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T. Rowe Price
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Annual Report
Spectrum Funds
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December 31, 1997
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REPORT HIGHLIGHTS
================================================================================
Spectrum Funds
* A strong domestic economy supported generous gains in the domestic stock
and bond markets, but a fourth quarter currency crisis in Asia deflated
international markets.
* Spectrum Growth posted 6- and 12-month gains of 5.66% and 17.40%,
respectively, trailing its more narrowly focused Lipper category.
* Spectrum Income enjoyed another strong year, with holdings in high-yield
bonds, U.S. Treasuries, and dividend-paying equities pushing its 6- and
12-month returns ahead of its Lipper benchmark.
* Spectrum International's -7.90% six-month return and 2.42% 12-month gain
fell shy of the fund's peer group, primarily due to greater Asia exposure.
* Recent events overseas suggest we may be entering a period of increased
volatility. In uncertain environments, we strongly believe in the value of
well-diversified portfolios.
<PAGE>
FELLOW SHAREHOLDERS
Despite faltering in the fourth quarter after a currency crisis in
Southeast Asia, most sectors of the U.S. stock market posted solid returns for
the last six months, finishing another strong year. Domestic bond markets also
had appreciable gains: a global shift toward modest-risk, dollar-denominated
securities helped U.S. Treasuries rally back from earlier underperformance of
corporate and mortgage-backed bonds in the second half. Most international stock
market returns fell behind their domestic counterparts.
Because of their diversification, each Spectrum Fund was broadly exposed to
both leading and lagging segments of their markets. The Spectrum Income Fund
finished ahead of its peer group for both the 6-and 12-month periods; however,
the Spectrum Growth Fund and the Spectrum International Fund trailed their peer
groups for these periods.
MARKET ENVIRONMENT
Almost unprecedented economic circumstances, including low interest rates,
strong growth, low unemployment, and negligible inflation, guided the domestic
stock market to a stellar performance in 1997. Although a fourth quarter
currency crisis in Southeast Asia hampered many global markets, the U.S.
included, it was not enough to diminish a good year overall for non-Asian
equities. Large-cap and dividend-paying stocks did particularly well, as
investors were drawn to their impressive earnings, steady income, and perceived
stability. As measured by the S&P 500 Index, stocks gained 33.36% in 1997.
[Line graph showning interest rate levels for 30-Year Treasury bond, 5-Year
Treasury nte, and 90-day Treasury bill from 12/31/96 to 12/31/97]
The problems in Asia benefited the U.S. Treasury market, however, as global
investors searched for relatively safe, liquid investments. Most segments of the
domestic bond market enjoyed a fine year. After the Federal Reserve raised the
federal funds lending rate in March, interest rates largely declined,
dramatically in the case of longer-term U.S. Treasuries. (As interest rates
decrease, the prices of bonds increase.) As measured by the Lehman Brothers
Aggregate Bond Index, the domestic bond market returned 9.7% for the year. The
only exception was in very short-term bonds, such as 90-day Treasury bills and
other money market instruments, whose yields climbed modestly.
International bonds, however, were weakened by both the Asian crisis and
the continued strength of the U.S. dollar. The J.P. Morgan Non-U.S. Dollar
Government Bond Index ended the year with a loss of -3.8%. Owing to excellent
returns in the first three quarters, emerging market bonds finished the year
with significantly better performance.
Among international stocks, what had been a strong year ended poorly.
Indices of the Japanese and Asian markets suffered losses of -23.6% and -30.8%,
respectively. On the brighter side, Europe and Latin American indices withstood
the shock waves of the Asian crisis and enjoyed returns of 24.2% and 31.6%,
respectively. When measured as a whole, international markets were up a
disappointing 2%, as measured by the MSCI Europe, Australasia, and Far East
Index.
<PAGE>
YEAR-END DISTRIBUTIONS
The Spectrum Funds' Directors declared year-end distributions as follows:
Spectrum Growth had a year-end dividend of $0.20 per share, a short-term capital
gain distribution of $0.05 per share, and a long-term capital gain distribution
of $1.55 per share. Spectrum Income had a year-end short-term capital gain
distribution of $0.01 per share and a long-term capital gain distribution of
$0.14 per share. Spectrum International had a year-end dividend of $0.15 per
share, a short-term capital gain distribution of $0.05 per share, and a
long-term capital gain distribution of $0.30 per share. Each of these
distributions was paid on December 30 to shareholders of record on December 26.
In early January we mailed your check or statement reflecting these
distributions, and Form 1099-DIV, reporting them for tax purposes, was sent
later in the month.
SPECTRUM GROWTH FUND
Your fund posted a modest 5.66% return for the six-month period, and a
strong 17.40% gain for the full year. The fund maintains a broadly diversified
strategy, which includes large-cap and small-cap holdings as well as a
significant stake in international investments. As a result, its results lagged
those of the Lipper Growth & Income Fund Index, which focuses more narrowly on
larger stocks and has few international investments.
