Annual Report
Financial
Services
Fund
December 31, 1999
T. Rowe Price
Report Highlights
- --------------------------------------------------------------------------------
Financial Services Fund
o While technology shares were strong in 1999, many sectors lagged including
financial services stocks.
o The fund's return was well off the pace of the S&P 500 but exceeded the
peer group average.
o Rising interest rates were negative for our group, but many positive trends
emerged such as the elimination of barriers among financial institutions.
o Many global leaders in financial services industries were among our top
performers.
o Despite the threat of further rate hikes in 2000, we believe our portfolio
of well-diversified financial stocks can benefit shareholders over time.
UPDATES AVAILABLE
For updates on T. Rowe Price funds following the end of each calendar quarter,
please see our Web site at www.troweprice.com.
Fellow Shareholders
The S&P 500 registered its fifth straight year of returns in excess of 20%, but
many sectors of the market, including financial stocks, languished in 1999.
Faced with three hikes in short-term interest rates by the Federal Reserve and a
negative operating environment in some areas of the financial services industry,
your fund posted weak results for the year following a strong return during the
first half.
Performance Comparison
---------------------------------------------------------------------------
Periods Ended 12/31/99 6 Months 12 Months
Financial Services Fund -6.57% 1.70%
S&P 500 7.71 21.04
Lipper Financial Services
Funds Average -8.07 -1.04
In a market dominated by a small group of growth stocks, particularly
high-flying technology shares, your fund was well off the pace of the
unmanaged Standard & Poor's 500 Stock Index for the six and 12 months ended
December 31, 1999. However, fund results were ahead of the Lipper Financial
Services Funds Average in both periods, which we realize is small
consolation for shareholders. As we look ahead to 2000 and beyond, it is
important to keep in mind the cyclical nature of the financial services
industry. Despite the lackluster year for the stocks in our sector, we are
excited by the opportunity to invest in many high-quality financial
companies at attractive prices, a result of indiscriminate selling in many
financial stocks regardless of their economic soundness and prospects for
growth.
YEAR-END DISTRIBUTIONS
Your Board of Directors declared a $0.10 per share income dividend and an
$0.85 per share capital gain distribution, of which $0.51 was long term and
$0.34 short term. These were paid on December 16, 1999, to shareholders of
record on December 14. You should have received your check or statement
reflecting them as well as Form 1099-DIV summarizing this information for
1999 tax purposes.
MARKET ENVIRONMENT
As mentioned in our last report, many trends evident in the second half of
1998 were reversed in 1999. Emerging market economies began to recover,
commodity prices rebounded, and the U.S. manufacturing sector revived. The
Federal Reserve acted preemptively in response to rapid economic growth by
raising short-term interest rates in June, August, and November. Investors
widely anticipate an additional interest rate increase when the Federal
Reserve's Open Market Committee reconvenes in February.
The financial services industry did a commendable job of preparing its
computer systems and customers for Y2K, and the crossover to the New Year
occurred without incident...
Last year presented several challenges to the financial services sector in
addition to rising interest rates, including aggressive competition among
established companies, market share gains from on-line competitors, higher
commercial loan losses, and severe catastrophe losses. However, 1999 also
saw important positive developments. The financial services industry did a
commendable job of preparing its computer systems and customers for Y2K,
and the crossover to the New Year occurred without incident, laying to rest
lingering fears of possible disruptions in global financial systems.
Consumer credit quality continued to improve, thanks to record low
unemployment and a slowdown in the rate of growth in personal bankruptcy
filings. Congress passed the Gramm-Leach-Bliley Act, which will allow
financial companies of all kinds to combine under more efficient corporate
structures. Finally, the fundamentals in the investment banking industry
were white hot as a result of the record level of mergers and acquisitions
in the United States and Europe, as well as the market's insatiable
appetite for Internet-related IPOs.
