Annual Report
Financial
Services
Fund
December 31, 1997
T. Rowe Price
Report Highlights
Financial Services Fund
o Financial services stocks posted strong gains in the second
half, and the broad market registered three straight years
of more than 20% returns.
o Your fund returned 17.36% during the past six months and
41.44% for the year, leading the S&P 500 in both periods
but trailing its peers.
o Performance versus the peer group reflected an
overweighting in insurance and selected mid-cap stocks.
o ACE Limited, EXEL, Travelers Group, and Mellon Bank were
among the top contributors to returns during the 6- and
12-month periods.
o While stocks are fully valued by historical measures, the
outlook remains favorable for financial services companies
because of benign inflation, low interest rates, and
improved efficiency.
Fellow Shareholders
Financial stocks generated strong gains in the second half of
1997, building on the consistent strength they demonstrated
during the first half. Although financial stocks and the overall
market continued to exhibit volatility, this was not entirely
unexpected as the S&P 500 returned over 20% three years in a row
(a modern record). Solid economic growth and restrained
inflation and interest rates continued to provide a fertile
environment for stocks.
Performance Comparison
Periods Ended 12/31/97 6 Months 12 Months
______________________________________________________________
____
Financial Services Fund 17.36% 41.44%
S&P 500 10.58 33.36
Lipper Financial Services
Funds Average 21.12 45.23
Your fund performed well in this favorable environment. Its
17.36% return during the six months ended December 31, 1997,
lagged that of its peer group average but surpassed the
unmanaged Standard & Poor's 500 Stock Index. For the 12-month
period, the Financial Services Fund also trailed the peer group
average but outpaced the S&P 500. The fund's overweighting in
insurance and selected mid-cap stocks dampened returns versus
the Lipper average.
MARKET ENVIRONMENT
The U.S. stock market again surprised many investors with its
consistent strength. Mounting problems in several Asian
economies caused investors to question the durability of the
long economic expansion in the U.S. and many of our trading
partners. Currency devaluations and banking system problems in
Korea, Indonesia, Malaysia, Thailand, the Philippines, and Japan
caused a sharp slowdown in economic growth and a reassessment of
the stability and growth potential for all of Asia. Because
these issues affect several major trading partners, economic
growth in the U.S. and the related earnings growth of domestic
and multinational companies could also be impaired. Some
observers fear that a general slowdown in economic activity and
a flood of cheap imports (due to the devaluation of foreign
currencies) could result in severe pricing pressures in the U.S.
While the severity of Asia's problems should not be
underestimated, the environment for financial stocks continued
to be positive. Inflation and interest rates, mutual fund
inflows, and corporate earnings were favorable. U.S. wholesale
prices declined 1.2% in 1997, and consumer prices continued
their benign trend. Long-term interest rates recently fell to
approximately 5.7%. Crop and related food prices are well
behaved, and energy prices have taken a turn for the better with
crude oil falling well below $20 per barrel.
Downward price pressure in some markets may not cause
significant problems for corporate profits or stock prices in
the U.S. Domestic job growth is solid, with the unemployment
rate at 4.7%. Retail sales ended the holiday season on a strong
note. Perhaps most important, U.S. financial companies continue
to improve their efficiency in ways that may offset some pricing
pressure.
Investors have been particularly concerned about the impact of
Asia on multinational financial companies. Again, although we
have some concerns, we believe there are reasons to be
constructive on the prospects for these companies. U.S.-based
financial companies appear to have limited direct lending
exposure to Asian economies. Even those multinationals with
important operations in the region, such as Citicorp, American
International Group (purchased after the end of the reporting
period), American Express, and Morgan Stanley Dean Witter
Discover, believe the current dislocation could allow them to
win substantial market share in certain Asian countries.
PORTFOLIO REVIEW
Insurance stocks performed well, as interest rates moderated and
investors focused on companies with consistent earnings growth
and strong capital generation, which helped finance sizable
repurchases of shares. In particular, Bermuda-based ACE Limited,
PartnerRe Holdings, and EXEL contributed strongly to returns. We
purchased Travelers Property Casualty, the separately traded
insurance operations of Travelers Group, at attractive prices,
and the stock was another major contributor to performance.
