
rates appears attractive, or, if the currency trend is unfavorable, where the
currency risk can be minimized through hedging.
Although the Fund expects to maintain an intermediate to long weighted
average maturity, it has no maturity restrictions on the overall portfolio or
on individual securities. Normally, the Fund does not hedge its foreign
currency exposure back to the dollar, nor involve more than 50% of total
assets in cross hedging transactions. Therefore, changes in foreign interest
rates and currency exchange rates are likely to have a significant impact on
total return and the market value of portfolio securities. Such changes
provide greater opportunities for capital gains and greater risks of capital
loss. Price-Fleming attempts to reduce these risks through diversification
among foreign securities and active management of maturities and currency
exposures.
T. Rowe Price 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 would be 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 five 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.
<PAGE>
T. Rowe Price International Stock Fund
The Fund's objective is long-term growth of capital through investments
primarily in common stocks of established, non-U.S. companies. The Fund
expects to invest substantially all of its assets outside the U.S. and to
diversify broadly among countries throughout the world - developed and
emerging.
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. Under normal market conditions, the Fund's
investment in securities other than common stocks is 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.
Risk Factors of Foreign Investing There are special risks in foreign
investing. Certain of these risks are inherent in any international mutual
fund while others relate more to the countries in which the Fund will invest.
Many of the risks are more pronounced for investments in developing or
emerging countries, such as many of the countries of Asia, Latin America,
Eastern Europe, Russia, Africa 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.
. Political and Economic Factors Individual foreign economies of certain
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. For example, in 1991, the existing government in Thailand was
overthrown in a military coup. In 1992, there were two military coup attempts
in Venezuela and in 1992 the President of Brazil was impeached. In 1994-1995,
the Mexican peso plunged in value setting off a severe crisis in the Mexican
economy. Asia is still coming to terms with its own crisis and recessionary
conditions sparked off by widespread currency weakness in late 1997. 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 and hostile relations 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 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 Fund's assets denominated in that currency.
Such changes will also affect the Fund's income. Generally, when a given
currency appreciates against the dollar (the dollar weakens) the value of the
Fund's securities denominated in that currency will rise. When a given
currency depreciates against the dollar (the dollar strengthens) the value of
the Fund's securities denominated in that currency would be expected to
decline.
. Investment and Repatriation of Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and 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
<PAGE>
restrictions may be imposed at any time by these or other countries in which
the international funds invest. In addition, the repatriation of both
investment income and capital from several foreign countries is restricted
and controlled under certain regulations, including in some cases the need
for certain government consents. For example, capital invested in Chile
normally cannot be repatriated for one year.
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on stock exchanges located in the
countries in which the respective principal offices of the issuers of the
various securities are located, if that is the best available market.
Investments in certain markets may be made through ADRs traded in the United
States. Foreign stock markets are generally not as developed or efficient as,
and more volatile than, those in the United States. While growing in volume,
they usually have substantially less volume than U.S. markets and the Fund's
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. Commissions
on foreign stocks are generally higher than commissions on United States
exchanges, and while there is an increasing number of overseas stock markets
that have adopted a system of negotiated rates, a number are still subject to
an established schedule of minimum commission rates. 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 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 the 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 Fund's shareholders will bear not only their proportionate share of the
expenses of the Fund (including operating expenses and the fees of the
investment manager), but also will bear indirectly similar expenses of the
underlying investment funds. In addition, the securities of these investment
funds may trade at a premium over their net asset value.
. Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also is often 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 Fund's shareholders.
. 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 Funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
. 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
<PAGE>
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 the 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. The 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.
. Latin America
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 restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is
no significant foreign exchange market for many 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.
. 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 invest in Japan, such investments
will be subject to these same factors. Additional factors relating to Japan
include the following:
Japan has experienced earthquakes and tidal waves of varying degrees of
severity, and the risks of such phenomena, and damage resulting therefrom,
continue to exist. Japan also has one of the world's highest population
densities. A significant percentage of the total population of Japan is
concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya.