PORTFOLIO REVIEW
After outperforming the broader market from 1995 through 1997, financial
stocks lagged in 1999 for the second consecutive year. The results varied
across sectors, but companies with leadership positions in global markets
were the standout performers among your fund's holdings. Seven of the top
10 contributors in the most recent six-month period, including Citigroup,
Morgan Stanley Dean Witter, American Express, Marsh & McLennan, American
International Group, GE, and Goldman Sachs Group, share this
characteristic.
Sector Diversification
- --------------------------------------------------------------------------------
Specialty Financial Services 41
Bank & Trust 27
Insurance 22
Railroad 2
Computer Services and Software 2
Electrical Equipment 2
Conglomerates 1
Reserves 3
Based on net asset as of 12/31/99.
Companies with substantial exposure to capital markets fared best as stocks
continued to recover from the crisis of fall 1998, and investment banking
activity was robust. Morgan Stanley Dean Witter and Goldman Sachs generated
a return on equity in excess of 30% by capitalizing on their leading
positions in mergers and acquisitions and corporate finance in Europe and
the United States. While a return on equity of that magnitude is not likely
to be sustained, we expect both companies to post solid results as
international capital markets deepen.
Citigroup, your fund's largest holding, made substantial progress
integrating the operations of Citicorp and Travelers. Management achieved
its original cost savings targets and identified further savings. More
important, we believe Citigroup's ability to deliver value-added products
to its extensive customer base through various distribution channels is
extremely valuable and difficult to replicate. As a result, we continue to
hold a substantial portion of fund assets (8.2%) in this stock.
Regional banks struggled throughout the year, with the most pronounced
weakness evident among those attempting to integrate expensive
acquisitions. Bank of America and U.S. Bancorp suffered from declining net
interest margins, modestly higher commercial loan losses, and the need to
invest heavily in several areas. Bank One, which we eliminated from the
portfolio this summer, announced substantial problems at its First USA
credit card division stemming from management's attempts to grow First USA
more rapidly than the market would permit.
Among nonbank lenders, The CIT Group suffered as investors questioned the
merits of its acquisition of Newcourt Credit, and Associates First Capital
was also weak because of concerns about rising loan losses in its
manufactured housing and home equity portfolios. We believe investor
concerns about Associates' credit are overblown but would like to see
management articulate a comprehensive Internet strategy. On the other hand,
American Express, one of our best contributors, unveiled several bold
Internet initiatives and positioned itself for growth in both
business-to-business and business-to-consumer markets.
Freddie Mac and Fannie Mae performed poorly as investors grew increasingly
concerned about the combination of aggressive portfolio growth in 1998 and
rising interest rates in 1999. Certain political risks facing these
companies also cast a shadow. We believe both companies are adept at
managing interest rate risk, and we are especially pleased with the steps
Freddie Mac has taken to preserve its net interest margin even if rates
continue to rise in 2000. So, while we take these issues seriously, we
believe they are manageable and will not jeopardize the prospects for
sustained mid-teens earnings growth from both companies.
Property and casualty insurers continued to suffer from global overcapacity
and high levels of catastrophe losses, which contributed to earnings
shortfalls at ACE Limited, Fairfax Financial, and XL Capital. While we
eliminated Fairfax from the fund, we continue to hold the other two
insurers as our research points to modest improvement in industry
fundamentals; we also believe Ace and XL Capital offer an extremely
attractive risk/reward trade-off at current prices even without
industry-wide improvement. Despite the difficult property and casualty
environment, American International Group registered impressive gains by
leveraging its life insurance and overseas operations. Marsh & McLennan, a
leading insurance broker and new addition to our holdings, also did well in
1999. Interestingly, Marsh & McLennan's CEO, Jeffrey Greenberg, is the
oldest son of AIG's legendary Chairman and CEO, Hank Greenberg.
STRATEGY
While the operating fundamentals in many financial services areas have
become more challenging, we believe your fund's holdings represent
companies with the management, brand recognition, and cost structure
required to capitalize on opportunities presented by their customers and
capital base. Our investment strategy remains the same: we focus on
maintaining core holdings as long as the fundamentals are strong and the
valuations reasonable. Consequently, additions to Freddie Mac, FirStar, US
Trust, and Hartford Financial Services Group were significant enough to
place them among our largest purchases during the past six months.