Transamerica continues to divest noncore assets, including the
recent sale of its consumer finance operations. The company's
keen focus on improving efficiency and return on invested
capital helped drive solid stock performance in 1997. Several
specialty insurance companies also generated robust returns.
Mutual Risk Management, the leading provider of alternative risk
management solutions for corporations, continued to post solid
earnings gains and favorable stock performance. Willis-Corroon,
one of four major insurance brokers, also helped boost returns.
Sector Diversification - Pie chart showing:
Insurance 33
Bank and Trust 25
Miscellaneous Business Services 2
Other 2
Reserves 11
Computer Service and Software 2
Specialty Financial Services 23
Consumer Cyclicals 2
In the banking area, Mellon Bank was the standout performer. Its
careful expense management and continued growth in high-return
businesses garnered support from investors. In addition, we
believe the company is considered to be a valuable franchise by
major banks consolidating the banking industry. Wells Fargo
started to solve some of the integration issues that have
plagued its acquisition of First Interstate, and its stock
responded with solid gains later in 1997.
BankBoston (like Mellon and Wells Fargo) is piloted by
management with a strong focus on shareholder interests. The
company's sale of several noncore businesses and consistent
share repurchase helped fuel strong stock performance.
Fortunately, we also held some banks that were acquired in 1997,
as the industry's steady consolidation continued. First
Commerce, a leading Louisiana-based bank, and Signet Banking of
Virginia were purchased for the fund at attractive prices. First
Commerce has announced a planned merger with BANC ONE and Signet
Banking was acquired by First Union, events that allowed us to
generate solid returns and receive shares in First Union, which
we are comfortable owning.
In the diversified financial area, we owned several strong
stocks but failed to exploit this sector as fully as we plan to.
Our largest position, Travelers Group, was the top-performing
stock among the Dow Jones Industrials and a solid contributor to
both second-half and full-year performance. We think the
company's recent acquisitions, including Salomon, will add to
earnings. Fannie Mae and Freddie Mac were major positive
contributors, and both appear well positioned for double-digit
earnings growth beyond 1998. American Express reversed a long
slide in market share in its credit card business and continues
to generate solid growth in its travel and money management
operations. Investors have recognized the company's innovation
and franchise strength, and the stock has done well for several
years.
Unfortunately, we owned stocks that also disappointed as the
market's recent volatility magnified the punishment investors
administered to stocks with deteriorating fundamentals. Aames
Financial and Delta Financial, home equity lenders using
gain-on-sale accounting, suffered as prepayments on outstanding
loans resulted in either lower reported earnings or concern that
earnings growth would slow. We have been aware of the frailties
of this type of accounting and continue to reduce our exposure
to these companies. Erie Indemnity, a small-cap
Pennsylvania-based insurance company, was also a major loser.
However, the company does appear to have quality operations and
a reasonably good track record. Thus, we will continue to
monitor this situation closely before deciding on any future
action.
Aetna, a major financial services and health care company, was
also a disappointment. Although your fund bought the stock after
its price had fallen substantially, problems in the company's
health care operations remain challenging. Aetna is now
aggressively addressing the cost control issues hurting
profitability. Perhaps more important, the company's retirement
services division (financial planning and money management) and
several other divisions have substantial value. Positive actions
by management, including the sale of certain subsidiaries and
substantial share repurchases, could lead to improved stock
results over time.
STRATEGY
Our investment strategy focuses on maintaining core holdings as
long as the fundamentals remain strong and valuations are
reasonable. Consequently, we invested much of the substantial
cash flow the fund has received in existing positions. For
example, additions to Willis-Corroon, BankBoston, PartnerRe
Holdings, and Citicorp were significant enough to put them among
our 10 largest purchases during the past six months.
We initiated other major purchases as well, none of which should
be particularly affected by the developments in Asia. SLM
Holding is the leading buyer and servicer of student loans in
the U.S. The company continues to generate an above-average
return on equity and solid earnings growth. Both BANC ONE and
BankAmerica possess strong franchises and managements that are
disciplined in improving the returns and earnings growth of
their businesses. Washington Mutual is a high-quality thrift,
with the largest franchise in the western U.S. The company's
acquisition and integration of Great Western Financial is
progressing as planned, and the resulting company should
generate strong growth consistent with the company's historical
track record. Newcourt Credit Group, a leading finance company
based in Canada, has an outstanding record of growth and credit
quality. The company's acquisition of AT&T Capital in January
1998 should position it as a franchise finance company with
continued solid earnings growth.