================================================================================
Performance Comparison
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Periods Ended 12/31/97 6 Months 12 Months
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Spectrum Growth Fund 5.66% 17.40%
Lipper Growth & Income Fund Index * 9.51 26.96
*Based on the 30 largest growth and income funds.
================================================================================
The fund benefited most from its exposure to large-cap and dividend-paying
stocks through its investments in the Equity Income, Growth & Income, Growth
Stock, and Blue Chip Growth funds. Our holdings in technology, small-cap, and
natural resources sectors, however, had disappointing results for the last six
months. New Era Fund, which invests in natural resources stocks, had the second
worst performance among our holdings, gaining a mere 0.86% in the second half
when the price of gold and other commodities sank. In addition, a 26% stake in
international markets hurt results: International Stock Fund, which represented
more than 18% of Spectrum Growth's assets, suffered a -8.21% six-month decline.
[Pie chart with the following slices: Money Market 6%, Domestic Stocks 67%,
International Stocks 26%, Bonds 1%. Based on net assets as of 12/31/97.]
<PAGE>
The fund's security diversification changed from six months ago with the
recent addition of two new underlying funds (as discussed in the semiannual
report). Half of the assets in Growth Stock were shifted to Blue Chip Growth,
which (as its name suggests) invests in well-known, large-cap companies with
stable earnings. The committee also reduced the allocation to New Era to
initiate a position in the Mid-Cap Value Fund, which invests in medium-sized
companies with value characteristics. The shift from natural resources to
mid-cap stocks proved especially timely, since Mid-Cap Value significantly
outperformed New Era at the end of 1997.
Recently, the committee slightly increased the weighting in the New
Horizons Fund as weak performance among high-growth, smaller-sized holdings
created lower valuations and provided buying opportunities. The fund's position
in international stocks declined somewhat as gains overseas did not keep up with
domestic returns. Even with the recent Asian turmoil, however, the fund
continues to have a 26% exposure to international stocks. We still believe that
a long-term, diversified strategy benefits from non-U.S. investments.
SPECTRUM INCOME FUND
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Performance Comparison
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Periods Ended 12/31/97 6 Months 12 Months
- --------------------------------------------------------------------------------
Spectrum Income Fund 6.81% 12.18%
Lipper General Bond
Funds Average 5.27 9.91
================================================================================
A positive bond market in the last half of 1997 helped your fund achieve a
strong, 12.18% gain for the full year. Its diversification boosted
returns-holdings in high-grade bonds, as well as a 15% stake in Equity Income
(an income-paying equity fund), helped it to significantly outperform the Lipper
General Bond Funds Average for both the 6- and 12-month periods.
The U.S. Treasury market did extremely well in the last quarter of 1997 and
into 1998, as the Asian currency crisis led global investors to seek stable,
dollar-denominated investments. The 30-year Treasury bond yield fell to under 6%
by the end of the year, even as the shorter 90-day Treasury bill yield rose to
5.4%. This flattening of the yield curve helped longer-term Treasuries surge in
price terms, while money market yields rose.
The economic support for this beneficial environment is sound. Inflation
has been subdued, giving the Fed very little incentive to raise interest rates.
A recently initiated position in the U.S. Treasury Long-Term Fund proved timely,
as that fund was our best-performing for the last six months.
<PAGE>
Fund holdings in Equity Income also performed very well for the full year,
as the stock market strongly favored its stable of large-cap, dividend-paying
stocks. The fund's investments in high-yield bonds, through a 19% position in
the High Yield Fund, also contributed to performance. The strong economy helped
propel lower-quality, high-yield bonds to strong gains for the full year, even
though they trailed Treasuries in the final quarter.
Among its major investments, the fund was most hampered by its investment
in the struggling International Bond Fund, which posted a slight -3.17% loss for
the year. Emerging Markets Bond, on the other hand, built up a strong gain
before giving back quite a bit of return in the fourth quarter as a result of
the Asian currency crisis. Overall, Emerging Markets Bond posted a positive
2.56% gain for the last half of 1997.
[Pie chart with the following slices: Moeny Market 6%, Stocks 15%,
International Bonds 8%, High-Yield Bonds 17%, High-grade Bonds 54%. Based on net
assets as of 12/31/97.]
We continued to increase the allocation to funds recently added to the
line-up. We shifted assets from Short-Term Bond and Summit Cash Reserves to the
U.S. Treasury Long-Term Fund as we expected long rates to fall. We slightly
increased the allocation to the Emerging Markets Bond Fund by reducing the
position in the High Yield Fund.
SPECTRUM INTERNATIONAL FUND
After advancing steadily earlier in the year, your fund ended 1997 on a
disappointing note in the wake of the Asian currency crisis and subsequent
global market declines. European equities, Latin American indexes, and emerging
market bonds survived the crisis to post solid returns for the entire year.
However, the Japan and Pacific regions suffered substantially lower market
returns.