We believe the financial services industry is particularly well suited to
the Internet as financial services are information intensive and frequently
require no physical interaction with the customer.
The only regional bank we added during the past six months was First
Tennessee National, a well-managed company with several national
businesses, including capital markets, mortgage banking, and merchant
processing. First Tennessee has consistently produced revenue-driven
earnings growth that places it near the top of its peer group.
We believe the banking sector as a whole has neglected to invest in the
products, technology, sales, and service skills necessary to compete
effectively. We expect many banks to play catch-up as deregulation and the
Internet erode longstanding barriers to entry. As a result, we have lowered
the fund's exposure to regional banking and intend to be very selective in
that area. We will continue to invest in banks with an established position
in capital markets, processing, trust, or asset management businesses such
as Chase Manhattan, the Bank of New York, US Trust, State Street, and
Mellon Financial, or with a well-developed sales and service culture such
as FirStar and Wells Fargo.
Several on-line financial companies established a notable presence in 1999
and gained significant market share. We believe the financial services
industry is particularly well suited to the Internet as financial services
are information intensive and frequently require no physical interaction
with the customer. We have developed a two-pronged strategy to capitalize
on this thesis. First, we are emphasizing established companies that have
embraced the Internet and recognize the opportunities and threats posed by
Internet distribution. Wells Fargo and American Express have allocated
substantial resources, including capital and senior management talent, to
develop on-line capabilities beyond their current businesses. Second,
valuations permitting, we will invest in pure on-line financial companies.
Accordingly, E*TRADE was our largest purchase during the past six months,
and both E*TRADE and Knight/Trimark Group, a leading market maker for
on-line brokers, were among our top 15 performance contributors during the
second half.
OUTLOOK
Stock prices are expensive by all conventional measures, and this along
with the S&P 500's record string of five-year gains invites caution. In
addition, the possibility of even higher interest rates in 2000 could take
its toll on stock prices.
Rate increases, in and of themselves, are not harmful to financial
companies. We believe the Fed's tightening was necessary to maintain the
moderate-growth and low-inflation environment in which financial stocks
perform best. We do acknowledge that rising interest rates can have painful
side effects for companies that have not managed their balance sheets
properly, or for companies relying on securities gains as a source of
earnings. However, unless rate increases are severe enough to trigger a
recession (something we do not foresee), well-managed financial companies
should continue to generate respectable earnings growth.
Our investment philosophy continues to be tailored to our outlook for the
general investment environment and earnings growth and focuses above all on
our careful selection of stocks. Therefore, despite our caution, we believe
the outlook for financial services stocks and your fund is still favorable
for several reasons:
o Despite concerns about rising interest rates, economic data
reveal that inflation remains contained and productivity
continues to rise. As long as worker productivity increases, the
economy can grow without a corresponding increase in inflation.
Moderate growth with low inflation is an ideal environment for
financial services stocks.
o 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.
o Demographic trends indicate that financial services will continue
to be a growing and vibrant sector of the global economy.
o Top-notch entrepreneurial management and sound business models
characterize fund holdings. Through careful containment of costs
and proper incentives, these companies have improved their
ability to compete and the durability and predictability of
earnings.
o 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 potential
acquisitions.
We are confident that we can enhance returns and reduce risk over time by
investing in financial companies that can earn high returns and grow
earnings in various economic or interest rate environments. As always, we
try to buy these companies at reasonable stock valuations.
We would like to take this opportunity to introduce Anna M. Dopkin, who has
been a member of the fund's Investment Advisory Committee and will have a
more active role in the day-to-day management of the fund. Ms. Dopkin
joined T. Rowe Price as an analyst in 1997, specializing in consumer and
commercial finance, government sponsored entities, savings and loans, and
mortgage insurers. Before joining T. Rowe Price, Ms. Dopkin worked as a
financial services analyst at Goldman Sachs for six and a half years.