Energy Japan has historically depended on oil for most of its energy
requirements. Almost all of its oil is imported, the majority from the Middle
East. In the past, oil prices have had a major impact on the domestic
economy, but more recently Japan has worked to reduce its dependence on oil
by encouraging energy conservation and use of alternative fuels. In addition,
a restructuring of industry, with emphasis shifting from basic industries to
processing and assembly type industries, has contributed to the reduction of
oil consumption. However, there is no guarantee this favorable trend will
continue.
Foreign Trade Overseas trade is important to Japan's economy. Japan has few
natural resources and must export to pay for its imports of these basic
requirements. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors and
the large trade surpluses
<PAGE>
ensuing therefrom, Japan has had difficult relations with its trading
partners, particularly the U.S. It is possible that trade sanctions or other
protectionist measures could impact Japan adversely in both the short- and
long-term.
. Costs Investors should understand that the expense ratios of the Fund 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 Fund is 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 Fund 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.
Asia (ex-Japan)
Political Instability The political history of certain Asian countries has
been characterized by political uncertainty, intervention by the military in
civilian and economic spheres, and political corruption. Such developments,
if they continue to occur, 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 Asian 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 1997 the Thai baht lost
46.75% of its value against the U.S. dollar. Certain Asian 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.
Debt A number of Asian companies are highly dependent on foreign loans for
their operation. In 1997, several Asian countries were forced to negotiate
loans from the IMF and others that impose strict repayment term schedules and
require significant economic and financial restructuring.
Types of Securities
Set forth below is additional information about certain of the investments
described in the Fund's prospectus.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that 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
Services, Inc., or the equivalent rating by 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. Repurchase agreements which
do not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements where (i) the
underlying securities are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest accrued, will
be at all times equal to or exceed the value of the
<PAGE>
repurchase agreement, and (iii) payment for the underlying security is made
only upon physical delivery or evidence of book-entry transfer to the account
of the custodian or a bank acting as agent. In the event of a bankruptcy or
other default of a seller of a repurchase agreement, the Fund 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.
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk derivative) have 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. Thus, 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 of investing in securities, options, futures and currencies, including
volatility and lack of liquidity. Reference is also made to the discussion of
futures, options, and forward contracts herein for a discussion of the risks
associated with such investments. Further, the prices of the Hybrid
Instrument and the related commodity or currency may not move in the same
direction or at the same time. Hybrid Instruments may bear interest or pay
preferred dividends at below market (or even relatively nominal) rates.
Alternatively, Hybrid Instruments may bear interest at above market rates but
bear an increased risk of principal loss (or gain). In addition, because the
purchase and sale of Hybrid Instruments could take place in an
over-the-counter market or in a private transaction between the Fund and the
seller of the Hybrid Instrument, the creditworthiness of the contra party to
the transaction would be a risk factor which the Fund would have to consider.
Hybrid Instruments also may not be subject to regulation of the Commodities
Futures Trading Commission ("CFTC"), which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental
regulatory authority.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the Fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in accordance with procedures prescribed
by the 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 is 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
<PAGE>
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 acquire warrants. Warrants are pure speculation in that they
have no voting rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. Warrants basically are options to
purchase equity securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but only the right
to buy them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do
not necessarily move parallel to the prices of the underlying securities.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the Funds may invest in
these securities.
InterFund Borrowing and Lending
Subject to approval by the Securities and Exchange Commission, and certain
state regulatory agencies, each Fund may borrow funds from, and certain of
the Underlying Price Funds may make loans to, and borrow funds from, other
Price Funds. These Funds have no current intention of engaging in these
practices at this time.