================================================================================
Performance Comparison
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Periods Ended 12/31/97 6 Months 12 Months
- --------------------------------------------------------------------------------
Spectrum International Fund -7.90% 2.42%
Lipper International Funds Average -6.45 5.44
================================================================================
Due primarily to its exposure to Japanese and Southeast Asian equities,
your fund fell -7.90% for the past six months, but stayed in positive territory
for the year, posting a 2.42% gain. Both returns lagged the Lipper International
Funds Average: many of our competitor funds carry a somewhat lower exposure to
the stocks of Asia and Japan.
<PAGE>
The fund's most significant investment was in the International Stock Fund,
a broadly diversified international fund. That holding's six-month decline of
- -8.21% and one-year gain of 2.70% closely mirrored your fund's performance. The
remainder of the fund's positions largely balanced one another out. Allocations
to the European Stock and Emerging Markets Bond funds made positive
contributions to performance for both the last six and 12 months. The Latin
America Fund fell in the last six months, but still returned a strong 31.88% for
the entire year. Unfortunately, the Japan Fund and the New Asia Fund offset most
of the gains from other regions.
[Pie chart with the following slices: Europe 61%, Latin America 9%, Japan
18%, Far East 7%, Other and REserves 5%. Based on net assets as of 12/31/97.]
The target asset allocations for this fund have changed somewhat over the
past six months. We decided to curtail our already small target for the New Asia
Fund, due to our concerns over the region's problems. Indeed, our overall
exposure to Asia has declined even more substantially, since two of our
underlying funds (International Stock and Emerging Markets Stock) have both
trimmed their weightings in the region. We also decided to reduce our Latin
America target until greater stability returns to the emerging markets.
On the other hand, we enhanced our exposure to Europe, where economic and
corporate prospects continue to be bright. Although our stock selection in
Europe had only mixed results in this year's third quarter, our holdings were
relatively strong in the fourth. We think the fund's blend of reliable growth
stocks selling at reasonable valuations might outperform if investors continue
to be concerned about the economic effects of the Asian crisis. In addition, we
modestly built our Japan stake. Japan has experienced a long period of market
weakness. However, its economy appears to be stabilizing and domestic companies
(those with little or no global exposure) have been improving. While Japan has
not yet lived up to our expectations, we believe there is benefit in purchasing
its quality companies at attractive prices.
OUTLOOK
The U.S. economy remains healthy. Growth has been steady and inflation
remains at low levels despite tight labor markets. Under these circumstances,
the Fed is likely to keep interest rates steady for a while, especially until
the effects of the Asian crisis become clearer. Both the domestic stock and bond
markets should fare well under these conditions. We expect the U.S. equity
market to deliver positive but less robust returns.
Overseas, however, there could be further turmoil or sharp rebounds-or
both. The uncertainty is sure to increase the volatility of markets around the
world, including the U.S. However, the recent declines in international markets
also present us with the opportunity to buy attractive companies at lower
valuations.
<PAGE>
Given the unpredictability of financial markets, we remind investors that a
well-diversified strategy can help cushion your investments against sharp
declines in particular market segments. We will continue to invest the Spectrum
Funds broadly, to seek long-term growth with less volatility than might be the
case with narrower investment programs.
Respectfully submitted,
/s/
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
January 22, 1998
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
Portfolio Highlights
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TEN LARGEST HOLDINGS
Percent of
(Of the combined underlying funds at 12/31/97) Net Assets
12/31/97
Spectrum Growth Fund
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Royal Dutch Petroleum ........................................... 1.0%
Cendant ......................................................... 0.8
GE .............................................................. 0.5
Mobil ........................................................... 0.5
Paychex ......................................................... 0.5
Atlantic Richfield .............................................. 0.4
National Westminster Bank ....................................... 0.4
Fannie Mae ...................................................... 0.4
Novartis ........................................................ 0.4
Cooper Cameron .................................................. 0.3
Total ........................................................... 5.2%
TEN LARGEST HOLDINGS
Percent of
(Of the combined underlying funds at 12/31/97) Net Assets
12/31/97
Spectrum International Fund
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Royal Dutch Petroleum .......................................... 2.0%
National Westminster Bank ...................................... 1.8
Novartis ....................................................... 1.7
Wolters Kluwer ................................................. 1.6
SmithKline Beecham ............................................. 1.5
Telecomunicacoes Brasileiras ................................... 1.3
Roche Holdings ................................................. 1.2
Eaux Cie Generale .............................................. 1.2
Reed International ............................................. 1.1
Glaxo Wellcome ................................................. 1.1
Total .......................................................... 14.5%
================================================================================
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
Key statistics
6/30/97 12/31/97
Spectrum Income Fund
Price Per Share .................................. $ 11.40 $ 11.66
Short-Term - 0.01
Capital Gain Distribution Per Share ..... Long-Term - 0.14
Dividends Per Share
For 6 months ............................. 0.35 0.36
For 12 months ............................ 0.71 0.71
Dividend Yield *
For 6 months ............................. 6.46% 6.13%
For 12 months ............................ 6.57 6.39
Weighted Average Maturity (years)** .............. 8.1 9.5
Weighted Average Effective Duration (years)** .... 4.0 4.1
Weighted Average Quality *** ..................... AA- AA-
30-Day Standardized Yield ........................ 6.11% 6.05%
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** Excludes Equity Income Fund.
