Semiannual Report
Financial
Services
Fund
June 30, 1998
T. Rowe Price
Report Highlights
- --------------------------------------------------------------------------------
Financial Services Fund
o Despite weakness in May, stocks generated strong gains in the first half;
financial shares also continued to rise.
o Your fund outpaced its peer group average during the last six months. For
the 12-month period, fund performance slightly exceeded the Lipper average
and bested the broad market by a wider margin.
o The economic environment continued to favor financial services companies,
which enjoyed improved profitability and operating efficiency.
o Fund returns were enhanced by merger and acquisition activity and by strong
gains in other key stocks.
o While we are cautious about generally high stock valuations, we continue to
find attractive financial stocks with strong earnings potential.
Fellow Shareholders
Recovering from weakness stemming from the economic crisis in Asia, the U.S.
stock market generated strong gains in the first half of 1998. Although the
market was volatile, this is not entirely unexpected as the S&P 500 works toward
its fourth consecutive annual gain exceeding 20%. Financial stocks were also
strong over the half year and 12-month period ended June 30, 1998.
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 6/30/98 6 Months 12 Months
- ------------------------------------------------------------------------------
Financial Services Fund 15.30% 35.31%
S&P 500 17.71 30.16
Lipper Financial Services
Funds Average 12.19 35.16
In this favorable environment, your fund continued to provide attractive
returns. For the six months ended June 30, 1998, performance surpassed that of
the Lipper peer group average but trailed the unmanaged Standard & Poor's 500
Stock Index. Investors have been favoring the large-capitalization growth stocks
represented in the broad market index. However, for the 12-month period, your
fund slightly outpaced the peer group average and bested the S&P 500 by a wider
margin, reflecting positive investor sentiment toward financial stocks.
MARKET ENVIRONMENT
Mounting problems in several Asian economies prompted investors to question the
underpinnings of the long economic expansion in the U.S. Specifically, currency
devaluations and banking system problems in Korea, Indonesia, Malaysia,
Thailand, and Japan triggered a sharp slowdown in their economic growth and a
reassessment of the stability and growth potential for all of Asia and its
trading partners.
Consequently, economic growth in the U.S. and the related earnings potential of
domestic and multinational companies could be affected. We have seen a
noteworthy deterioration in growth for a number of industry sectors and
companies. Technology and capital equipment companies experienced softening
demand in key Asian markets. Surprisingly, even some food companies such as
Hershey Foods, which has relatively small Asian operations, reported earnings
shortfalls.
Investors also feared that a general slowdown in economic activity and a flood
of cheap imports (due to foreign currency devaluations) would result in severe
pricing pressure and possible deflation in the U.S. This concern was evident in
the specialty chemicals area, where even such stalwarts as DuPont were subjected
to sharp price competition.
However, while the severity and the ultimate effect of these Asian problems
should not be underestimated, the environment for U.S. equities, including
financial services stocks, continued to be positive. The news on inflation,
interest rates, corporate earnings, mutual fund inflows, and investment activity
was all favorable.
Consequently, the earnings drivers for financial companies are still positive.
Credit quality at many commercial and consumer lenders is stable or improving.
U.S. financial companies are participating in a dramatic consolidation that
should continue to improve efficiency. Industry-defining bellwether mergers such
as Travelers Group/Citicorp and NationsBank/BankAmerica should result in the
removal of excess capacity and costs, and facilitate the use of enhanced scale
technologies that will further improve efficiency. Finally, the buoyant U.S.
economy and resultant advances in corporate profitability, personal income, and
liquidity are creating an extremely favorable environment for companies that
provide brokerage and investment management services.
PORTFOLIO REVIEW
Financial stocks performed well as interest rates moderated and investors
remained focused on companies with consistent earnings growth and strong capital
generation, which helped finance sizable share repurchases. Merger activity
heated up, as mentioned, benefiting our major positions in Travelers Group and
Citicorp, which will form Citigroup. The proposed new entity will have access to
100 million consumers in 100 countries. Consistent with its progenitors, the
combined company should exhibit stringent cost controls, heavy stock ownership
by management, aggressive share repurchase, and above-average return on equity
and earnings growth. Other significant fund holdings, NationsBank and
BankAmerica, also posted strong returns as investors began to appreciate the
improvements in efficiency and cash flow that would result from their pending
merger. Investors should benefit as well from the successful integration of
Barnett Banks into NationsBank's strong franchise in the Southeast.