SPECIAL CONSIDERATIONS
-------------------------------------------------------------------------------
Prospective investors should consider that certain underlying price funds
(the "Price Funds") may engage in the following:
Foreign Currency Transactions Enter into foreign currency transactions. Since
investments in foreign companies will usually involve currencies of foreign
countries, and the International Bond and International Stock Funds, as well
as certain other Price Funds, will hold Funds in bank deposits in foreign
custodians during the completion of investment programs, the value of the
assets of the Price Funds as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and these Price Funds may incur costs in
connection with conversions between various currencies. The Price Funds will
generally conduct their foreign currency exchange transactions either on a
spot (i.e., cash) basis at the prevailing rate in the foreign currency
exchange market, or through entering into forward contracts to purchase or
sell foreign currencies. The Price Funds will generally not enter into a
forward contract with a term of greater than one year. Although foreign
currency transactions will be used primarily to protect the Price Funds from
adverse currency movements, they also involve the risk that anticipated
currency movements will not be accurately predicted.
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.
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
<PAGE>
movements or currency exchange rates in the Price Funds' portfolios in order
to establish more definitely the effective return on securities or currencies
held or intended to be acquired by such Price Funds; (2) as an efficient
means of adjusting the Price Funds' exposure to the markets; or (3) to adjust
the duration of the Price Funds' portfolios. Initial margin deposits and
premiums on options used for non-hedging purposes will not equal more than 5%
of each Price Fund's net asset value. Certain Price Funds may also purchase
and sell call and put options on securities, currencies and financial and
stock indices. The aggregate market value of each Fund's currencies or
portfolio securities covering call or put options will not exceed 25% of a
Fund's net assets. Futures contracts and options can be highly volatile and
could result in reduction of a Price Fund's total return and a Price Fund's
attempt to use such investments for hedging purposes may not be successful.
FOR MORE INFORMATION ABOUT AN UNDERLYING PRICE FUND, CALL 1-800-638-5660
(1-410-345-2308).
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the Fund's 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 a Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
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, the Fund. Calculation of the Fund's total assets for
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the Fund's prospectus or Statement
of Additional Information will not include cash collateral held in connection
with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing Borrow money, except the 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. The 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. Interest
paid on any such borrowings will reduce net investment income;
(2) Commodities (a) Spectrum Growth and Spectrum Income Funds may not
purchase or sell commodities or commodity or futures contracts;
(b)Spectrum International Fund 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
<PAGE>
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 that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of its portfolio securities in the ordinary course of pursuing its
investment program.
Operating Policies
As a matter of operating policy, the 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;
(3) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to, oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the Fund would be invested in such
programs;
(4) Options Invest in options;
(5) 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;
(6) 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; or
(7) Warrants Invest in warrants.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission (Investment Company Act Release No. IC-21425, October 18, 1995):
(i) there is no limit on the amount the Fund 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, Short-Term Bond, High Yield,
Latin America, and International Bond Funds) 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
America countries (at times more than 25% of total assets). The New Income
and Short-Term Bond Funds 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, International Bond, and High Yield Funds will each normally
concentrate 25% or more of their assets in the securities of the banking
industry when their position in issues maturing in one year or less equals
35% or more of their total assets.
<PAGE>
MANAGEMENT OF FUNDS
-------------------------------------------------------------------------------
The management of each Fund's business and affairs is the responsibility of
the Board of Directors for Spectrum Fund. In exercising their
responsibilities, the Board, among other things, will refer to the Special
Servicing Agreement (see page 20 and 21) and policies and guidelines included
in an Application for an Exemptive Order (and accompanying Notice and Order
issued by the Commission). A majority of Spectrum Fund's directors will be
non-interested persons as defined in Section 2(a)(19) of the 1940 Act.
However, the interested directors and the officers of Spectrum Fund, T. Rowe
Price and Rowe Price-Fleming also serve in similar positions with most of the
Underlying Price Funds. Thus, if the interests of a Fund and the Underlying
Price Funds were ever to become divergent, it is possible that a conflict of
interest could arise and affect how this latter group of persons fulfill
their fiduciary duties to that Fund and the Underlying Price Funds. The
directors of Spectrum Fund believe they have structured each Fund to avoid
these concerns. However, conceivably, a situation could occur where proper
action for Spectrum Fund or the Growth Fund, Income Fund or International
Fund separately, could be adverse to the interests of an Underlying Price
Fund, or the reverse could occur. If such a possibility arises, the directors
and officers of the affected Funds and T. Rowe Price will carefully analyze
the situation and take all steps they believe reasonable to minimize and,
where possible, eliminate the potential conflict. Moreover, limitations on
aggregate investments in the Underlying Price Funds and other restrictions
have been adopted by Spectrum Fund to minimize this possibility, and close
and continuous monitoring will be exercised to avoid, insofar as possible,
these concerns.