OUTLOOK
Stock valuations remain expensive by all conventional valuation
measures, including the low dividend yield on the S&P 500. We
are also cautious because the market has generated strong
results for several consecutive years, and the problems in Asia
have the potential to hurt earnings growth for various
multinational companies.
However, we realize that sound investing must be driven by the
outlook for the general investment environment, future company
earnings, and careful selection of stocks. Considering these
factors, we believe the outlook for financial stocks and your
fund remains favorable for the following reasons:
o Inflation and interest rate levels continue to be
supportive. Despite concerns about an economic slowdown,
economic data show that the economy is growing at a moderate
pace;
o Earnings growth continues to be very strong at many high-
quality U.S. companies, and the valuations of selected
companies remain reasonable;
o Top-notch, entrepreneurial management and sound business
models at many of our holdings are major positives. Through
careful management of costs and proper incentives, many of
these management teams have improved the competitiveness of
their businesses and also improved the durability and
predictability of earnings;
o Many of our companies generate significant free cash flow,
which shareholder-oriented management will likely use to
repurchase shares or make acquisitions that often enhance
stock performance over time. This may be particularly
advantageous if stock prices weaken in a more challenging
environment.
We invest your money with the knowledge that the stock market
will not always go up. As always, we strive to find companies
with solid market positions, seasoned management, and strong
financial fundamentals since we believe they will provide
superior investment results over time.
We appreciate your continued support in this endeavor.
Respectfully submitted,
Larry J. Puglia
President and Chairman of the Investment Advisory Committee
January 20, 1998
Mailing Error
Those of you who were shareholders in the fund on October 22,
1997, recently received a letter dated October 29 that discussed
the change in the fund's manager from Daniel Theriault to Larry
Puglia. Due to a mailhouse problem of which we had no knowledge,
the letter was not mailed until January 16. Since we make every
effort to inform you of important fund matters in a timely
manner, we regret this error exceedingly. Please accept our
apologies.
T. Rowe Price Financial Services Fund
Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/97
______________________________________________________________
______
Travelers Group 2.8%
PartnerRe Holdings 2.7
Willis-Corroon 2.6
BankBoston 2.4
EXEL 2.3
___________________________________________________________________
ACE Limited 2.3
Chase Manhattan 2.2
Citicorp 2.1
Mid Ocean Limited 2.0
Mellon Bank 2.0
___________________________________________________________________
INMC Mortgage Holdings 2.0
Transamerica 2.0
Mutual Risk Management 1.8
Wells Fargo 1.8
Fannie Mae 1.7
___________________________________________________________________
First Union 1.6
SLM Holding 1.5
BANC ONE 1.4
Protective Life 1.4
Aetna 1.4
___________________________________________________________________
NationsBank 1.3
Fleet Financial Group 1.3
Travelers Property Casualty 1.2
UICI 1.2
PennCorp Financial Group 1.2
___________________________________________________________________
Total 46.2%
T. Rowe Price Financial Services Fund
Portfolio Highlights
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/97
Ten Best Contributors
____________________________________________________________
ACE Limited 11(cents)
Intuit 10
Travelers Group 10
First Sierra Financial 10
Mellon Bank 8
Mutual Risk Management 8
PartnerRe Holdings 8
EXEL 8
Wells Fargo 7
Fannie Mae 7
___________________________________________________________
Total 87(cents)
Ten Worst Contributors
___________________________________________________________
Unionamerica Holdings** -10(cents)
Aames Financial 6
Delta Financial 6
Erie Indemnity 4
Fairfax Financial 3
Aetna* 2
Mercury Finance** 1
NationsBank 1
Onyx Acceptance** 1
First Investors Financial 1
___________________________________________________________
Total -35(cents)
12 Months Ended 12/31/97
Ten Best Contributors
___________________________________________________________
EXEL 22(cents)
Travelers Group 21
ACE Limited 19
Mutual Risk Management 16
First Sierra Financial* 14
Mellon Bank 13
AmerUs Life* 12
Mercury General* 10
PartnerRe Holdings 10
ADVANTA** 10
___________________________________________________________
Total 147(cents)
Ten Worst Contributors
___________________________________________________________
Aames Financial -15(cents)
Mercury Finance** 12
Unionamerica Holdings** 6
Fairfax Financial* 3
PNC Bank** 3
Aetna* 2
Delta Financial 2
Onyx Acceptance** 1
SABRE Group Holdings** 1
ACC Consumer Finance** 1
___________________________________________________________
Total -46(cents)
* Position added
** Position eliminated
T. Rowe Price Financial Services Fund
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the 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.