Sector Diversification
- --------------------------------------------------------------------------------
Bank and Trust 31%
Specialty Fin Svcs 28
Insurance 27
Misc Bus Sev 2
Health Care 1
Electrical 1
Other 1
Reserves 9
Based on net assets as of 6/10/98.
Several other standouts in the banking sector were not involved in major
mergers. Chase Manhattan adopted a more stringent capital allocation discipline
while continuing to build dominant positions in key businesses, and investors
took notice. BankBoston improved efficiency, sold nonstrategic businesses, and
invested in several core growth areas, including its Latin American banking
operations. Mellon Bank spurned a merger overture from Bank of New York, but
management's careful control of expenses and its focus on fee-generating
businesses boosted its share price.
The robust economy continued to produce a fertile environment for well-managed
consumer lenders. Investors appreciated the solid growth in loans, revenues, and
earnings in the sector, which enabled Capital One Financial, American Express,
Providian Financial, and Household International to contribute substantially to
performance. The under-lying credit and earnings trends were also solid for
specialty and commercial lenders. Newcourt Credit Group, an innovative and
rapidly growing Canadian-based lender, won important dealer-financing
arrangements with Dell Computer and Lucent Technologies that helped fuel strong
revenue and earnings growth. The CIT Group, a leading provider of equipment
financing and other forms of commercial and retail credit, also performed
solidly.
Several companies in the brokerage and investment management industries
generated powerful returns. Morgan Stanley Dean Witter Discover, a product of
mergers, produced top-tier gains for your fund. The company's heritage of
superior international reach, first rate systems, high return on equity, and
balance sheet strength are driving substantial market share gains and sharp
growth in earnings power. We have already discussed the contribution from
Travelers Group, the fund's largest position. Nationwide Financial Services and
Hartford Life, two highly regarded distributors of annuity-based investment
products, generated strong revenue and earnings growth as well as stock price
gains. Investment management company Franklin Resources also posted strong stock
price appreciation in the first half.
While fundamental trends are mixed in the insurance industry . . . your fund
benefited from strong advances in several key holdings.
While the fundamental trends are mixed in the insurance industry, particularly
in the property casualty area where pricing is highly competitive, your fund
benefited from strong advances in several key holdings. Mid Ocean Limited, a
leading Bermuda-based property casualty reinsurer, was acquired by EXEL, another
strong contributor to performance. Both companies have a history of careful
underwriting, strong control over expenses, and aggressive capital management,
including large share repurchases. The combined company will be an important
force in reinsurance and in the Lloyd's syndicate. Fairfax Financial, a top 10
contributor in the half year, is a unique acquirer of insurance properties,
often buying them at a sharp discount to book and economic values. The company
appears to have made a very advantageous purchase of Xerox's remaining insurance
operations. ACE Limited, a Bermuda-based property catastrophe reinsurer,
continued to make additive acquisitions and has been a stellar stock in the
portfolio.
As always, some holdings fell in value. As we noted in previous reports, the
market has been unforgiving, punishing the stocks of companies with
disappointing earnings. Fortunately, your fund had only two major losers in the
first half. UICI, a leading provider of health insurance for college students,
experienced a material shortfall in one of its specialty health care insurance
businesses. PennCorp Financial Group appears to have lost its focus as several
key executives left the company, and some of its businesses have been put up for
sale. We are carefully analyzing both companies, particularly the fair market
values of PennCorp's various businesses, to ascertain whether the return
potential justifies the risk of holding the stocks.
STRATEGY
Our investment strategy remains the same: we focus on maintaining core holdings
as long as the fundamentals are strong and the valuations reasonable.
Consequently, much of the substantial cash flow the fund received was invested
in existing holdings. Additions to Travelers Group, U.S. Bancorp, BankAmerica,
NationsBank, BANC ONE, Morgan Stanley Dean Witter Discover, and Chase Manhattan
were significant enough to be included among our 10 largest purchases during the
past six months.
However, among our major purchases we did establish some new positions that
should not be seriously affected by developments in Asia. Cleveland-based
National City has a history of strong credit quality and capital strength. With
good market positions in many key Mid-western communities (augmented by the
bank's recent purchase of First of America Banks), National City is poised to
improve efficiency and earnings growth for several years. Associates First
Capital is a leading consumer and commercial lender recently spun off from Ford
Motor. The company has a strong credit culture, and a high percentage of its
loans are secured. Consequently, its credit quality has remained good even in
economic slowdowns. Associates also has an extraordinary record of earnings and
dividend growth stretching for more than 20 years.