The officers and directors of Spectrum Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, Spectrum Fund's directors
who are considered "interested persons" of T. Rowe Price, Rowe Price-Fleming,
or the Fund as defined under Section 2(a)(19) of the Investment Company Act
of 1940 are noted with an asterisk (*). Mr. Riepe is referred to as an inside
director by virtue of his directorship and employment by T. Rowe Price.
Independent Directors
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, Seven St. Paul Street,
Baltimore, Maryland 21202
* JAMES S. RIEPE, Chairman of the Board -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
Officers
PETER VAN DYKE, President -Managing Director, T. Rowe Price; Vice President,
Price-Fleming and T. Rowe Price Trust Company
EDMUND M. NOTZON, Executive Vice President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President -Managing Director, T. Rowe Price
JOHN R. FORD, Vice President -Executive Vice President, T. Rowe Price;
Chartered Financial Analyst
HENRY H. HOPKINS, Vice President-Vice President, Price-Fleming and T. Rowe
Price Retirement Plan Services, Inc.; Director and 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
<PAGE>
GEORGE A. MURNAGHAN, Vice President -Managing Director, T. Rowe Price; Vice
President, Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price
Investment Services, Inc.
WILLIAM T. REYNOLDS, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, Vice President -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
CHARLES P. SMITH, Vice President -Managing Director, T. Rowe Price; Vice
President, Price-Fleming
M. DAVID TESTA, Vice President -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
MARTIN G. WADE, Vice President -President, Director, Chief Investment Officer
Price-Fleming; Director, Robert Fleming Holdings Limited; Director, Robert
Fleming Asset Management; Address: 25 Copthall Avenue, London, EC2R 7DR,
England
JUDITH B. WARD, Vice President -Employee, T. Rowe Price
DAVID J. L. WARREN, Vice President -Executive Vice President, T. Rowe Price
PATRICIA S. BUTCHER, 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, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
JOSEPH A. CRUMBLING, Assistant Vice President -Employee, T. Rowe Price
INGRID I. VORDEMBERGE, 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 or Price-Fleming does not receive any remuneration from the Fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and
Position ------- Fund Complex Paid to Directors(b)
- -------------------------------------- ---------------------------------
- ----------------------------------------------------------------------------
---------------------------------------------------------------------------------
<S> <S> <S>
Income Fund
Jeffrey H. Donahue, Director $5,474 $15,000
A. MacDonough Plant, Director 5,474 15,000
- -------------------------------------------------------------------------------------------------------------------------
Growth Fund
Jeffrey H. Donahue, Director $6,966 $15,000
A. MacDonough Plant, Director 6,966 15,000
- -------------------------------------------------------------------------------------------------------------------------
International Fund
Jeffrey H. Donahue, Director $2,560 $15,000
David K. Fagin, Director 2,560 15,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts in this column are based on accrued compensation for calendar
year 1997.
(b) Amounts in this column are based on compensation received from January 1,
1997, to December 31, 1997. The T. Rowe Price complex included 84 funds as of
December 31, 1997.
<PAGE>
The Fund's Executive Committee, consisting of the Fund's interested
directors, has been authorized by its respective Board of Directors to
exercise all powers of the Board to manage the Funds in the intervals between
meetings of the Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors of the Fund, as
a group, owned less than 1% of the outstanding shares of the Fund.
As of April 1, 1998, no shareholder beneficially owned more than 5% of the
outstanding shares of either the Spectrum International or Spectrum Growth
Funds.
