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T. Rowe Price
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Annual Report
Financial Services Fund
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December 31, 1998
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REPORT HIGHLIGHTS
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Financial Services Fund
* Stocks enjoyed another powerful year, but financial stocks fell behind
after keeping pace during the first half.
* The fund returned -3.25% and 11.55% for the 6- and 12-month periods
ended December 31, 1998, respectively, ahead of its Lipper benchmark
but behind the S&P 500.
* Several bank stocks were portfolio standouts, but BankAmerica and
Citigroup disappointed because of trading and loan losses.
* We continued to emphasize core holdings and established several new
positions, including General Re and Allstate.
* While we expect the economy to slow, we believe we can enhance returns
through financial companies with the ability to increase earnings
growth in any economic environment.
FELLOW SHAREHOLDERS
<PAGE>
Despite its extreme volatility, the U.S. stock market generated strong gains
again in 1998. While financial stocks kept pace with the overall market during
the first half of the year, concerns over slowing global economic growth,
emerging markets losses, and bond market illiquidity took a toll on financial
stock performance during the second half.
================================================================================
Performance Comparison
----------------------
Periods Ended 12/31/98 6 Months 12 Months
---------------------- -------- ---------
Financial Services Fund -3.25% 11.55%
S&P 500 9.22 28.57
Lipper Financial Services
Funds Average -4.90 6.92
================================================================================
In this challenging environment, your fund provided a negative return over
the past six months but respectable results for the full year. For both periods,
fund performance trailed that of the unmanaged Standard & Poor's 500 Stock Index
and surpassed the Lipper average for similar funds. The S&P 500 benefited from
continuing favorable investor sentiment toward large-capitalization growth
stocks and from powerful performance from a surprisingly narrow group of stocks
that accounted for much of the return. As mentioned, financial stocks fell out
of favor during the second half of the year, which made it virtually impossible
for funds like ours to keep up with the broad market.
MARKET ENVIRONMENT
The Russian government's debt default during the summer prompted investors
to flee emerging markets worldwide. While market participants were questioning
whether economic problems in Russia and other Asian countries would spread to
Brazil, investors were also becoming increasingly concerned about Japan's
fragile banking system and political turmoil here in the United States. In
response to these uncertainties, investors shunned risky instruments of all
types and sought the safety of U.S. Treasury securities.
================================================================================
Preparing For The Year 2000
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<PAGE>
The Year 2000 draws closer every day, and it holds special meaning beyond
the arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations.
T. Rowe Price has been taking steps to assure that its computer systems and
processes are capable of functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are currently being executed.
OUR PLAN OF ACTION
We began to address these issues several years ago by requiring that all
new systems process and store four-digit years. All critical systems have been
reprogrammed (including business applications required to service our customers
and processing infrastructure necessary to ensure the integrity of customer data
and investments), and they are currently being tested. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be able
to modify their interface files prior to December 31, 1999. In addition, we are
scheduling tests for critical vendors and companies that claim Year 2000
compliance to ensure that time-related data and calculations function properly
as we move into the next century.
SMOOTH TRANSITION PLANNED
We believe our programs and initiatives will provide a smooth transition
into the next millennium. We are assessing all systems providing products or
services to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we have modified them where necessary for the Year 2000.
The Securities Industry Association (SIA) is coordinating Year 2000 testing
to assure that securities markets, clearing corporations, depositories, and
third party service providers can send, receive, and process files and
transactions accurately. In late July 1998, the SIA completed a beta test of
Year 2000 readiness. The test was considered successful in terms of transactions
completed and will serve as the basis for the SIA's industry-wide approach.
During October 1998, T. Rowe Price completed its beta test of Year 2000
readiness with the SIA and is ready for the industry-wide test that is scheduled
for March and April 1999.
For a more detailed discussion of our Year 2000 effort, as well as
continuing updates on our progress, please check our Web site
(WWW.TROWEPRICE.COM).
================================================================================
<PAGE>
The resulting increase in credit spreads (yield premiums that investors
demand for owning riskier bonds) and bond market illiquidity caused trading
losses for many financial institutions. While U.S.-based banks and brokerage
firms had sufficient earnings, capital, and reserves to absorb those losses,
leveraged hedge funds did not. In order to avert the market disruption that
would have accompanied the failure of hedge fund Long-Term Capital Management,
14 international banks and brokerage firms, including three of your fund's
holdings, were compelled to make an emergency capital infusion totaling $3.5
billion.