OUTLOOK
Stock prices remain expensive by all conventional valuation measures,
particularly the historically low dividend yield of the S&P 500. This makes us
cautious, as do the market's outstanding results during the past years. In
addition, the problems in Asia have the potential to impair earnings growth for
many 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. Despite our caution, we believe the outlook for U.S. stocks and your
fund is still favorable for several reasons:
o Inflation and interest rates remain low. Despite concerns about an economic
slowdown and possible deflation, data show that the economy continues to
grow at a robust pace.
o Earnings growth is still strong at many high-quality U.S. companies, and
many of their share price valuations are reasonable.
o Top-notch entrepreneurial management and sound business models characterize
many fund holdings. Through careful containment of costs and proper
incentives, these companies have improved both their ability to compete and
the durability and predictability of earnings.
o Many holdings generate significant free cash flow, which management will
likely use to repurchase shares or make acquisitions that can enhance stock
performance over time. This could be particularly advantageous if a serious
stock market correction results in lower share prices for these companies
or for potential acquisitions.
While the stock market will not always go up, we believe we can enhance returns
and reduce risk over time by investing in "all season" growth companies that can
increase earnings growth regardless of the economic or interest rate
environment. As always, we try to buy these companies at reasonable stock
valuations.
We appreciate your continued confidence and support.
Respectfully submitted,
Larry J. Puglia
President and Chairman of the Investment Advisory Committee
July 24, 1998
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/98
- ------------------------------------------------------------
Travelers Group 3.5%
BankBoston 2.8
NationsBank 2.7
Chase Manhattan 2.6
BANC ONE 2.5
- ------------------------------------------------------------
Citicorp 2.3
ACE Limited 2.2
First Union 2.1
BankAmerica 2.1
U.S. Bancorp 2.0
- ------------------------------------------------------------
PartnerRe Holdings 1.8
Morgan Stanley Dean Witter Discover 1.8
Willis-Corroon 1.8
Mid Ocean Limited 1.8
Mellon Bank 1.7
- ------------------------------------------------------------
Freddie Mac 1.7
Fannie Mae 1.7
Wells Fargo 1.7
American Express 1.7
EXEL 1.5
- ------------------------------------------------------------
Mutual Risk Management 1.5
The CIT Group 1.5
Washington Mutual 1.4
SLM Holding 1.4
Capital One Financial 1.4
- ------------------------------------------------------------
Total 49.2%
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 6/30/98
Ten Best Contributors
- -----------------------------------------------------------
Chase Manhattan 12(cents)
Mid Ocean Limited 11
Morgan Stanley Dean Witter Discover 11
Capital One Financial* 11
NationsBank 9
Fairfax Financial 8
BankBoston 8
Citicorp 7
EXEL 7
BankAmerica 7
- -----------------------------------------------------------
Total 91(cents)
Ten Worst Contributors
- -----------------------------------------------------------
PennCorp Financial Group -7(cents)
UICI 4
AmerUs Life 2
Provident 1
Excel Realty Trust** 1
Golden West Financial** 1
Mercantile Bancorporation 1
Friedman, Billings, Ramsey Group** 1
AMVESCAP* 1
Security Capital Group** 1
- -----------------------------------------------------------
Total -20(cents)
12 Months Ended 6/30/98
Ten Best Contributors
- -----------------------------------------------------------
ACE Limited 18(cents)
Chase Manhattan 16
Travelers Group 16
First Sierra Financial 15
Mid Ocean Limited 15
EXEL 15
BankBoston 14
Mutual Risk Management 13
Mellon Bank 13
Nationwide Financial Services 12
- -----------------------------------------------------------
Total 147(cents)
Ten Worst Contributors
- -----------------------------------------------------------
Unionamerica Holdings** -10(cents)
Aames Financial** 6
PennCorp Financial Group 6
Erie Indemnity 4
Friedman, Billings, Ramsey Group** 2
Delta Financial 2
Mercury Finance** 1
Onyx Acceptance** 1
AMVESCAP* 1
First Investors Financial** 1
- -----------------------------------------------------------
Total -34(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
- --------------------------------------------------------------------------------
As of 6/30/98
S&P 500 Index Financial Services Fund
9/30/96 10,000 10,000
6/97 13,066 13,666
6/98 17,000 18,492
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 6/30/98 1 Year Inception Date
- --------------------------------------------------------------------------------
Financial Services Fund 35.31% 42.13% 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
- --------------------------------------------------------------------------------
Unaudited
For a share outstanding throughout each period
- --------------------------------------------------------------------------------
Financial Highlights
6 Months Year 9/30/96
Ended Ended Through
6/30/98 12/31/97 12/31/96
NET ASSET VALUE
Beginning of period $ 15.56 $ 11.31 $ 10.00
Investment activities
Net investment income 0.09 0.10* 0.04*
Net realized and
unrealized gain (loss) 2.29 4.58 1.30
Total from
investment activities 2.38 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 $ 17.94 $ 15.56 $ 11.31
---------------------------------------
Ratios/Supplemental Data
Total return(C) 15.30% 41.44%* 13.40%*
Ratio of expenses to
average net assets 1.19%! 1.25%* 1.25%*!
