Semiannual Report
Tax-Efficient
Balanced
Fund
August 31, 1998
T. Rowe Price
Report Highlights
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Tax-Efficient Balanced Fund
o Your fund solidly outperformed the Lipper Balanced Fund Index over the past
six and 12 months.
o Fund results were aided by our stock selection and our emphasis on
municipal bonds with relatively long durations.
o We continued to diversify our bond portfolio and emphasized investment-
grade municipal bonds over high-yield municipals.
o In equities, we continued to focus on quality growth stocks; technology and
health care remain our top sectors.
o The fund held up well during the market correction and is well positioned
to take advantage of long-term buying opportunities in stocks and
compelling valuations in tax-exempt bonds.
Fellow Shareholders
U.S. stocks and bonds diverged in the six months ended August 31. The theme that
drove stocks lower pushed bonds higher: fear of global recession and deflation.
Large-capitalization stocks rallied early in the period but began a steep
correction in mid-July as the Asian economic crisis spread to Russia and
threatened Latin America. U.S. tax-exempt bonds, generally unscathed by the
turmoil, rose modestly.
MARKET ENVIRONMENT
U.S. stocks began a powerful rally in January and through the first half of the
calendar year looked set to turn in their fourth straight year of high
double-digit gains. The strength in blue chip growth stocks, however, masked
continued deterioration in the broader market. Though small- and mid-cap stocks
rallied in the first quarter, they turned down well in advance of the
large-caps, and their decline was far more severe. Small- and mid-cap stocks
have now lagged the S&P 500 Stock Index for the last four years.
Municipal Bond and Note Yields
30-Year 5-Year 1-Year Moody's
AAA AAA Investment
General General Grade
Obligation Obligation 1 Note
8/97 5.35 4.35 3.85
5.25 4.20 3.80
5.23 4.15 3.80
5.18 4.20 3.85
12/97 5.03 4.10 3.85
5.00 4.00 3.65
5.08 4.05 3.60
5.13 4.10 3.65
4/98 5.20 4.30 3.85
5.05 4.10 3.75
5.05 4.10 3.60
5.10 4.10 3.70
8/98 4.93 3.85 3.50
Growing evidence of a slowing U.S. economy and declining inflation combined to
push long-term interest rates to historic lows-even before the major equity
market averages began to correct. The tremendous rally in U.S. Treasury bonds
accelerated in July as the global crisis worsened and investors worldwide
flocked to the perceived safety of U.S. government securities. Municipal bond
prices rose over the past six months, bolstered by low inflation, budget
surpluses at the state and federal level, and cash flows into fixed income
investments.
Tax-exempt securities fared better than most asset classes but could not keep
pace with surging Treasury bond prices, since municipals appeal to a smaller,
strictly domestic audience. With long-term Treasury yields falling almost 60
basis points while municipal yields fell only about 15 basis points, the gap
between them continued to narrow. (One hundred basis points equal one percent.)
As a result, tax-exempt yields are now only slightly lower than yields on fully
taxable securities. A near-record supply of tax-exempt bond issues constrained
the municipal market somewhat throughout the year and contributed to the
contracting yield spread. During the same period, Treasury issuance continued to
decline. When income taxes are taken into account, municipals now yield
substantially more than most other types of bonds.
Preparing For The Year 2000
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. We plan to complete all
reprogramming efforts for the major application systems, including business
applications required to service our customers and processing infrastructure
necessary to ensure the integrity of customer data and investments, by December
31, 1998, leaving a full 12 months for system testing. 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. Our goal is to
identify any noncompliant files so that we can implement alternative solutions.
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 EXPECTED
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 are taking steps to make modifications where necessary for
the Year 2000. Our plan provides time to develop solutions for all noncompliant
systems and data files from customers or vendors.
The Securities Industry Association (SIA) is coordinating Year 2000 testing to
assure that securities markets, clearing corporations, depositories, and third
party software and hardware vendors can send, receive, and process files and
transactions accurately. T. Rowe Price will participate in this industry-wide
effort.
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).
PERFORMANCE AND STRATEGY REVIEW
Performance Comparison
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Periods Ended 8/31/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Tax-Efficient Balanced Fund - 2.84% 9.15%
Lipper Balanced Fund Index - 5.51 4.49
Combined Index Portfolio* - 2.10 8.38
* An unmanaged portfolio of 48% stocks (S&P 500) and 52% bonds (Lehman
Municipal Bond Index).