*** Based on T. Rowe Price research; excludes Equity Income Fund.
================================================================================
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
Portfolio Highlights
TARGET ALLOCATIONS for Underlying fundS
Minimum- Target at
Maximum 12/31/97
Spectrum Growth Fund
- --------------------------------------------------------------------------------
International Stock ........................... 10-25% 18.2%
New Horizons .................................. 10-25 17.2
Growth & Income ............................... 7.5-22.5 14.9
Equity Income ................................. 7.5-22.5 14.6
Growth Stock .................................. 5-20 11.8
Blue Chip Growth .............................. 5-20 11.7
New Era ....................................... 0-15 7.8
Mid-Cap Value ................................. 0-15 3.8
Spectrum Income Fund
- --------------------------------------------------------------------------------
Summit Cash Reserves .......................... 0-25 1.5
Short-Term Bond ............................... 0-15 0.0
GNMA .......................................... 5-20 19.5
New Income .................................... 15-30 30.0
High Yield .................................... 10-25 19.0
International Bond ............................ 5-20 7.0
U.S. Treasury Long-Term ....................... 0-15 6.0
Equity Income ................................. 10-25 15.0
Emerging Markets Bond ......................... 0-10 2.0
Spectrum International Fund
- --------------------------------------------------------------------------------
International Stock ........................... 35-65 50.0
European Stock ................................ 0-30 22.5
Japan ......................................... 0-30 9.5
New Asia ...................................... 0-20 3.5
Latin America ................................. 0-15 1.5
Emerging Markets Stock ........................ 0-20 3.0
International Bond ............................ 0-20 5.0
Emerging Markets Bond ......................... 0-15 5.0
================================================================================
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
Performance Comparison
These charts show the value of a hypothetical $10,000 investment in each
fund over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
[Spectrum Growth Fund SEC graph shown here]
[Spectrum Income Fund SEC Graph Shown here]
[Spectrum International Fund SEC graph shown here]
================================================================================
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
================================================================================
Since Inception
Periods Ended 12/31/97 1 Year 5 Years Inception Date
- --------------------------------------------------------------------------------
Spectrum Growth Fund 17.40% 17.67% 14.84% 6/29/90
Spectrum Income Fund 12.18 9.70 10.42 6/29/90
Spectrum International Fund 2.42 - 2.42 12/31/96
Investment return represents past performance and will vary. Shares of the
funds may be worth more or less at redemption than at original purchase.
================================================================================
<PAGE>
<TABLE>
T. Rowe Price Spectrum Growth Fund
================================================================================
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year
Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period ......................... $ 15.13 $ 13.49 $ 11.13 $ 11.87 $ 10.54
Investment activities
Investment income ................... 0.20 0.20 0.21 0.17 0.16
Net realized and
unrealized gain (loss) .............. 2.40 2.57 3.12 (0.01) 2.05
Total from
investment activities ............... 2.60 2.77 3.33 0.16 2.21
Distributions
Investment income ................... (0.20) (0.20) (0.21) (0.17) (0.16)
Net realized gain ................... (1.60) (0.93) (0.76) (0.73) (0.72)
Total distributions ................. (1.80) (1.13) (0.97) (0.90) (0.88)
NET ASSET VALUE
End of period ............................... $ 15.93 $ 15.13 $ 13.49 $ 11.13 $ 11.87
Ratios/Supplemental Data
Total return ................................ 17.40% 20.53% 29.96% 1.40% 20.98%
Ratio of expenses to
average net assets .......................... 0.00%* 0.00% 0.00% 0.00% 0.00%
Ratio of net investment
income to average
net assets .................................. 1.26% 1.58% 1.81% 1.60% 1.57%
Portfolio turnover rate ..................... 20.4% 2.9% 7.4% 20.7% 7.0%
Net assets, end of period
(in millions) ............................... $ 2,605 $ 2,104 $ 1,358 $ 879 $ 585
====================================================================================================================================
<FN>
* See Note 3. The annualized weighted average expense ratio of the underlying funds was 0.81% for the year ended December 31,
1997.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
T. Rowe Price Spectrum Income Fund
================================================================================
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year
Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period ...................... $ 11.20 $ 11.24 $ 10.11 $ 11.11 $ 10.70
Investment activities
Investment income ................ 0.71 0.71 0.72 0.69 0.69
Net realized and
unrealized gain (loss) ........... 0.61 0.11 1.16 (0.90) 0.60
Total from
investment activities ............ 1.32 0.82 1.88 (0.21) 1.29
Distributions
Investment income ................ (0.71) (0.71) (0.72) (0.69) (0.69)
Net realized gain ................ (0.15) (0.15) (0.03) (0.10) (0.19)
Total distributions .............. (0.86) (0.86) (0.75) (0.79) (0.88)
NET ASSET VALUE
End of period ............................ $ 11.66 $ 11.20 $ 11.24 $ 10.11 $ 11.11
Ratios/Supplemental Data
Total return ............................. 12.18% 7.64% 19.41% (1.94)% 12.36%
Ratio of expenses to
average net assets ....................... 0.00%* 0.00% 0.00% 0.00% 0.00%
Ratio of net investment
income to average
net assets ............................... 6.21% 6.46% 6.43% 6.48% 6.19%
Portfolio turnover rate .................. 14.1% 17.6% 20.2% 23.1% 14.4%
Net assets, end of period
(in millions) ............................ $ 2,022 $ 1,356 $ 987 $ 625 $ 588
====================================================================================================================================
<FN>
* See Note 3. The annualized weighted average expense ratio of the underlying funds was 0.75% for the year ended December 31,
1997.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum International Fund
================================================================================
For a share outstanding throughout the period