Financial Services Fund
Financial
S&P 500 Index Services Fund
9/30/96 $10,000 $ 10,000
12/31/96 10,833 11,340
12/31/97 14,448 16,039
Average Annual Compound Total Return
This table shows how the 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 Inception Date
__________________________________________________________________
Financial Services Fund 41.44% 45.87% 9/30/96
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
T. Rowe Price Financial Services Fund
For a share outstanding throughout each period
Financial Highlights
Year 9/30/96
Ended Through
12/31/97 12/31/96
NET ASSET VALUE
Beginning of period $ 11.31 $ 10.00
Investment activities
Net investment income 0.10* 0.04*
Net realized and
unrealized gain (loss) 4.58 1.30
Total from
investment activities 4.68 1.34
Distributions
Net investment income (0.10) (0.03)
Net realized gain (0.33) -
Total distributions (0.43) (0.03)
NET ASSET VALUE
End of period $ 15.56 $ 11.31
__________________________
Ratios/Supplemental Data
Total return 41.44%* 13.40%*
Ratio of expenses to
average net assets 1.25%* 1.25%*!
Ratio of net investment
income to average
net assets 1.15%* 1.71%*!
Portfolio turnover rate 46.0% 5.6%!
Average commission rate paid $ 0.0521 $ 0.0389
Net assets, end of period
(in thousands) $ 177,335 $ 30,047
* Excludes expenses in excess of a 1.25% voluntary expense limitation in
effect through 12/31/98.
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
December 31, 1997
Statement of Net Assets
Shares/Par Value
In thousands
Common Stocks 89.1%
FINANCIAL 77.4%
Bank and Trust 25.5%
BANC ONE 47,000 $ 2,553
BankAmerica 28,000 2,044
BankBoston 45,000 4,227
Barnett Banks 15,000 1,078
Chase Manhattan 35,000 3,832
Citicorp 29,010 3,668
First Chicago NBD 20,000 1,670
First Commerce 19,000 1,281
First International Bancorp 61,000 759
First Union 57,000 2,921
Fleet Financial Group 31,620 2,369
Golden West Financial 12,000 1,174
H. F. Ahmanson 26,600 1,781
KeyCorp 17,000 1,204
Mellon Bank 58,000 3,516
Mercantile Bancorporation 9,000 553
NationsBank 39,000 2,372
Norwest 35,000 1,352
U.S. Bancorp 15,000 1,679
Washington Mutual 31,900 2,035
Wells Fargo 9,435 3,203
45,271
Insurance 31.4%
ACE Limited 42,000 4,053
American General 32,000 1,730
AmerUs Life 41,500 1,536
Citizens Corp. 5,000 144
Erie Indemnity 32,800 980
EXEL 65,000 4,119
Harleysville Group 40,520 980
Hartford Life (Class A) 34,000 1,541
Horace Mann Educators 40,000 1,138
LaSalle Re Holdings 20,000 708
Mercury General 20,000 $ 1,105
Mid Ocean Limited 65,110 3,532
NAC Re 15,000 732
Nationwide Financial
Services (Class A) 59,000 2,131
PartnerRe Holdings 102,360 4,747
PennCorp Financial Group 60,640 2,164
Protective Life 41,000 2,450
Provident 38,000 1,468
PXRE 26,863 892
St. Paul Companies 23,000 1,887
Torchmark 40,000 1,682
Transamerica 32,500 3,461
Travelers Property
Casualty (Class A) 50,010 2,200
Trenwick Group 15,000 553
UICI * 61,940 2,172
UNUM 27,830 1,513
W. R. Berkley 31,875 1,416
Willis-Corroon ADR 378,620 4,662
55,696
Financial Services 20.5%
Aames Financial 85,000 1,100
American Capital Strategies 20,000 359
American Express 21,550 1,923
Capital Re 34,000 2,110
Countrywide Credit 25,000 1,072
Delta Financial * 120,000 1,605
Fairfax Financial (CAD) * 5,800 1,299
Fannie Mae 51,620 2,946
FINOVA Group 12,500 621
First Investors Financial * 17,565 119
First Sierra Financial * 100,000 1,800
Franklin Resources 11,835 1,029
Freddie Mac 51,440 2,157
Household International 10,000 1,276
INMC Mortgage Holdings 148,500 3,480
John Nuveen (Class A) 15,000 525
Leucadia National 54,500 1,880
Liberty Financial Companies 16,200 611
Morgan Stanley Dean Witter Discover 17,500 $ 1,035
Newcourt Credit Group (CAD) 5,000 167
Newcourt Credit Group,