Ratio of net investment
income to average net assets 1.15%! 1.15%* 1.71%*!
Portfolio turnover rate 13.4% 46.0% 5.6%!
Net assets, end of period
(in thousands) $ 263,346 $ 177,335 $ 30,047
(C) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
* 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
- --------------------------------------------------------------------------------
Unaudited June 30, 1998
Statement of Net Assets
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 91.0%
FINANCIAL 84.0%
Bank and Trust 30.5%
BANC ONE 119,752 $ 6,684
BankAmerica 63,000 5,446
BankBoston 132,000 7,342
Chase Manhattan 90,000 6,795
Citicorp 41,010 6,121
First Chicago NBD 20,000 1,773
First International Bancorp 74,000 1,068
First Union 97,000 5,650
Fleet Financial Group 36,000 3,006
H. F. Ahmanson 34,500 2,449
KeyCorp 34,000 1,211
Mellon Bank 65,000 4,526
Mercantile Bancorporation 20,000 1,008
National City 50,000 3,550
NationsBank 93,000 7,114
Norwest 83,000 3,102
U.S. Bancorp 121,000 5,203
Washington Mutual 85,000 3,690
Wells Fargo 12,000 4,428
80,166
Insurance 25.8%
ACE Limited 146,000 5,694
American General 44,000 3,132
American International Group 19,000 2,774
AmerUs Life 41,500 1,344
Erie Indemnity 32,800 943
ESG Re 40,000 883
EXEL 51,000 3,968
Harleysville Group 40,520 846
Hartford Financial Services 23,000 2,631
Hartford Life (Class A) 48,000 2,733
Horace Mann Educators 45,000 1,552
Mercury General 20,000 1,289
Mid Ocean Limited 60,000 $ 4,710
Nationwide Financial Services (Class A) 55,000 2,805
PartnerRe Holdings 95,000 4,845
PennCorp Financial Group 60,640 1,243
Protective Life 82,000 3,008
Provident 59,000 2,035
PXRE 13,000 390
St. Paul Companies 46,000 1,935
Torchmark 40,000 1,830
Transamerica 30,000 3,454
Travelers Property Casualty (Class A) 71,000 3,044
UICI * 61,940 1,688
UNUM 58,000 3,219
W. R. Berkley 31,875 1,278
Willis-Corroon ADR 378,620 4,756
68,029
Financial Services 27.7%
Affiliated Managers Group * 47,000 1,745
American Capital Strategies 18,500 422
American Express 38,500 4,389
AMVESCAP ADR 25,000 1,228
Associates First Capital (Class A) 38,000 2,921
Capital One Financial 29,000 3,601
Capital Re (Class A) 11,000 788
The CIT Group (Class A) 102,500 3,844
Countrywide Credit 25,000 1,269
Delta Financial * 120,000 2,205
Fairfax Financial (CAD) * 7,300 2,847
Fannie Mae 74,000 4,495
Financial Federal * 29,000 778
FINOVA Group 36,000 2,039
First Sierra Financial * 50,000 1,522
Franklin Resources 37,670 2,034
Freddie Mac 96,000 4,518
Household International 54,500 2,711
Imperial Credit Commercial
Mortgage Investment 40,000 521
INMC Mortgage Holdings 150,000 3,412
Leucadia National 50,000 1,653
Metris Companies 4,000 256
Morgan Stanley Dean Witter Discover 53,000 $ 4,843
Newcourt Credit Group 53,000 2,607
Providian Financial 30,000 2,357
SLM Holding 75,000 3,675
Travelers Group 150,199 9,106
Waddell & Reed (Class A) 51,000 1,221
73,007
Total Financial 221,202
CONSUMER NONDURABLES 1.0%
Health Care Services 1.0%
Aetna 35,000 2,665
Total Consumer Nondurables 2,665
CAPITAL EQUIPMENT 0.6%
Electrical Equipment 0.6%
GE 18,000 1,638
Total Capital Equipment 1,638
BUSINESS SERVICES AND
TRANSPORTATION 2.1%
Computer Service and Software 0.6%
DST Systems * 26,000 1,456
1,456
Miscellaneous Business Services 1.5%
Mutual Risk Management 108,300 3,946
3,946
Total Business Services and Transportation 5,402
MISCELLANEOUS COMMON STOCKS 3.3%
Conglomerates 0.3%
Berkshire Hathaway (Class A) * 9 705
705
Other Miscellaneous Common Stocks 3.0% 7,879
Total Miscellaneous Common Stocks 8,584
Total Common Stocks (Cost $186,473) 239,491
Short-Term Investments 8.9%
Money Market Funds 8.9%
Reserve Investment Fund, 5.69% # 23,541,125 $ 23,541
Total Short-Term Investments (Cost $23,541) 23,541
Total Investments in Securities
99.9% of Net Assets (Cost $210,014) $ 263,032
Other Assets Less Liabilities 314
NET ASSETS $ 263,346
----------
Net Assets Consist of:
Accumulated net investment income
- - net of distributions $ 1,337
Accumulated net realized gain/loss
- - net of distributions 3,550
Net unrealized gain (loss) 53,018
Paid-in-capital applicable to
14,681,387 shares of $0.0001 par
value capital stock outstanding;
1,000,000,000 shares authorized 205,441
NET ASSETS $ 263,346
----------
NET ASSET VALUE PER SHARE $ 17.94
----------
# Seven-day yield
* Non-income producing