================================================================================
Financial Highlights
- --------------------------------------------------------------------------------
12/31/96
Through
12/31/97
NET ASSET VALUE
Beginning of period .................................... $ 10.00
Investment activities
Investment income .............................. 0.15
Net realized and
unrealized gain (loss) ......................... 0.09+
Total from
investment activities .......................... 0.24
Distributions
Investment income .............................. (0.15)
Net realized gain .............................. (0.35)
Total distributions ............................ (0.50)
NET ASSET VALUE
End of period .......................................... $ 9.74
Ratios/Supplemental Data
Total return ........................................... 2.42%
Ratio of expenses to
average net assets ..................................... 0.00%*
Ratio of net investment
income to average
net assets ............................................. 2.23%
Portfolio turnover rate ................................ 20.0%
Net assets, end of period
(in thousands) ......................................... $ 51,050
* See Note 3. The annualized weighted average expense ratio of the underlying
funds was 1.01% for the year ended December 31, 1997.
+ 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.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum Growth Fund
================================================================================
December 31, 1997
Percent of
Net Assets Shares Value
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
In thousands
T. Rowe Price International Stock Fund ..... 18.3% 35,470,802 $476,018
T. Rowe Price New Horizons Fund ............ 17.2 19,371,347 451,352
T. Rowe Price Growth & Income Fund ......... 14.9 14,728,216 388,236
T. Rowe Price Equity Income Fund ........... 14.6 14,580,800 380,122
T. Rowe Price Growth Stock Fund ............ 11.8 10,580,795 306,737
T. Rowe Price Blue Chip Growth Fund ........ 11.7 12,586,196 304,208
T. Rowe Price New Era Fund ................. 7.9 7,886,160 204,646
T. Rowe Price Mid-Cap Value Fund ........... 3.8 6,816,449 98,634
Total Investments
100.2% of Net Assets (Cost $2,113,466) ..... $ 2,609,953
Other Assets Less Liabilities .............. (4,688)
NET ASSETS ................................. $ 2,605,265
Net Assets Consist of:
Accumulated net investment income -
net of distributions ....................... $ 836
Accumulated net realized gain/loss -
net of distributions ....................... 6,422
Net unrealized gain (loss) ................. 496,487
Paid-in-capital applicable to 163,587,813
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares of
Spectrum authorized ....................... 2,101,520
NET ASSETS ................................. $ 2,605,265
NET ASSET VALUE PER SHARE .................. $ 15.93
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum Income Fund
================================================================================
December 31, 1997
Percent of
Net Assets Shares Value
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
In thousands
T. Rowe Price New Income Fund ................ 29.6% 65,982,339 $598,460
T. Rowe Price GNMA Fund ...................... 19.3 40,665,234 389,573
T. Rowe Price High Yield Fund ................ 18.9 43,796,595 382,782
T. Rowe Price Equity Income Fund ............. 15.2 11,756,053 306,480
T. Rowe Price International Bond Fund ........ 6.8 14,366,947 137,636
T. Rowe Price U.S. Treasury Long-Term Fund ... 5.5 10,004,282 112,748
T. Rowe Price Summit Cash Reserves Fund ...... 2.1 41,811,130 41,811
T. Rowe Price Emerging Markets Bond Fund ..... 2.0 2,969,752 40,715
T. Rowe Price Short-Term Bond Fund ........... 0.7 2,886,702 13,510
Total Investments
100.1% of Net Assets (Cost $1,913,845) ....... $2,023,715
Other Assets Less Liabilities ................ (1,488)
NET ASSETS ................................... $2,022,227
Net Assets Consist of:
Accumulated net investment income -
net of distributions ......................... $ 111
Accumulated net realized gain/loss -
net of distributions ......................... 1,027
Net unrealized gain (loss) ................... 109,870
Paid-in-capital applicable to 173,439,151
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares of
Spectrum authorized .......................... 1,911,219
NET ASSETS ................................... $2,022,227
NET ASSET VALUE PER SHARE .................... $ 11.66
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum International Fund
================================================================================
December 31, 1997
Percent of
Net Assets Shares Value
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
In thousands
T. Rowe Price International Stock Fund ........ 50.2% 1,908,547 $25,613
T. Rowe Price European Stock Fund ............. 22.5 591,820 11,458
T. Rowe Price Japan Fund ...................... 9.2 686,280 4,708
T. Rowe Price Emerging Markets Bond Fund ...... 5.2 194,965 2,673
T. Rowe Price International Bond Fund ......... 5.0 267,774 2,565
T. Rowe Price New Asia Fund ................... 3.3 296,833 1,704
T. Rowe Price Emerging Markets Stock Fund ..... 3.2 138,144 1,613
T. Rowe Price Latin America Fund .............. 1.6 77,362 833
Total Investments
100.2% of Net Assets (Cost $54,436) ........... $ 51,167
Other Assets Less Liabilities ................. (117)
NET ASSETS .................................... $ 51,050
Net Assets Consist of:
Accumulated net investment income -
net of distributions .......................... $ 33
Accumulated net realized gain/loss -
net of distributions .......................... 203
Net unrealized gain (loss) .................... (3,269)
Paid-in-capital applicable to 5,243,166
shares of $0.01 par value capital stock
outstanding;1,000,000,000 shares of
Spectrum authorized ........................... 54,083
NET ASSETS .................................... $ 51,050
NET ASSET VALUE PER SHARE ..................... $ 9.74
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands Growth Income International
Fund Fund Fund
Year Year 12/31/96
Ended Ended Through
12/31/97 12/31/97 12/31/97
Investment Income
Income distributions from underlying funds .. $ 30,195 $ 101,589 $ 784
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Sale of underlying funds ............ 114,511 (112) 307
Capital gain distributions
from underlying funds ............... 127,002 26,983 1,648
Net realized gain (loss) ............ 241,513 26,871 1,955
Change in net unrealized gain or loss ....... 107,050 63,392 (3,269)
Net realized and unrealized gain (loss) ..... 348,563 90,263 (1,314)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ...................... $378,758 $ 191,852 $ (530)