rights, 12/3/98 (CAD) * 52,000 1,721
SLM Holding 19,000 2,643
Travelers Group 90,699 4,886
36,364
Total Financial 137,331
CONSUMER NONDURABLES 1.4%
Health Care Services 1.4%
Aetna 34,000 2,399
Total Consumer Nondurables 2,399
CONSUMER CYCLICALS 1.4%
Building and Real Estate 1.4%
Excel Realty Trust 50,000 1,575
Security Capital Group (Class B) * 26,500 861
Total Consumer Cyclicals 2,436
CAPITAL EQUIPMENT 0.6%
Electrical Equipment 0.6%
GE 15,000 1,101
Total Capital Equipment 1,101
BUSINESS SERVICES AND
TRANSPORTATION 3.5%
Computer Service and Software 1.7%
DST Systems * 26,000 1,110
Intuit * 45,000 1,859
2,969
Miscellaneous Business Services 1.8%
Mutual Risk Management 108,300 3,242
3,242
Total Business Services and
Transportation 6,211
MISCELLANEOUS common stocks 4.8%
Berkshire Hathaway (Class A) * 9 $ 414
Other Miscellaneous Common
Stocks 8,070
Total Miscellaneous Common
Stocks 8,484
Total Common Stocks (Cost
$130,785) 157,962
Short-Term Investments 11.4%
Money Market Funds 11.4%
Reserve Investment Fund,
5.84% # $20,213,594 20,214
Total Short-Term Investments
(Cost $20,214) 20,214
Total Investments in Securities
100.5% of Net Assets (Cost
$150,999) $178,176
Other Assets Less Liabilities (841)
NET ASSETS $177,335
___________
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 58
Accumulated net realized gain/loss -
net of distributions 96
Net unrealized gain (loss) 27,177
Paid-in-capital applicable to
11,397,810 shares of $0.0001 par
value capital stock outstanding;
1,000,000,000 shares authorized 150,004
NET ASSETS $177,335
___________
NET ASSET VALUE PER SHARE $ 15.56
___________
* Non-income producing
# Seven-day yield
ADR American Depository Receipt
CAD Canadian dollar
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
Statement of Operations
In thousands
Year
Ended
12/31/97
Investment Income
Income
Dividend $ 1,828
Interest 532
Total income 2,360
Expenses
Investment management 636
Shareholder servicing 341
Registration 96
Custody and accounting 89
Prospectus and shareholder reports 31
Legal and audit 16
Directors 6
Miscellaneous 12
Total expenses 1,227
Net investment income 1,133
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 3,684
Foreign currency transactions (9)
Net realized gain (loss) 3,675
Change in net unrealized gain
or loss on securities 25,992
Net realized and unrealized
gain (loss) 29,667
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 30,800
___________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
Statement of Changes in Net Assets
In thousands
Year 9/30/96
Ended Through
12/31/97 12/31/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,133 $ 63
Net realized gain (loss) 3,675 6
Change in net unrealized
gain or loss 25,992 1,185
Increase (decrease) in net
assets from operations 30,800 1,254
Distributions to shareholders
Net investment income (1,084) (74)
Net realized gain (3,579) -
Decrease in net assets
from distributions (4,663) (74)
Capital share transactions*
Shares sold 176,221 31,393
Distributions reinvested 4,505 71
Shares redeemed (59,575) (2,744)
Increase (decrease) in net
assets from capital
share transactions 121,151 28,720
Net equalization - 47
Net Assets
Increase (decrease) during
period 147,288 29,947
Beginning of period 30,047 100
End of period $ 177,335 $ 30,047
______________________________
*Share information
Shares sold 12,854 2,889
Distributions reinvested 294 6
Shares redeemed (4,407) (248)
Increase (decrease) in shares
outstanding 8,741 2,647
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
December 31, 1997
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Financial Services Fund, Inc. (the fund) is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on September 30, 1996.