Respectfully submitted,
Larry J. Puglia
President
Robert W. Sharps
Chairman of the Investment Advisory Committee
January 21, 2000
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/99
---------------------------------------------------------------------------
Citigroup 8.2%
Freddie Mac 5.3
Bank of New York 4.9
Wells Fargo 3.7
XL Capital 3.6
---------------------------------------------------------------------------
FirStar 3.6
Fannie Mae 3.4
Capital One Financial 3.3
Chase Manhattan 3.2
American General 2.9
---------------------------------------------------------------------------
American Express 2.9
Mellon Financial 2.8
State Street 2.8
American International Group 2.7
Morgan Stanley Dean Witter 2.7
---------------------------------------------------------------------------
Hartford Financial Services Group 2.5
Bank of America 2.5
Marsh & McLennan 2.4
Kansas City Southern Industries 2.3
ACE Limited 2.0
---------------------------------------------------------------------------
US Trust 2.0
Waddell & Reed Financial 2.0
UNUMProvident 1.9
Associates First Capital 1.9
Protective Life 1.6
---------------------------------------------------------------------------
Total 77.1%
Note: Table excludes reserves.
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/99
Ten Best Contributors
---------------------------------------------------------------------------
Citigroup 21(cents)
Morgan Stanley Dean Witter 13
American Express 13
Marsh & McLennan 10
Kansas City Southern Industries* 9
Bank of New York 9
American International Group 8
GE 7
Knight/Trimark Group** 6
Goldman Sachs Group 6
---------------------------------------------------------------------------
Total 102(cents)
Ten Worst Contributors
---------------------------------------------------------------------------
Bank of America -33(cents)
Associates First Capital 28
UNUMProvident 22
ACE Limited 21
Freddie Mac 17
Bank One** 10
The CIT Group 10
FirStar* 9
Mutual Risk Management** 9
Fairfax Financial** 8
---------------------------------------------------------------------------
Total -167(cents)
12 Months Ended 12/31/99
Ten Best Contributors
---------------------------------------------------------------------------
Citigroup 55(cents)
Morgan Stanley Dean Witter 31
American Express 24
American International Group 14
Kansas City Southern Industries* 14
Marsh & McLennan* 14
Goldman Sachs Group* 11
TheStreet.com** 10
Chase Manhattan 10
GE 9
---------------------------------------------------------------------------
Total 192(cents)
Ten Worst Contributors
---------------------------------------------------------------------------
ACE Limited -30(cents)
UNUMProvident 25
Associates First Capital 24
Freddie Mac 23
Fairfax Financial** 17
The CIT Group 15
Mutual Risk Management** 14
Bank of America 12
XL Capital 11
FirStar* 9
---------------------------------------------------------------------------
Total -180(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 benchmarks, which may include
a broad-based market index and a peer group average or index. Market
indexes do not include expenses, which are deducted from fund returns as
well as mutual fund averages and indexes.
FINANCIAL SERVICES FUND
---------------------------------------------------------------------------
S&P 500 Financial Services
Index Fund
9/30/96 10,000 10,000
12/96 10,833 11,340
12/97 14,448 16,039
12/98 18,575 17,891
12/99 22,485 18,196
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 12/31/99 1 Year 3 Years Inception Date
---------------------------------------------------------------------------
Financial Services Fund 1.70% 17.07% 20.21% 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
- --------------------------------------------------------------------------------
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
Year 9/30/96
Ended Through
12/31/99 12/31/98 12/31/97 12/31/96
NET ASSET VALUE
Beginning of period $ 16.82 $ 15.56 $ 11.31 $ 10.00
Investment activities
Net investment income
(loss) 0.10 0.16 0.10* 0.04*
Net realized and
unrealized gain (loss) 0.15 1.60 4.58 1.30
Total from
investment activities 0.25 1.76 4.68 1.34
Distributions
Net investment income (0.10) (0.16) (0.10) (0.03)
Net realized gain (0.85) (0.34) (0.33) --
Total distributions (0.95) (0.50) (0.43) (0.03)
NET ASSET VALUE
End of period $ 16.12 $ 16.82 $ 15.56 $ 11.31
-----------------------------------------------
Ratios/Supplemental Data
Total return(diamond) 1.70% 11.55% 41.44% *13.40%*
Ratio of total expenses
to average net assets 1.14% 1.19% 1.25%* 1.25%*!