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
T. Rowe Price Spectrum Growth Fund
====================================================================================================================================
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands
<CAPTION>
Year
Ended
12/31/97 12/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Investment income ........................................................ $ 30,195 $ 25,566
Net realized gain (loss) ................................................. 241,513 117,652
Change in net unrealized gain or loss .................................... 107,050 185,985
Increase (decrease) in net assets from operations ........................ 378,758 329,203
Distributions to shareholders
Investment income ........................................................ (29,390) (25,866)
Net realized gain ........................................................ (235,060) (120,141)
Decrease in net assets from distributions ................................ (264,450) (146,007)
Capital share transactions *
Shares sold .............................................................. 581,730 698,161
Distributions reinvested ................................................. 260,813 144,024
Shares redeemed .......................................................... (455,680) (279,631)
Increase (decrease) in net assets from capital
share transactions ....................................................... 386,863 562,554
Net Assets
Increase (decrease) during period ................................................ 501,171 745,750
Beginning of period .............................................................. 2,104,094 1,358,344
End of period .................................................................... $ 2,605,265 $ 2,104,094
*Share information
Shares sold .............................................................. 35,829 47,726
Distributions reinvested ................................................. 16,665 9,513
Shares redeemed .......................................................... (27,933) (18,899)
Increase (decrease) in shares outstanding ................................ 24,561 38,340
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
T. Rowe Price Spectrum Income Fund
====================================================================================================================================
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands
<CAPTION>
Year
Ended
12/31/97 12/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Investment income ........................................................ $ 101,589 $ 78,017
Net realized gain (loss) ................................................. 26,871 16,311
Change in net unrealized gain or loss .................................... 63,392 (1,749)
Increase (decrease) in net assets from operations ........................ 191,852 92,579
Distributions to shareholders
Investment income ........................................................ (101,589) (78,017)
Net realized gain ........................................................ (25,467) (17,756)
Decrease in net assets from distributions ................................ (127,056) (95,773)
Capital share transactions *
Shares sold .............................................................. 847,820 651,254
Distributions reinvested ................................................. 117,122 88,084
Shares redeemed .......................................................... (363,481) (366,875)
Increase (decrease) in net assets from capital
share transactions ....................................................... 601,461 372,463
Net Assets
Increase (decrease) during period ................................................ 666,257 369,269
Beginning of period .............................................................. 1,355,970 986,701
End of period .................................................................... $ 2,022,227 $ 1,355,970
*Share information
Shares sold .............................................................. 74,079 58,403
Distributions reinvested ................................................. 10,200 7,910
Shares redeemed .......................................................... (31,887) (33,027)
Increase (decrease) in shares outstanding ................................ 52,392 33,286
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum International Fund
================================================================================
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
12/31/96
Through
12/31/97
Increase (Decrease) in Net Assets
Operations
Investment income ........................................ $ 784
Net realized gain (loss) ................................. 1,955
Change in net unrealized gain or loss .................... (3,269)
Increase (decrease) in net assets from operations ........ (530)
Distributions to shareholders
Investment income ........................................ (751)
Net realized gain ........................................ (1,752)
Decrease in net assets from distributions ................ (2,503)
Capital share transactions *
Shares sold .............................................. 69,234
Distributions reinvested ................................. 2,414
Shares redeemed .......................................... (17,565)
Increase (decrease) in net assets from capital
share transactions ....................................... 54,083
Net Assets
Increase (decrease) during period ................................ 51,050
Beginning of period .............................................. -
End of period .................................................... $ 51,050
*Share information
Shares sold .............................................. 6,668
Distributions reinvested ................................. 248
Shares redeemed .......................................... (1,673)
Increase (decrease) in shares outstanding ................ 5,243
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
December 31, 1997
================================================================================
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
T. Rowe Price Spectrum Fund, Inc. (the corporation) is registered under the
Investment Company Act of 1940 (the Act) as a nondiversified, open-end
management investment company. Spectrum Growth Fund, Spectrum Income Fund, and
Spectrum International Fund (collectively, the Spectrum Funds), are the three
portfolios established by the corporation. Operations commenced on June 29, 1990
for Spectrum Growth and Spectrum Income Funds, and on December 31, 1996 for
Spectrum International Fund.