As of April 1, 1998, the following shareholder beneficially owned more than
5% of the outstanding shares of the Spectrum Income Fund: Manulife Financial
USA, 200 Bloor Street East, NT3, Toronto, Ontario, Canada M4W 1E5.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
The business of Spectrum Fund will be conducted by its officers, directors,
and investment manager in accordance with policies and guidelines set up by
Spectrum Fund's directors which were included in the Exemptive Order issued
by the Securities and Exchange Commission (Investment Company Act Release No.
IC-21425, October 18, 1995).
Each Fund will operate at a zero expense ratio. To accomplish this, the
payment of each Fund's operational expenses is subject to a Special Servicing
Agreement described below as well as certain undertakings made by T. Rowe
Price, under its Investment Management Agreement with Spectrum Growth and
Spectrum Income Funds and Rowe Price-Fleming International, Inc. under its
Investment Management Agreement with Spectrum International 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 the 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 Fund, the underlying funds, Price-Fleming, and T. Rowe Price.
Each Agreement provides that, if the Board of Directors of any Underlying
Price Fund determines that such Underlying Fund's share of the aggregate
expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of
numerous separate shareholder accounts which are or would have been invested
directly in the Underlying Price Funds and the resulting reduction in
shareholder servicing costs. Although such cost savings are not certain, the
estimated savings to the Underlying Price Funds generated by the operation of
Spectrum Fund are expected to be sufficient to offset most, if not all, of
the expenses incurred by Spectrum Fund.
Each 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 Funds are invested pursuant to each Fund's
objectives and policies in shares of the various Underlying Price Funds
(except for such cash or cash items as the directors may determine to
maintain from time to time to meet current expenses and
<PAGE>
redemptions). The Special Servicing Agreements provide 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, with respect to Spectrum Income and
Spectrum Growth, and Price-Fleming, with respect to Spectrum International,
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
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 the Fund with discretionary investment services.
Specifically, T. Rowe Price and Price-Fleming are responsible for supervising
and directing the investments of the Fund in accordance with the Fund's
investment objectives, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. T. Rowe Price and
Price-Fleming are also responsible for effecting all security transactions on
behalf of the Fund, including the negotiation of commissions and the
allocation of principal business and portfolio brokerage. However, it should
be understood that the Fund will invest its 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 provides the Fund with
certain corporate administrative services, including: maintaining the Fund's
corporate existence and corporate records; registering and qualifying Fund
shares under federal laws; monitoring the financial, accounting, and
administrative functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer agent;
assisting the Fund in the coordination of such agents' activities; and
permitting T. Rowe Price's and Price-Fleming's employees to serve as
officers, directors, and committee members of the Fund without cost to the
Fund.
T. Rowe Price and Price-Fleming have agreed not to be paid a management fee
for performing their services. However, T. Rowe Price and Price-Fleming will
receive management fees from managing the Underlying Price Funds in which
Spectrum Fund invests.
Each Fund's Management Agreement also provides that T. Rowe Price or
Price-Fleming, its directors, officers, employees, and certain other persons
performing specific functions for the Fund will only be liable to the Fund
for losses resulting from willful misfeasance, bad faith, gross negligence,
or reckless disregard of duty.
Management Fees of Underlying Price Funds
The 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 Price 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
<PAGE>
multiplying the fraction of one (1) over the number of calendar days in the
year by the annualized Daily Price Funds' Group Fee Accrual for that day as
determined in accordance with the following schedule:
<TABLE>
Price Funds' Annual Group Base Fee Rate for Each Level of
Assets
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16
billion
---------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30
billion
---------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
---------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
---------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
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 T. Rowe Price Spectrum Funds, and any institutional, index, 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 Funds' prospectus as of the close
of business on the previous business day on which the Fund was open for
business.