Responding to signs of slowing U.S. economic growth, sharp equity and
corporate bond market declines, and the inability of some businesses to obtain
credit, the Federal Reserve began lowering interest rates in late September. The
second rate cut, which came in October, sparked a U.S. equity market recovery
that was nothing short of spectacular. Low inflation, falling interest rates,
and mutual fund inflows helped support the rally.
Although the broad stock market has recovered, economic difficulties in
emerging markets have dampened growth prospects for many U.S. firms. Demand for
U.S. exports has fallen, commodity prices are at 30-year lows in constant
dollars, and the U.S. manufacturing sector is contracting. While the ultimate
severity and effect of emerging markets' difficulties should not be
underestimated, the financial strength and competitive position of U.S.
companies should allow them to successfully cope with, or adapt to, the
challenging environment. The management of Exxon and Mobil did just that by
merging to create the world's largest integrated oil company in the face of
historically low crude prices.
In spite of the market turmoil, the factors driving the earnings of
financial services companies remain intact. Commercial credit quality is stable
while some areas of consumer credit quality are improving. U.S. financial
companies are participating in a dramatic consolidation, which should enhance
efficiency and provide sufficient scale to support investments in technology and
products. Financial company fundamentals could actually benefit from 1998's
turmoil as managements identify inadequacies in their risk management systems
and refocus on expense management. Additionally, a number of aggressive
specialty lenders either scaled back or failed, which should serve to
rationalize competition.
PORTFOLIO REVIEW
After three consecutive years of outperforming the broader market,
financial stocks lagged in 1998 despite falling interest rates. Your fund's
performance versus the S&P 500 can be attributed to a number of fundamental
issues. These include emerging markets lending and trading losses, difficulties
involving the integration of merging companies, the impact of lower interest
rates and a flat yield curve on portfolio yields, and the possibility of a less
robust U.S. economy.
<PAGE>
[edgar description: insert Sector Diversification pie chart showing
Insurance 25%, Bank and Trust 42%, Specialty Financial Services 27%,
Miscellaneous Business Services 2%, Conglomerates 1%, Electrical Equipment 1%,
and Reserves 2%]
As is often the case in choppy markets, performance within sectors was not
uniform. Financial services companies with consistent earnings growth and a
lower risk profile were rewarded, while companies with emerging markets or
capital markets exposure were viewed less favorably regardless of whether their
main business was in banking, brokerage, or insurance. Bank of New York, State
Street, and TeleBanc Financial were standouts among your fund's bank holdings.
Bank of New York combined strong top-line growth from its securities processing
businesses with expense and capital discipline to produce industry-leading
returns. State Street continued to focus on fee-oriented businesses such as
custody and asset management, both of which benefited from strong mutual fund
flows and market appreciation. TeleBanc Financial generated considerable growth
through its Internet delivery strategy. The market was particularly pleased with
the announcement of TeleBanc's alliance with Internet search engine Yahoo!.
Predominantly domestic super-regional banks such as First Union and Wells Fargo
delivered steady performance, and investors also rewarded Chase Manhattan's
careful management of expenses and capital, notwithstanding the company's
market-sensitive business mix and substantial exposure to Asia and Latin
America.
However, performance within the banking sector was uneven. BankA merica,
the fund's largest position, suffered significant losses asa result of an
unsecured lending relationship with hedge fund D.E. Shaw, as well as overseas
trading losses. Investors also began to question whether BankAmerica's
management will be able to successfully integrate NationsBank and the old Bank
of America in light of the resignation of former BofA CEO David Coulter. We
believe they will. Citigroup, another large position, suffered from similar
issues as the magnitude of the company's proprietary trading losses stunned
investors, and clashes between executives from Salomon Smith Barney and Citibank
led to the resignation of Citigroup President Jamie Dimon. While Dimon is a
talented manager, we have met with his successors and believe Citigroup is well
positioned.