Each Spectrum Fund diversifies its assets within set limits among specific
underlying T. Rowe Price funds (underlying funds). Spectrum Growth Fund
principally seeks long-term capital appreciation and growth of income by
allocating its assets to underlying funds that invest primarily in stocks.
Spectrum Income Fund strives to provide a high level of current income with
moderate share price fluctuation, by investing in underlying funds that invest
primarily in fixed income securities. The objective of Spectrum International
Fund is to provide long-term capital appreciation through allocations to
underlying funds that invest primarily in international stocks and, to a lesser
degree, international bonds.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION The financial statements are prepared in accordance
with generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund management.
VALUATION Investments in the underlying funds are valued at the closing net
asset value per share of each underlying fund on the day of valuation.
Assets for which the above 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.
DISTRIBUTIONS Income and capital gain distributions from the underlying
funds and distributions to the Spectrum Funds' shareholders are recorded on the
ex-dividend date.
Income and capital gain distributions to the Spectrum Funds' shareholders
are determined in accordance with federal income tax regulations, which may
differ from generally accepted accounting principles. Accordingly, for the year
ended December 31, 1997, Spectrum Growth Fund's undistributed net investment
income was increased by $31,000 and undistributed net realized gain was reduced
by $31,000, in order for the fund's capital accounts and distributions to
shareholders to reflect the tax character of certain transactions. Similarly,
Spectrum Income Fund's undistributed net investment income was increased by
$377,000 and undistributed net realized gain was reduced by $377,000. Such
reclassifications had no effect on results of operations or net assets.
<PAGE>
FEDERAL INCOME Taxes No provision for federal income taxes is required
since each fund intends to continue to qualify as a regulated investment company
and distribute all of its taxable income.
OTHER Income is recorded on the accrual basis. Purchases and sales of the
underlying funds are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis.
NOTE 2 - INVESTMENTS IN UNDERLYING FUNDS
Purchases and sales of the underlying funds for the year ended December 31,
1997, were as follows:
================================================================================
Growth Income International
Fund Fund Fund
Purchases $ 766,650,000 $ 834,847,000 $ 61,660,000
Sales 485,701,000 231,860,000 7,632,000
- --------------------------------------------------------------------------------
At December 31, 1997, the net unrealized gain (loss) on investments in the
underlying funds for both federal income tax and financial reporting purposes
were as follows:
================================================================================
Growth Income International
Fund Fund Fund
Appreciated investments $ 496,487,000 $ 115,708,000 $ 531,000
Depreciated investments - (5,838,000) (3,800,000)
Net unrealized gain (loss) $ 496,487,000 $ 109,870,000 $ (3,269,000)
- --------------------------------------------------------------------------------
NOTE 3 - RELATED PARTIES
T. Rowe Price Associates, Inc. (T. Rowe Price) is the investment manager
for Spectrum Growth and Spectrum Income Funds, and also serves as manager for
the domestic underlying funds. Rowe Price-Fleming International, Inc.
(Price-Fleming) is the investment manager for Spectrum International Fund, and
also serves as manager for the international underlying funds. T. Rowe Price and
its wholly-owned subsidiaries provide transfer and dividend disbursing agent,
accounting, shareholder, administrative, marketing, and certain other services
to the Spectrum Funds. Certain officers and directors of the Spectrum Funds are
also officers and directors of T. Rowe Price, Price-Fleming, and the underlying
funds.
The Spectrum Funds pay no management fees; however, T. Rowe Price and
Price-Fleming receive management fees from managing the underlying funds. In
addition, expenses associated with the operation of the Spectrum Funds are borne
by each underlying fund in proportion to the average daily value of its shares
owned by the Spectrum Funds, pursuant to special servicing agreements between
and among the corporation, the underlying funds, T. Rowe Price, and, in the case
<PAGE>
of Spectrum International, Rowe Price-Fleming. Therefore, the Spectrum Funds
each operate at a zero expense ratio, although the valuations of the underlying
funds reflect the impact of Spectrum investments on management fees and other
expenses of the underlying funds.