ADR American depository receipt
CAD Canadian dollar
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
6/30/98
Investment Income
Income
Dividend $ 1,988
Interest 653
Total income 2,641
Expenses
Investment management 806
Shareholder servicing 369
Custody and accounting 51
Registration 51
Prospectus and shareholder reports 34
Legal and audit 6
Directors 3
Miscellaneous 40
Reimbursed to manager 2
Total expenses 1,362
Net investment income 1,279
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 3,456
Foreign currency transactions (2)
Net realized gain (loss) 3,454
Change in net unrealized gain
or loss on securities 25,841
Net realized and unrealized gain (loss) 29,295
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 30,574
---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
6/30/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,279 $ 1,133
Net realized gain (loss) 3,454 3,675
Change in net unrealized gain or loss 25,841 25,992
Increase (decrease) in
net assets from operations 30,574 30,800
Distributions to shareholders
Net investment income -- (1,084)
Net realized gain -- (3,579)
Decrease in net assets
from distributions -- (4,663)
Capital share transactions*
Shares sold 114,916 176,221
Distributions reinvested -- 4,505
Shares redeemed (59,479) (59,575)
Increase (decrease) in
net assets from capital
share transactions 55,437 121,151
Net Assets
Increase (decrease) during period 86,011 147,288
Beginning of period 177,335 30,047
End of period $ 263,346 $ 177,335
---------------------------------
*Share information
Shares sold 6,867 12,854
Distributions reinvested -- 294
Shares redeemed (3,583) (4,407)
Increase (decrease) in shares outstanding 3,284 8,741
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Unaudited June 30, 1998
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
secur-ity. 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, best to 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.
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. 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 $79,248,000 and $27,316,000, respectively, for the six months ended
June 30, 1998.
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.
At June 30, 1998, the aggregate cost of investments for federal income tax and
financial reporting purposes was $210,014,000, and net unrealized gain
aggregated $53,018,000, of which $54,496,000 related to appreciated investments
and $1,478,000 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 $141,000 was payable at June 30, 1998. 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. At June
30, 1998, and for the six months then ended, the effective annual group fee rate
was 0.32%. 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, $50,000 of
unaccrued 1996-1997 fees and expenses were repaid during the six months ended
June 30, 1998.
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 $323,000 for the six months
ended June 30, 1998, of which $59,000 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 six months ended June 30, 1998, totaled
$653,000 and are reflected as interest income in the accompanying Statement of
Operations.
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*Access(registered trademark) and the
T. Rowe Price Web site on the Internet. Address: www.troweprice.com
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 all your accounts with T. Rowe Price.
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.
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
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 Bond!
International Bond
MONEY MARKET FUNDS!!
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
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 named Equity Index.
** Formerly the closed-end New Age Media Fund. Converted to open-end status
on7/28/97.
*** Closed to new investors.
! Formerly named Global Government Bond.
!! Neither the funds nor their share prices are insured or guaranteed by the
U.S. government.
Please call for a prospectus. Read it carefully before investing.
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.
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
"T. Rowe Price, Invest with Comfidence"(registered trademark)
T. Rowe Price Investment Services, Inc., Distributor. F17-051 6/30/98