Record mortgage refinancing, stellar credit quality, and attractive
investment opportunities drove results at Freddie Mac and Fannie Mae. Underlying
credit and earnings trends were also favorable for high-quality consumer
lenders. In particular, a deceleration in personal bankruptcies and record low
unemployment combined to improve loss rates on several credit card portfolios,
especially at Capi tal One Financial, which is now experiencing record account
growth and profitability. Associates First Capital, which finances both
consumers and businesses, has a stellar long-term growth record and superb
financial strength. The company's stock performed well as management augmented
solid internal receivables growth with several portfolio acquisitions that
should boost earnings growth next year. Unfortunately, other smaller,
less-capitalized nonbank lenders didn't fare as well. Despite maintaining
reasonable credit quality, consumer and specialty lenders Newcourt Credit Group,
IndyMac Mortgage Holdings, and Delta Financial were damaged by an inability to
obtain funding at attractive rates when the market for asset-backed securities
crashed in September.
<PAGE>
While all companies in the brokerage and investment management industries
were bruised by the market turmoil, some healed more quickly. Morgan Stanley
Dean Witter's diversified business mix and strong balance sheet weathered the
storm surprisingly well, setting the stage for a rapid recovery. However, poor
investment performance and escalating information technology expenses continue
to plague Franklin Resources. Given the firm's strong brands and recently
announced cost-saving initiatives, we expect Franklin to overcome these problems
in time.
Among insurance holdings, your fund benefited from consolidation although
fundamental trends remained mixed. U.K.-based insurance broker Willis-Corroon
was acquired by buyout firm Kohlberg, Kravis & Roberts. Provident, the country's
largest provider of individual disability insurance, is merging with UNUM, which
specializes in group disability. The new company, to be called UNUMProvident,
will have dominant positions in all areas of the under-penetrated disability
insurance market. This combination affords the opportunity to eliminate staff
and expand global distribution. Commercial property and casualty companies such
as Travelers Property Casualty continued to suffer from pricing pressures as a
result of intense competition and industry overcapacity. While Travelers
Property Casualty's management is focused on growing personal lines businesses
and increasing efficiency, the stock has languished.
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 cash flow the fund received was invested in existing
holdings. Additions to Associates First Capital, First Union, The CIT Group, and
Chase Manhattan were significant enough to be among our 10 largest purchases
during the past six months.
However, we did take advantage of the opportunity presented by the market's
indiscriminate sell-off to establish new positions. Several of these, including
Bank of New York, State Street, and TeleBanc Financial, were made at what proved
to be very attractive prices and, as a result, have already been discussed as
major contributors during the six-month period. Other new purchases include
General Re and Allstate. We bought General Re after the announcement that the
company was to be acquired by Berkshire Hathaway. We believe the resulting
company will differentiate itself through its capacity to take on unique
underwriting risks. Allstate is a leading personal lines insurer that has
recently suffered from lackluster premium growth but has a new CEO committed to
improving top-line growth and aggressively managing expenses and capital.
OUTLOOK
Stock prices continue to look expensive by all conventional measures,
particularly when the outlook for slower growth in corporate earnings is
considered. This makes us cautious, as do the market's record-breaking four-year
gains. In addition, economic problems in neighboring Latin America could prove
harmful to the domestic economy and, consequently, to the financial services
sector.
<PAGE>
However, we realize that the outlook for the general investment
environment, future company earnings, and above all careful selection of stocks
drive sound investing. Despite our caution, we believe the outlook for financial
services stocks and your fund is still favorable for several reasons:
* Despite concerns about an economic slowdown and possible deflation,
data show that the economy continues to grow at a robust pace. Low
inflation and declining interest rates are accompanying record low
unemployment. This is a powerful combination that has rarely occurred
before.
* Earnings growth is still strong at many high-quality financial
companies, and the share price valuations of financial companies are
attractive relative to the market.
* Top-notch entrepreneurial management and sound business models
characterize 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.