Over the past 6- and 12-month periods, your fund outpaced the Lipper Balanced
Fund Index by a wide margin. The typical balanced fund invests 60% in stocks and
40% in a mix of taxable bonds. By charter, we must keep at least 50% of our
assets in tax-free debt securities. When compared with the Combined Index
Portfolio, which is more reflective of our asset mix, the fund lagged for the
six-month period but outperformed over the past year. The fund has exceeded the
returns of the composite benchmark since inception on June 30, 1997, driven by
strong performance from both the stock and bond portions of the fund. At the end
of August our allocation was 46% equities and 54% tax-free securities (including
cash reserves held in tax-free money market investments).
Our bond portfolio continued to perform well over the past six months. We kept
duration fairly long to benefit from the higher income of long-term municipal
bonds as well as their greater price appreciation when interest rates fall.
(Duration is a measure of a bond portfolio's sensitivity to interest rates. For
example, a portfolio with a duration of eight years would fall or rise about 8%
in value in response to a one-percentage-point rise or fall in interest rates.)
We continued to overweight noncallable bonds, which appreciate more than
callable bonds when rates decline. We shifted our credit strategy to put more
emphasis on investment-grade bonds as credit quality spreads-the difference
between high- and low-quality bond yields-widened. While lower-quality bonds
have been strong performers over the past several years, this trend appears to
have reversed as the market contemplates the prospect of a weaker economy and
rising potential credit risk. As the portfolio grows, we continue to broaden our
diversification by investing in different sectors and bond issuers to reduce
risk.
The performance of the equity portion of the fund is not directly comparable to
that of the S&P 500, which is part of our Combined Index Portfolio benchmark. We
emphasize growth stocks and have some small- and mid-cap exposure. Given that
small-cap stocks have continued to lag the major market averages, however, our
equity performance has been especially satisfying. Our stock selections have
outperformed the S&P 500 year-to-date and since the fund's inception just over a
year ago. The portfolio represents our best buy-and-hold ideas; we use a growth
style designed for taxable investors since our objective is to maximize
after-tax returns. Consistent with this approach, we believe that capital gain
realization must be very modest, and we have invested in companies we expect to
own for a long time. We actively take losses and closely monitor the fund's net
gain or loss position. At this time we have enough losses to offset our gains,
and we do not expect to make a capital gain distribution this year.
Security Diversification
- --------------------------------------------------------------------------------
Investment-Grade Municipal Bonds 49%
Noninvestment-Grade Municipal Bonds 4%
Large-Cap Stocks 41%
Mid- and Small-Cap Stocks 5%
Other and Reserves 1%
The fund is well diversified and owns market leaders with strong prospects and
lower dividend yields than the S&P 500 in order to keep taxable income to a
minimum. Most of our holdings are large companies; however, small and mid-cap
companies represent about 10% of the fund's equity portfolio (about 5% of net
assets). We are optimistic that some of these companies will become large and
successful. In the smaller-company portion of the fund, we stress
diversification.
We have made no major realignments since our last report in February. Technology
remains the fund's largest sector weighting at about 22% of the stock portfolio.
We have more technology exposure than the S&P 500 and many other growth stock
portfolios, because the sector offers not only strong long-term prospects but
also good relative value. Some of the largest technology holdings include Intel,
Microsoft, and Hewlett-Packard. Our second largest sector is health care, where
we are also overweighted compared with the S&P 500 and other growth funds. Our
investments in this area are almost exclusively in pharmaceutical companies such
as Merck, American Home Products, and Pfizer.
The fund's overall performance reflected good stock selection, the long duration
of our bond portfolio, and the fact that we hold municipal bonds rather than
corporates. While overall returns were negative for the six months, they were
strong in both relative and absolute terms for the year and reflect our mission
of reducing risk while providing tax-efficient returns. The fund's performance
in the difficult month of August-when the S&P 500 fell 14.46%-also illustrates
the strength of our approach. Though our equity portfolio fell 15.02% that
month, the fund as a whole fell just 6.51%, compared with the 8.62% drop of the
Lipper Balanced Fund Index.
The fund was 100% tax-efficient in the past six months, which means that since
there were no taxable income or capital gain distributions during the period,
your after-tax returns were exactly the same as your pretax returns.
OUTLOOK
Federal Reserve Chairman Alan Greenspan has hinted strongly of late that the
Fed's next move could well be a lowering of key short-term rates in the face of
turmoil overseas. As recently as early August, it was widely anticipated that
the Fed was leaning toward a possible interest rate hike because of concerns
about tight labor markets and wage pressures.