The accompanying 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 Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price on the day the valuations
are made. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market
for such security. Listed securities not traded on a particular day and
securities regularly traded in the over-the-counter market are valued at the
mean of the latest bid and asked prices. Other equity securities are valued
at a price within the limits of the latest bid and asked prices deemed by the
Board of Directors, or by persons delegated by the Board, to best reflect
fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities 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.
Currency Translation Assets and liabilities are translated into U.S. dollars
at the prevailing exchange rate at the end of the reporting period. Purchases
and sales of securities and income and expenses are translated into U.S.
dollars at the prevailing exchange rate on the dates of such transactions.
The effect of changes in foreign exchange rates on realized and unrealized
security gains and losses is reflected as a component of such gains and
losses.
Premiums and Discounts Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and distributions
to shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income
tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. Effective January 1, 1997, the fund
discontinued its practice of equalization. The results of operations and net
assets were not affected by this change.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $142,399,000 and $41,401,000, respectively, for the
year ended December 31, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended December 31, 1997. The
results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
Undistributed net investment income $ 9,000
Paid-in capital (9,000)
At December 31, 1997, the aggregate cost of investments for federal income
tax and financial reporting purposes was $150,999,000, and net unrealized
gain aggregated $27,177,000, of which $29,129,000 related to appreciated
investments and $1,952,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $100,000 was payable at December 31, 1997. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to 0.35%
of average daily net assets and a group fee. The group fee is based on the
combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges from
0.48% for the first $1 billion of assets to 0.30% for assets in excess of $80
billion. The effective annual group fee rate was 0.32% at December 31, 1997,
and 0.33% for the year then ended. The fund pays a pro-rata share of the
group fee based on the ratio of its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through December 31, 1998, which would cause
the fund's ratio of expenses to average net assets to exceed 1.25%.
Thereafter, through December 31, 2000, the fund is required to reimburse the
manager for these expenses, provided that average net assets have grown or
expenses have declined sufficiently to allow reimbursement without causing
the fund's ratio of expenses to average net assets to exceed 1.25%. Pursuant
to this agreement, $24,000 of management fees were not accrued by the fund
for the year ended December 31, 1997. Additionally, $26,000 of unaccrued fees
and expenses are subject to reimbursement through December 31, 2000.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc.,
is the fund's transfer and dividend disbursing agent and provides shareholder
and administrative services to the fund. T. Rowe Price Retirement Plan
Services, Inc., provides subaccounting and recordkeeping services for certain
retirement accounts invested in the fund. The fund incurred expenses pursuant
to these related party agreements totaling approximately $316,000 for the
year ended December 31, 1997, of which $34,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended December
31, 1997, totaled $292,000 and are reflected as interest income in the
accompanying Statement of Operations.
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 fund's distributions to shareholders included:
o $3,579,000 from short-term capital gains.
For corporate shareholders, 25% of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
T. Rowe Price Financial Services Fund
Report of Independent Accountants
To the Shareholders and Board of Directors of
T. Rowe Price Financial Services Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe Price
Financial Services Fund, Inc. as of December 31, 1997, and the related
statement of operations for the year then ended, and the statement of changes
in net assets and the financial highlights for the year then ended and the
period from September 30, 1996 (commencement of operations) through December
31, 1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
investments owned as of December 31, 1997, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
T. Rowe Price Financial Services Fund, Inc. as of December 31, 1997, the
results of its operations, the changes in its net assets and financial
highlights for each of the respective periods stated in the first paragraph,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
January 21, 1998
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
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 Financial Services Fund.
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
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor.F17-050 12/31/97