* Many holdings generate significant free cash flow, which management is
likely to 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 financial 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,
/s/
Larry J. Puglia
President and Chairman of the Investment Advisory Committee
January 22, 1999
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
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Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/98
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BankAmerica 5.3%
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Citigroup 4.2
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First Union 4.1
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Wells Fargo 4.0
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EXEL 3.9
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Bank of New York 3.8
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Freddie Mac 3.7
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Chase Manhattan 3.6
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Associates First Capital 3.4
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Fannie Mae 3.0
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Bank One 3.0
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ACE Limited 2.8
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Mellon Bank 2.8
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The CIT Group 2.7
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Morgan Stanley Dean Witter 2.4
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PartnerRe Holdings 2.3
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UNUM 2.1
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American General 2.1
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Fairfax Financial 2.1
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American Express 2.0
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U.S. Bancorp 1.9
- ---------------------------------------------------------
Mutual Risk Management 1.9
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State Street 1.9
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Washington Mutual 1.8
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American International Group 1.7
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Total 72.5%
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
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Portfolio Highlights
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/98
================================================================================
Ten Best Contributors
- ---------------------
Freddie Mac 18 cents
Bank of New York * 14
Willis-Corroon ** 10
Fannie Mae 9
State Street * 8
TeleBanc Financial * 8
Associates First Capital 8
Wells Fargo 5
First Union 4
Provident 3
Total 87 cents
Ten Worst Contributors
- ----------------------
Citigroup -20 cents
BankAmerica 19
BankBoston 14
Newcourt Credit Group ** 11
IndyMac Mortgage Holdings ** 9
Franklin Resources 7
Delta Financial ** 7
Travelers Property Casualty 7
SLM Holdings ** 7
U.S. Bancorp 6
Total -107 cents
<PAGE>
12 Months Ended 12/31/98
================================================================================
Ten Best Contributors
- ---------------------
Freddie Mac 20 cents
Bank of New York * 14
Mid Ocean Limited *** 12
Capital One Financial * 12
Fannie Mae 11
Willis-Corroon ** 10
Chase Manhattan 9
American General 9
First Union 9
State Street * 8
Total 114 cents
Ten Worst Contributors
- ----------------------
PennCorp Financial Group ** -10 cents
IndyMac Mortgage Holdings ** 10
Travelers Property Casualty 8
UICI ** 7
Citigroup 7
BankBoston 7
Franklin Resources 5
Newcourt Credit Group ** 5
AMRESCO** 3
H.F. Ahmanson *** 3
Total -65 cents
* Position added
** Position eliminated
*** Acquired by another company
================================================================================
<PAGE>
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 SEC Chart shown here]
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 12/31/98 1 Year Inception Date
- ---------------------- ------ --------- ----
Financial Services Fund 11.55% 29.48% 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.
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
For a share outstanding throughout each period
Financial Highlights
- --------------------
Year 9/30/96
Ended Through
12/31/98 12/31/97 12/31/96
-------- -------- --------
NET ASSET VALUE
Beginning of period $15.56 $11.31 $10.00
Investment activities
Net investment income 0.16 0.10* 0.04*
Net realized and
unrealized gain (loss) 1.60 4.58 1.30
Total from
investment activities 1.76 4.68 1.34
Distributions
Net investment income (0.16) (0.10) (0.03)
Net realized gain (0.34) (0.33) -
Total distributions (0.50) (0.43) (0.03)
NET ASSET VALUE
End of period $16.82 $15.56 $11.31
Ratios/Supplemental Data
Total return + 11.55% 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 0.94% 1.15%* 1.71%*++
Portfolio turnover rate 46.8% 46.0% 5.6%++
Net assets, end of period
(in thousands) $ 224,277 $ 177,335 $ 30,047
- --------------------------------------------------------------------------------
+ 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.