Ratio of net investment
income (loss) to average
net assets 0.50% 0.94% 1.15%* 1.71%*!
Portfolio turnover rate 37.1% 46.8% 46.0% 5.6%!
Net assets, end of period
(in thousands) $159,031 $224,277 $177,335 $ 30,047
(diamond) 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
- --------------------------------------------------------------------------------
December 31, 1999
Statement of Net Assets Shares Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 96.8%
FINANCIAL 85.9%
Bank and Trust 27.0%
Bank of America 80,000 $ 4,015
Bank of New York 195,000 7,800
Chase Manhattan 65,000 5,050
First Tennessee National 85,000 2,422
FirStar 270,000 5,704
Huntington Bancshares 20,000 477
Mellon Financial 130,000 4,428
State Street 60,000 4,384
U.S. Bancorp 75,000 1,786
Wells Fargo 145,000 5,863
Wilmington Trust 20,000 965
42,894
Insurance 21.0%
ACE Limited 195,000 3,254
American General 60,000 4,552
American International Group 40,000 4,325
Hartford Financial Services Group 85,000 4,027
London Pacific Group ADR 30,000 1,080
Marsh & McLennan 40,000 3,828
Protective Life 82,000 2,609
Radian Group 20,000 955
UNUMProvident 95,000 3,046
XL Capital (Class A) 110,000 5,706
33,382
Financial Services 37.9%
American Express 27,300 4,539
Associates First Capital (Class A) 109,300 2,999
Capital One Financial 110,000 5,301
Citigroup 235,000 13,057
eSpeed (Class A) * 25,000 891
Fannie Mae 86,000 5,370
Financial Federal * 58,000 1,323
Freddie Mac 180,000 8,471
Goldman Sachs Group 24,000 2,261
MBNA 74,000 2,017
Morgan Stanley Dean Witter 30,000 $ 4,282
Nextcard * 25,000 720
Providian Financial 23,000 2,094
The CIT Group (Class A) 30,000 634
US Trust 40,000 3,207
Waddell & Reed Financial (Class A) 72,076 1,955
Waddell & Reed Financial (Class B) 47,396 1,191
60,312
Total Financial 136,588
CAPITAL EQUIPMENT 1.5%
Electrical Equipment 1.5%
GE 15,000 2,321
Total Capital Equipment 2,321
BUSINESS SERVICES AND
TRANSPORTATION 3.3%
Computer Service and Software 1.0%
E*TRADE * 60,000 1,570
1,570
Railroad 2.3%
Kansas City Southern Industries 50,000 3,731
3,731
Total Business Services and Transportation 5,301
MISCELLANEOUS 6.1%
Berkshire Hathaway (Class A) * 39 2,188
Other Miscellaneous Common Stocks 7,580
Total Miscellaneous 9,768
Total Common Stocks (Cost $126,916) 153,978
Short-Term Investments 3.9%
Money Market Funds 3.9%
Reserve Investment Fund, 6.16% 6,157,558 6,158
Total Short-Term Investments (Cost $6,158) 6,158
Total Investments in Securities
100.7% of Net Assets (Cost $133,074) $ 160,136
Other Assets Less Liabilities (1,105)
NET ASSETS $ 159,031
----------
Net Assets Consist of:
Accumulated net investment income
- - net of distributions $ (18)
Accumulated net realized gain/loss
- - net of distributions 3,710
Net unrealized gain (loss) 27,062
Paid-in-capital applicable to 9,867,819
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares authorized 128,277
NET ASSETS $ 159,031
----------
NET ASSET VALUE PER SHARE $ 16.12
----------
# Seven-day yield
* Non-income producing
ADR American Depository Receipt
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/99
Investment Income (Loss)
Income
Dividend $ 2,726
Interest 371
Total income 3,097
Expenses
Investment management 1,266
Shareholder servicing 657
Custody and accounting 95
Prospectus and shareholder reports 73
Registration 39
Legal and audit 14
Directors 7
Miscellaneous 4
Total expenses 2,155
Net investment income (loss) 942
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 12,881
Written options 66
Foreign currency transactions (10)
Net realized gain (loss) 12,937
Change in net unrealized gain
or loss on securities (11,122)
Net realized and unrealized gain (loss) 1,815
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 2,757
----------
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
Ended
12/31/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 942 $ 2,136
Net realized gain (loss) 12,937 3,142
Change in net unrealized
gain or loss (11,122) 11,007
Increase (decrease) in net
assets from operations 2,757 16,285
Distributions to shareholders
Net investment income
(loss) (960) (2,107)
Net realized gain (8,164) (4,477)
Decrease in net assets