We believe the U.S. economy and corporate profits will continue to grow, but at
a slower pace than recent years. Exports may fall further because of weak
international markets and the strong dollar, and growth in consumer spending
could decline in the aftermath of the correction in stock prices. Commodity
prices have also been under pressure, further restraining inflation. In this
environment, the trend toward lower overall interest rates should remain intact.
The backdrop of low interest rates should provide some support for the stock
market going forward. As we stated in our previous report, we had expected
equity returns to moderate from the sizzling results of recent years. However,
it also appears to us that this summer's sell-off has created some good
opportunities for long-term investors. Having said that, we recognize that
problems in many Asian economies have been building for years and will not be
solved quickly. We also recognize that political uncertainties in the U.S.
driven by the scandals surrounding President Clinton have exacerbated global
economic fears and had a negative effect on U.S. stocks. Certainly, an extended
recession across Asia and Russia, especially if it spread to Latin America,
would significantly affect the earnings of U.S. companies.
We expect municipal securities to remain undervalued compared with Treasuries
until demand catches up with heavy supply. However, investors should eventually
recognize the attractive yields available in the municipal market compared with
taxable yields, and rising demand would benefit the municipal bond portion of
the fund over the long term. Clearly, the after-tax yield advantage of
tax-exempt securities is already providing a valuable benefit to fund
shareholders.
Over time, we also expect our equity approach will prove a better strategy than
indexing, especially on an after-tax basis. In addition, the fund's relatively
conservative asset allocation-with less than 50% exposure to stocks-allows
shareholders to participate when financial markets rally, while providing some
cushion during market downdrafts.
Respectfully submitted,
Mary J. Miller
Cochairman of the Investment Advisory Committee
Donald J. Peters
Cochairman of the Investment Advisory Committee
September 25, 1998
Note: William F. Snider, a member of the advisory committee, was recently named
co-manager of the bond portion of the fund. Mr. Snider joined T. Rowe Price in
1991 and has been managing municipal bond portfolios since 1993.
T. Rowe Price Tax-Efficient Balanced Fund
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Portfolio Highlights
LARGEST HOLDINGS
Percent of
Net Assets
8/31/98
Stocks
- --------------------------------------------------------------------------------
Intel 1.3%
Microsoft 1.3
Disney 1.1
GE 1.1
Fannie Mae 1.1
American Home Products 0.9
Merck 0.9
Hewlett-Packard 0.9
Pfizer 0.9
Procter & Gamble 0.8
- --------------------------------------------------------------------------------
Total 10.3%
Percent of
Net Assets
8/31/98
Bonds
- --------------------------------------------------------------------------------
Illinois Health Facilities Authority 3.7%
Middlesex Utilities Authority 2.5
New Jersey Turnpike Authority 2.4
Wisconsin Health & Education
Facilities Authority 2.3
Piedmont Municipal Power Agency 2.2
Kalamazoo Health Facilities Authority 2.2
Intermountain Power Agency 2.2
Oliver North Dakota Pollution
Control Revenue 2.2
New York State Urban Development 2.1
Massachusetts Health Facilities
Authority 2.0
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Total 23.8%
T. Rowe Price Tax-Efficient Balanced Fund
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Portfolio Highlights
- --------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
2/28/98 8/31/98
Stocks
- --------------------------------------------------------------------------------
Technology 10.7% 10.2%
Health Care 7.2 7.9
Financial 7.6 7.1
Consumer Services 6.1 6.9
Consumer Nondurables 6.2 6.4
Business Services and Transportation 3.0 1.8
Capital Equipment 1.7 1.7
Energy 2.0 1.3
Process Industries 1.2 1.0
Utilities 0.8 0.8
Consumer Cyclicals 1.7 0.5
All Other 0.2 --
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Total 48.4% 45.6%
Bonds and Reserves
- --------------------------------------------------------------------------------
Hospital Revenue 8.2% 13.8%
General Obligation - Local 8.5 5.9
Electric Revenue -- 5.5
Nuclear Revenue 7.2 5.2
Water and Sewer Revenue 2.6 4.5
Escrowed to Maturity 1.7 3.7
Ground Transportation Revenue 2.9 3.4
Lease Revenue 4.2 3.2
Other Revenue 2.9 2.2
Housing Finance Revenue 2.8 2.0
All Other 9.6 3.8
Reserves 1.0 1.2
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Total 51.6% 54.4%
T. Rowe Price Tax-Efficient Balanced Fund
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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.