The Spectrum Funds do not invest in the underlying funds for the purpose of
exercising management or control; however, investments by Spectrum within the
set limits may represent a significant portion of an underlying fund's net
assets. At December 31, 1997, Spectrum International Fund held less than 25% of
the outstanding shares of any underlying fund. Spectrum Growth Fund held
approximately 31% of the outstanding shares of T. Rowe Price Mid-Cap Value Fund
at December 31, 1997, and Spectrum Income Fund held approximately 55% of the
outstanding shares of T. Rowe Price U.S. Treasury Long-Term Fund, 37% of T. Rowe
Price GNMA Fund, 36% of T. Rowe Price Emerging Markets Bond Fund, and 31% of T.
Rowe Price New Income Fund.
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
Report of Independent Accountants
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
T. ROWE PRICE SPECTRUM FUND, INC.
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Spectrum Growth Fund, Spectrum Income Fund and Spectrum International Fund
(constituting T. Rowe Price Spectrum Fund, Inc., hereafter referred to as the
"Funds") at December 31, 1997, and the results of each of their operations, the
changes in each of their net assets and the financial highlights for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
transfer agent and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 21, 1998
<PAGE>
T. Rowe Price Spectrum Funds
================================================================================
Tax Information (Unaudited) for the Tax Year Ended 12/31/97
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The funds' distributions included capital gain amounts as follows:
- --------------------------------------------------------------------------------
Growth Income International
Fund Fund Fund
- --------------------------------------------------------------------------------
Short-term gains .................... $ 7,346,000 $ 1,698,000 $ 250,000
Total long-term gains ............... 227,714,000 23,769,000 1,502,000
20% category ..................... 148,948,000 11,633,000 1,004,000
For corporate shareholders, 50% of Spectrum Growth Fund's and 5% of
Spectrum Income Fund's distributed income and short-term capital gains qualified
for the dividends-received deduction.
- --------------------------------------------------------------------------------
<PAGE>
T. Rowe Price Shareholder Services
================================================================================
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE 1-800-225-5132 Available Monday through Friday from 8 a.m. to
10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
IN PERSON Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
CHECKING Available on most fixed income funds ($500 minimum).
AUTOMATIC INVESTING From your bank account or paycheck.
AUTOMATIC WITHDRAWAL Scheduled, automatic redemptions.
DISTRIBUTION OPTIONS Reinvest all, some, or none of your
distributions.
AUTOMATED 24-HOUR SERVICES Including Tele*AccessRegistration Mark and
T. Rowe Price OnLine.
DISCOUNT BROKERAGE*
INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals, and
other securities at a savings over regular commission rates.
INVESTMENT INFORMATION
COMBINED STATEMENT Overview of your T. Rowe Price accounts.
SHAREHOLDER REPORTS Fund managers' reviews of their strategies and
results.
T. ROWE PRICE REPORT Quarterly investment newsletter discussing
markets and financial strategies.
PERFORMANCE UPDATE Quarterly review of all T. Rowe Price fund results.
INSIGHTS Educational reports on investment strategies and financial
markets.
INVESTMENT GUIDES Asset Mix Worksheet, College Planning Kit,
Diversifying Overseas: A Guide to International Investing, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning
Kit.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
<PAGE>
T. Rowe Price Mutual Funds
================================================================================
STOCK FUNDS
- --------------------------------------------------------------------------------
DOMESTIC
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications*
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons**
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value**
Spectrum Growth
Total Equity Market Index
Value
INTERNATIONAL/GLOBAL
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
<PAGE>
BOND FUNDS
- --------------------------------------------------------------------------------
DOMESTIC TAXABLE
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
DOMESTIC TAX-FREE
California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
INTERNATIONAL/GLOBAL
Emerging Markets Bond
Global Government Bond
International Bond
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
TAXABLE
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
<PAGE>
TAX-FREE
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
BLENDED ASSET FUNDS
- --------------------------------------------------------------------------------
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD VARIABLE ANNUITY
- --------------------------------------------------------------------------------
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Formerly the closed-end New Age Media Fund. Converted to open-end status on
7/28/97.
** Closed to new investors.
Please call for a prospectus. Read it carefully before you invest or send money.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY. T.
Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
<PAGE>
FOR YIELD, PRICE, LAST TRANSACTION,
CURRENT BALANCE, OR TO CONDUCT
TRANSACTIONS, 24 HOURS, 7 DAYS
A WEEK, CALL TELE*ACCESS [REGISTRATION MARK]:
1-800-638-2587 toll free
FOR ASSISTANCE
WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
TO OPEN A DISCOUNT BROKERAGE
ACCOUNT OR OBTAIN INFORMATION,
CALL: 1-800-638-5660 toll free
INTERNET ADDRESS:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Spectrum Funds.
INVESTOR CENTERS:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor. C08-050 12/31/97