The monthly Fund Fee ("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 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. The individual fund fees and total management fees of the
Underlying Price Funds are listed in the chart below:
<TABLE>
<CAPTION>
Fund Individual Fee as a Percentage Total Management Fee Paid
---- ------------------------------ -------------------------
- ----------------------------------------------------- of Fund Net Assets
------------------
-----------------------------------------------------------
<S> <C> <C>
Blue Chip Growth 0.30% 0.62%
Emerging Markets Bond 0.45 0.43a
Emerging Markets Stock 0.75 1.07
Equity Income 0.25 0.57
European Stock 0.50 0.82
GNMA 0.15 0.47
Growth & Income 0.25 0.57
Growth Stock 0.25 0.57
High Yield 0.30 0.62
International Bond 0.35 0.67
International Discovery 0.75 1.07
International Stock 0.35 0.67
Japan 0.50 0.82
Latin America 0.75 1.07
Mid-Cap Value 0.35 0.67b
New Asia 0.50 0.82
New Era 0.25 0.57
New Horizons 0.35 0.67
New Income 0.15 0.47
Short-Term Bond 0.10 0.42
Summit Cash Reserves N/A 0.45
U.S. Treasury Long-Term 0.05 0.37
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
a Had Price-Fleming not agreed to waive a portion of its management fees
and bear certain expenses in accordance with an expense limitation
agreement, Emerging Markets Bond's total management fee paid would
have been 0.60%.
b Price-Fleming agreed to waive management fees and bear certain
expenses in accordance with an expense limitation in effect through
December 31, 1997. The Fund's management fee includes 0.07% of
management fees repaid from prior years pursuant to the expense
limitation. Had Price-Fleming not agreed to waive a portion of its
management fees, Mid-Cap Value Fund's total management fee paid would
have been 0.74%.
Based on combined Price Funds' assets of over $76 billion at December 31,
1997, the Group Fee was 0.32%. The total combined management fee for each of
the Underlying Price Funds would have been an annual rate as shown above.
DISTRIBUTOR FOR FUND
-------------------------------------------------------------------------------
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 the Spectrum Fund and
T. Rowe Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Spectrum Fund, on behalf of
the Income, Growth, and International Funds, pursuant to an Underwriting
Agreement ("Underwriting Agreement"), which provides that the Fund will pay
all fees and expenses in connection with: necessary state filings; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
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 Fund shares; 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 Fund. Investment Services' expenses are paid by
T. Rowe Price.
Investment Services acts as the agent of the Spectrum Fund, on behalf of the
Income, Growth, and International Funds, in connection with the sale of the
shares for each Fund in the various states in which Investment Services is
qualified as a broker-dealer. Under the Underwriting Agreement, Investment
Services accepts orders for each Fund's shares at net asset value. No sales
charges are paid by investors or the Fund.
<PAGE>
CUSTODIAN
-------------------------------------------------------------------------------
The Underlying Funds of the Spectrum International Fund have entered into a
Custodian Agreement with The Chase Manhattan Bank, N.A., London, pursuant to
which portfolio securities which are purchased outside the United States 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 as are approved in accordance with regulations under
the Investment Company Act of 1940. State Street Bank's main office is at 225
Franklin Street, Boston, Massachusetts 02110. The address for The Chase
Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
2HD, England.
State Street Bank and Trust Company, under an agreement with Spectrum Fund,
on behalf of the Income, Growth, and International Funds, is the custodian
for the Fund's U.S. securities and cash, but it does not participate in the
Funds' investment decisions. The Bank maintains shares of the Spectrum Funds
in the book entry system of such Funds' transfer agent, T. Rowe Price
Services. The domestic Underlying Funds' portfolio securities purchased in
the U.S. are maintained in the custody of the Bank and may be entered into
the Federal Reserve Book Entry System, or the security depository system of
the Depository Trust Corporation.
SHAREHOLDER SERVICES
-------------------------------------------------------------------------------
The Fund from time to time may enter into agreements with outside parties
through which shareholders hold Fund shares. The shares would be held by such
parties in omnibus accounts. The agreements would provide for payments by the
Fund to the outside party for shareholder services provided to shareholders
in the omnibus accounts.