from distributions (9,124) (6,584)
Capital share transactions *
Shares sold 69,449 171,412
Distributions reinvested 8,796 6,364
Shares redeemed (137,124) (140,535)
Increase (decrease) in
net assets from capital
share transactions (58,879) 37,241
Net Assets
Increase (decrease) during period (65,246) 46,942
Beginning of period 224,277 177,335
End of period $ 159,031 $ 224,277
-----------------------------
*Share information
Shares sold 4,049 10,282
Distributions reinvested 567 406
Shares redeemed (8,082) (8,752)
Increase (decrease) in
shares outstanding (3,466) 1,936
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
December 31, 1999
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.
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. Credits earned on
daily uninvested cash balances at the custodian are used to reduce the
fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Options Call and put options give the holder the right to purchase or sell,
respectively, a security at a specified price on a certain date. Risks
arise from possible illiquidity of the options market and from movements in
security values. Transactions in options written and related premiums
received during the year ended December 31, 1999, were as follows:
---------------------------------------------------------------------------
Number of
Contracts Premiums
Outstanding at beginning of period -- $ --
Written 500 89,000
Closed (500) (89,000)
Outstanding at end of period -- $ --
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $67,715,000 and $135,261,000, respectively, for the
year ended December 31, 1999.
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 December 31, 1999, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$133,074,000. Net unrealized gain aggregated $27,062,000 at period-end, of
which $34,356,000 related to appreciated investments and $7,294,000 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 $92,000 was payable at December 31, 1999. 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 0.295% for assets
in excess of $120 billion. At December 31, 1999, 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.
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 $592,000 for the year ended December 31, 1999, of which
$63,000 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, 1999, totaled $371,000 and are reflected as interest income in
the accompanying Statement of Operations.
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,
1999, 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 accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 20, 2000
T. Rowe Price Financial Services Fund
- --------------------------------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 12/31/99
- --------------------------------------------------------------------------------
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 $3,266,000 from short-term capital gains,
o $4,898,000 from long-term capital gains, subject to the 20% rate gains
category.
For corporate shareholders, $2,416,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
For fund and account information
or to conduct transactions,
24 hours, 7 days a week
By touch-tone telephone
Tele*Access 1-800-638-2587
By Account Access on the Internet
www.troweprice.com/access
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132
To open a brokerage account
or obtain information, call:
1-800-638-5660
Internet address:
www.troweprice.com
Plan Account Lines for retirement
plan participants:
The appropriate 800 number appears
on your retirement account statement.
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 appropriate
to the fund or funds covered in this
report.
Walk-In Investor Centers:
For directions, call 1-800-225-5132
or visit our Web site
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
Boston Area
386 Washington Street
Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills
Tampa
4200 West Cypress Street
10th Floor
Washington, D.C.
900 17th Street N.W.
Farragut Square
Invest With Confidence (register trademark) T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor. F17-050 12/31/99