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
December 31, 1998
Statement of Net Assets
Shares Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 98.0%
=====FINANCIAL==92.8%==========================================================
Bank and Trust 40.9%
Bank of New York 210,000 $ 8,452
- -------------------------------------------------------------------------------
Bank One 130,152 6,646
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BankAmerica 196,791 11,832
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BankBoston 95,000 3,699
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Chase Manhattan 120,000 8,167
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Citigroup 190,724 9,441
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First International Bancorp 74,000 641
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First Union 150,000 9,122
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Fleet Financial Group 81,000 3,620
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Mellon Bank 90,000 6,187
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National City 36,000 2,610
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State Street 60,000 4,174
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U.S. Bancorp 122,000 4,331
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Washington Mutual 102,960 3,932
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Wells Fargo 223,000 8,906
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91,760
- -------------------------------------------------------------------------------
<PAGE>
Insurance 26.7%
ACE Limited 185,000 6,371
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Allstate 50,000 1,931
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American General 60,000 4,680
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American International Group 38,500 3,720
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CMAC Investment 15,000 689
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Erie Indemnity 32,800 1,025
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EXEL (Class A) 115,290 8,647
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Fairfax Financial (CAD) * 7,300 2,579
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Fairfax Financial, Rights (144a) (CAD) * 6,100 2,047
- -------------------------------------------------------------------------------
Harleysville Group 30,520 783
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Hartford Financial Services Group 56,000 3,073
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Horace Mann Educators 45,000 1,283
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Mercury General 15,000 657
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Nationwide Financial Services (Class A) 45,000 2,326
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PartnerRe Holdings 114,000 5,215
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Protective Life 82,000 3,265
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Provident 66,000 2,739
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Torchmark 40,000$ 1,413
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Travelers Property Casualty (Class A) 86,000 2,666
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UNUM 80,400 4,693
- -------------------------------------------------------------------------------
59,802
- -------------------------------------------------------------------------------
<PAGE>
Financial Services 25.2%
Affiliated Managers Group * 52,000 1,554
- -------------------------------------------------------------------------------
American Express 43,000 4,397
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AMVESCAP ADR 34,000 1,309
- -------------------------------------------------------------------------------
Associates First Capital (Class A) 180,000 7,628
- -------------------------------------------------------------------------------
Capital One Financial 29,000 3,335
- -------------------------------------------------------------------------------
Fannie Mae 90,500 6,697
- -------------------------------------------------------------------------------
Financial Federal * 54,000 1,337
- -------------------------------------------------------------------------------
FINOVA Group 67,000 3,614
- -------------------------------------------------------------------------------
Franklin Resources 55,000 1,760
- -------------------------------------------------------------------------------
Freddie Mac 129,000 8,312
- -------------------------------------------------------------------------------
Household International 26,500 1,050
- -------------------------------------------------------------------------------
Morgan Stanley Dean Witter 77,000 5,467
- -------------------------------------------------------------------------------
TeleBanc Financial * 50,200 1,716
- -------------------------------------------------------------------------------
The CIT Group (Class A) 187,000 5,949
- -------------------------------------------------------------------------------
Waddell & Reed Financial (Class A) 72,076 1,707
- -------------------------------------------------------------------------------
Waddell & Reed Financial (Class B) * 29,996 697
- -------------------------------------------------------------------------------
56,529
- -------------------------------------------------------------------------------
Total Financial 208,091
- -------------------------------------------------------------------------------
=====CAPITAL=EQUIPMENT==1.0%===================================================
Electrical Equipment 1.0%
GE 21,000 2,143
- -------------------------------------------------------------------------------
Total Capital Equipment 2,143
<PAGE>
BUSINESS=SERVICES=AND
TRANSPORTATION==2.1%
Miscellaneous Business Services 2.1%
Checkfree Holdings * 25,000 583
- -------------------------------------------------------------------------------
Mutual Risk Management 108,300 4,237
- -------------------------------------------------------------------------------
Total Business Services and Transportation 4,820
=====MISCELLANEOUS==2.1%=======================================================
Berkshire Hathaway (Class A) * 39$ 2,730
- -------------------------------------------------------------------------------
Berkshire Hathaway (Class B) * 13 30
- -------------------------------------------------------------------------------
Other Miscellaneous Common Stocks 2,001
- -------------------------------------------------------------------------------
Total Miscellaneous 4,761
- -------------------------------------------------------------------------------
Total Common Stocks (Cost $181,631) 219,815
=====Short-Term=Investments==1.9%==============================================
Money Market Funds 1.9%
Reserve Investment Fund, 5.42% # 4,207,729 4,208
Total Short-Term Investments (Cost $4,208) 4,208
=Total=Investments=in=Securities===============================================
99.9% of Net Assets (Cost $185,839) $ 224,023
Other Assets Less Liabilities 254
NET ASSETS $ 224,277
===============================================================================
Net Assets Consist of:
Accumulated net realized gain/loss - net of distributions $ (1,063)
Net unrealized gain (loss) 38,184
Paid-in-capital applicable to 13,334,431 shares of $0.0001 par
value capital stock outstanding; 1,000,000,000 shares authorized 187,156
- -------------------------------------------------------------------------------
NET ASSETS $ 224,277
NET ASSET VALUE PER SHARE $ 16.82
===============================================================================
# Seven-day yield
* Non-income producing
144a Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers - total of such securities at period-end amounts
to .91% of net assets.