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. In addition, all employees must report
their personal securities transactions within 10 days. 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 closing net asset value per share of each Underlying Price Fund on the
day of valuation. Assets for which the valuation procedures are inappropriate
or are deemed not to reflect fair value are stated at fair value as
determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors. For the Growth Fund,
short-term money market investments are valued at amortized cost in local
currency which, when combined with accrued interest, approximates market
value. For the International Fund, short-term debt securities are valued at
amortized cost, which approximates fair market value. For the Income Fund,
securities with less than one year to maturity are stated at fair value which
is determined by using a matrix system that establishes a value for each
security based on money market yields. Also, for the International
<PAGE>
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 the Fund's shares is equal to the Fund's
net asset value per share or share price. The 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 the 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 the Fund is normally
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, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
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 the 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 the 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 AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, capital gain distributions, if any, will be
reinvested on the reinvestment date using the NAV per share of that date. The
reinvestment date normally precedes the payment date by about 10 days,
although the exact timing is subject to change.
TAX STATUS
-------------------------------------------------------------------------------
The 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 the 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. The 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 to avoid a federal income tax.
At the time of your purchase, the 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
<PAGE>
subsequent distribution to you of such amounts, although constituting a
return of your investment, would be taxable. For federal income tax purposes,
the 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.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
Fund's distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends), and, for Spectrum Income and Spectrum Growth Funds,
would qualify for the 70% deduction for dividends received by corporations.
However, for Spectrum International Fund, the dividends will not be eligible
for the 70% deduction for dividends received by corporations, if, as
expected, none of the Fund's income consists of dividends paid by U.S.
corporations.
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
Fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
YIELD INFORMATION
-------------------------------------------------------------------------------
Spectrum Income Fund
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. If applicable, a taxable-equivalent
yield is calculated by dividing this yield by one minus the effective federal
income tax rate. Quoted yield factors are for comparison purposes only, and
are not intended to indicate future performance or forecast the dividend per
share of the Fund.
The yield of the Fund calculated under the above-described method for the
month ended December 31, 1997, was 6.05%.
INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------
Total Return Performance
The Fund's calculation of total return performance includes the reinvestment
of all capital gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a shareholder in the
Fund. Total return is calculated as the percentage change between the
beginning value of a static account in the Fund and the ending value of that
account measured by the then current net asset value, including all shares
acquired through reinvestment of income and capital gain dividends. The
results shown are historical and should not be considered indicative of the
future performance of the Fund. Each average
<PAGE>
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
for the Fund over any other period of time will vary from the average.
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. Ended 5 Yrs. Ended 10 Yrs. Ended % Since Inception
----------- ------------ ------------- ------- ---------
12/31/97 12/31/97 12/31/97 Inception Date
-------- -------- -------- --------- ----
12/31/97
--------
<S> <C> <C> <C> <C> <C>
S & P 500 33.36% 151.63% 425.68%
Dow Jones Industrial
Average 24.94 170.73 451.88
CPI 2.02 14.02 40.21
Spectrum Growth Fund 17.40 125.59 -- 182.48% 06/29/90
Spectrum Income Fund 12.18 58.89 -- 110.44 06/29/90
Spectrum International 2.42 -- -- 2.42 12/31/96
Fund
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. Ended 5 Yrs. Ended 10 Yrs. Ended % Since Inception Date
----------- ------------ ------------- ------- --------------
12/31/97 12/31/97 12/31/97 Inception
-------- -------- -------- ---------
12/31/97
--------
<S> <C> <C> <C> <C> <C>
S & P 500 33.36% 20.27% 18.05%
Dow Jones Industrial
Average 24.94 22.04 18.63
CPI 2.02 2.66 3.44
Spectrum Growth Fund 17.40 17.67 -- 14.84% 06/29/90
Spectrum Income Fund 12.18 9.70 -- 10.42 06/29/90
Spectrum International 2.42 -- -- 2.42 12/31/96
Fund
- -------------------------------------------------------------------------------------------------
</TABLE>
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the Fund's
total return performance, ranking, or any other measure of the Fund's
performance may be compared to any one or combination of the following: (i) a
broadbased index; (ii) other groups of mutual funds, including T. Rowe Price
Funds, tracked by independent research firms ranking entities, or financial
publications; (iii) indices of stocks comparable to those in which the Fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the Fund or the general economic, business, investment, or
financial environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and other
persons may be used to illustrate aspects of the Fund's performance; (4) the
effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the Fund invests may be compared to
relevant indices or surveys in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by T. Rowe
Price Investment Services, Inc., T. Rowe Price mutual fund portfolio managers
may discuss economic, financial and political developments in the U.S. and
abroad and how these conditions have affected or may affect securities prices
or the Fund; individual securities within the Fund's portfolio; and their
philosophy regarding the selection of individual stocks, including why
specific stocks have been added, removed or excluded from the Fund's
portfolio.
<PAGE>
Other Features and Benefits
The Fund is a member of the T. Rowe Price family of Funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the Fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price Associates, Inc. and/or T. Rowe Price Investment Services, Inc. may be
made available.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
investors or use fund assets to finance distribution activities. These fees
are in addition to the normal advisory fees and expenses charged by all
mutual funds. There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or "load") can be
charged at the time the fund is purchased (front-end load) or at the time of
redemption (back-end load). Front-end loads are charged on the total amount
invested. Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1 plans allow for
the payment of marketing and sales expenses from fund assets. These expenses
are usually computed daily as a fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges or 12b-1 fees.
No-load funds are generally sold directly to the public without the use of
commissioned sales representatives. This means that 100% of your purchase is
invested for you.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the Fund, brokerage fees could be incurred by the
shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund 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 objective 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 exchange or market; and (d) are not
illiquid.
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 Fund's 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, conversions 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
<PAGE>
aggregate number of shares of stock or the number of shares of stock of any
class or series that the Fund has authorized to issue without shareholder
approval.
Except to the extent that the Fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class
vote unless and to the extent that such a right might be construed to exist
under Maryland law. The Charter contains no provision entitling the holders
of the present class of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics attaching to
any class of shares, including the present class of capital stock, might be
altered or eliminated, or the class might be combined with another class or
classes, by action approved by the vote of the holders of a majority of all
the shares of all classes entitled to be voted on the proposal, without any
additional right to vote as a class by the holders of the capital stock or of
another affected class or classes.
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 Fund, 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 Fund, a special meeting of
shareholders of the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of all the
votes of the Fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The Fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of the Fund to the extent required by
Section 16(c) of the Investment Company Act of 1940.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The Fund's shares are registered for sale under the Securities Act of 1933.
Registration of the Fund's shares is not required under any state law, but
the Fund is required to make certain filings with and pay fees to the states
in order to sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Shereff, Friedman, Hoffman, & Goodman LLP, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Fund.
<PAGE>
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
Price Waterhouse LLP, 1306 Concourse Drive, Suite 100, Linthicum, Maryland
21090-1020, are independent accountants to the Fund.
The financial statements of the Funds for the year ended December 31, 1997,
and the report of independent accountants are included in each Fund's Annual
Report for the year ended December 31, 1997. A copy of each Annual Report
accompanies this Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in each Annual
Report for the year ended December 31, 1997, are incorporated into this
Statement of Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
SPECTRUM SPECTRUM
GROWTH INCOME
------ ------
<S> <C> <C>
Report of Independent Accountants 26 26
Statement of Net Assets, December 31, 1997 16 17
Statement of Operations, year ended
December 31, 1997 19 19
Statement of Changes in Net Assets, years ended
December 31, 1997 and December 31, 1996 20 21
Notes to Financial Statements, December 31, 1997 23-25 23-25
Financial Highlights 13 14
</TABLE>
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
SPECTRUM
INTERNATIONAL
-------------
<S> <C>
Report of Independent Accountants 26
Statement of Net Assets, December 31, 1997 18
Statement of Operations, year ended
December 31, 1997 19
Statement of Changes in Net Assets, years ended
December 31, 1997 22
Notes to Financial Statements, December 31, 1997 23-25
Financial Highlights 15
</TABLE>