ADR American Depository Receipt
CAD Canadian dollar
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Statement of Operations
Year
Ended
12/31/98
==Investment=Income============================================================
Income
Dividend $ 3,783
Interest 1,080
- -------------------------------------------------------------------------------
Total income 4,863
- -------------------------------------------------------------------------------
Expenses
Investment management 1,582
Shareholder servicing 775
Registration 135
Custody and accounting 99
Prospectus and shareholder reports 73
Legal and audit 12
Directors 7
Miscellaneous 42
Reimbursed to manager 2
- -------------------------------------------------------------------------------
Total expenses 2,727
- -------------------------------------------------------------------------------
Net investment income 2,136
- -------------------------------------------------------------------------------
==Realized=and=Unrealized=Gain=(Loss)==========================================
Net realized gain (loss)
Securities 3,140
Foreign currency transactions 2
- -------------------------------------------------------------------------------
Net realized gain (loss) 3,142
Change in net unrealized gain or loss on securities 11,007
- -------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 14,149
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
===============================================================================
ASSETS FROM OPERATIONS $ 16,285
===============================================================================
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
InThousands
Year
Ended
12/31/98 12/31/97
==Increase=(Decrease)=in=Net=Assets============================================
Operations
Net investment income $ 2,136 $ 1,133
Net realized gain (loss) 3,142 3,675
Change in net unrealized gain or loss 11,007 25,992
- -------------------------------------------------------------------------------
Increase (decrease) in net assets from operations 16,285 30,800
- -------------------------------------------------------------------------------
Distributions to shareholders
Net investment income (2,107) (1,084)
Net realized gain (4,477) (3,579)
- -------------------------------------------------------------------------------
Decrease in net assets from distributions (6,584) (4,663)
- -------------------------------------------------------------------------------
Capital share transactions *
Shares sold 171,412 176,221
Distributions reinvested 6,364 4,505
Shares redeemed (140,535) (59,575)
- -------------------------------------------------------------------------------
Increase (decrease) in net assets from capital
share transactions 37,241 121,151
==Net=Assets===================================================================
Increase (decrease) during period 46,942 147,288
Beginning of period 177,335 30,047
End of period $ 224,277 $ 177,335
===============================================================================
*Share information
Shares sold 10,282 12,854
Distributions reinvested 406 294
Shares redeemed (8,752) (4,407)
- -------------------------------------------------------------------------------
Increase (decrease) in shares outstanding 1,936 8,741
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
December 31, 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
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, 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.
<PAGE>
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.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $144,345,000 and $96,938,000, respectively, for the year
ended December 31, 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.
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, 1998. The results
of operations and net assets were not affected by the increases/(decreases) to
these accounts.
Undistributed net investment income $ (87,000)
Undistributed net realized gain 176,000
Paid-in-capital (89,000)
At December 31, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$185,839,000. Net unrealized gain aggregated $38,184,000 at period-end, of which
$41,133,000 related to appreciated investments and $2,949,000 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 $127,000 was payable at December 31, 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
December 31, 1998, and for the year 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.
<PAGE>
Under the terms of the investment management agreement, the manager was
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,
$48,000 of previously unaccrued management fees were recognized and $2,000 of
other expenses were reimbursed to the manager during the year ended December 31,
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 $669,000 for the year ended
December 31, 1998, of which $72,000 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, 1998, totaled
$1,080,000 and are reflected as interest income in the accompanying Statement of
Operations.
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Shareholders of
T. Rowe Price Financial Services Fund, Inc.
In our opinion, the accompanying statement 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
T. Rowe Price Financial Services Fund, Inc. (the "Fund") at December 31, 1998,
and the results of its operations, the changes in its 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 Fund's 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 examini ng, 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 financialstatement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998, by
correspondence with custodians, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 21, 1999
================================================================================
<PAGE>
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 12/31/98
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:
* $472,000 from short-term capital gains,
* $3,950,000 from long-term capital gains, all of which is subject
to the 20% rate gains category.
For corporate shareholders, $2,645,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
================================================================================
<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 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 Investment Services, Inc., Distributor. F17-050 12/31/98