TAX-EFFICIENT BALANCED FUND
- --------------------------------------------------------------------------------
As of 8/31/98
Combined Index Portfolio
$11,039 (48% S&P 500 stocks Tax-Efficient
and 52% Lehman Municipal Balanced Fund
Bond Index) $11,170
6/30/97 10,000 10,000
8/31/97 10,186 10,233
8/31/98 11,039 11,170
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 8/31/98 1 Year Inception Date
- --------------------------------------------------------------------------------
Tax-Efficient Balanced Fund 9.15% 9.92% 6/30/97
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 Tax-Efficient Balanced Fund
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Unaudited
For a share outstanding throughout each period
- --------------------------------------------------------------------------------
Financial Highlights
6 Months 6/30/97
Ended Through
8/31/98 2/28/98
NET ASSET VALUE
Beginning of period $ 11.34 $ 10.00
Investment activities
Net investment income 0.12* 0.15*
Net realized and
unrealized gain (loss) (0.44) 1.34
Total from
investment activities (0.32) 1.49
Distributions
Net investment income (0.10) (0.15)
NET ASSET VALUE
End of period $ 10.92 $ 11.34
----------------------------------
Ratios/Supplemental Data
Total return(C) (2.84)%* 14.96%*
Ratio of expenses to
average net assets 1.00%*! 1.00%*!
Ratio of net investment
income to average
net assets 2.09%*! 2.31%*!
Portfolio turnover rate 10.5% 12.5%!
Net assets, end of period
(in thousands) $ 23,797 $ 17,714
(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 and payment of no redemption or account fees.
* Excludes expenses in excess of a 1.00% voluntary expense limitation in
effect through 2/28/99.
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
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Unaudited August 31, 1998
Portfolio of Investments
Par/Shares Value
In thousands
Common Stocks 45.6%
FINANCIAL 7.1%
Bank and Trust 2.7%
BANC ONE 1,370 $ 52
Bank of New York 2,500 61
Citicorp 900 97
Mellon Bank 1,600 83
NationsBank 1,300 74
Northern Trust 800 45
Norwest 3,100 92
State Street 1,600 83
Wells Fargo 200 57
644
Miscellaneous Finance 1.5%
American Express 1,700 133
Charles Schwab 1,550 46
Franklin Resources 2,000 64
Travelers Group 2,700 120
363
Mortgage Finance 1.8%
Fannie Mae 4,400 250
Freddie Mac 4,400 174
424
Other Insurance 1.0%
AMBAC 700 33
American International Group 1,725 133
Chubb 500 31
EXEL * 500 33
230
Life Insurance 0.1%
American General 600 39
39
Total Financial 1,700
UTILITIES 0.8%
Telephone Services 0.8%
Vodafone ADR 800 $ 100
WorldCom * 1,900 78
Total Utilities 178
CONSUMER NONDURABLES 6.4%
Cosmetics 1.1%
Avon 900 57
Procter & Gamble 2,600 199
256
Beverages 1.2%
Anheuser-Busch 1,200 56
Coca-Cola 1,800 117
PepsiCo 4,300 119
292
Food Processing 1.1%
General Mills 500 33
Heinz 600 32
Pioneer Hi-Bred 1,500 51
Sara Lee 700 32
Unilever N.V. ADR 1,000 63
Wrigley 600 46
257
Entertainment and Leisure 0.5%
Carnival (Class A) 1,400 40
Mattel 2,400 78
118
Textiles and Apparel 0.3%
NIKE (Class B) 2,400 83
83
Soaps and Housewares 1.5%
Colgate-Palmolive 1,100 79
Gillette 3,400 140
Kimberly-Clark 1,400 53
Newell 900 43
Ralston Purina 1,200 32
347
Tobacco 0.7%
Philip Morris 3,900 $ 162
162
Total Consumer Nondurables 1,515
CONSUMER SERVICES 6.9%
Media and Communications 2.7%
CBS 2,800 73
Circuit City Stores 1,000 30
Clear Channel Communications * 800 36
Disney 9,400 258
Sony ADR 1,200 85
Time Warner 1,800 145
627
Hotels and Restaurants 0.3%
McDonald's 1,100 62
62
Publishing 0.5%
McGraw-Hill 1,700 130
130
Retail - All Other 1.5%
AutoZone * 1,600 42
Bed Bath & Beyond * 1,800 32
Home Depot 2,800 108
Sherwin-Williams 1,700 41
Tiffany & Company 2,000 74
Walgreen 1,700 65
362
Retail - Food 0.9%
Albertson's 1,300 66
Safeway * 1,600 63
Starbucks * 1,000 32
Sysco 2,500 50
211
Retail - General Department 1.0%
Dollar General 2,100 56
Wal-Mart 3,100 182
238
Total Consumer Services 1,630
CONSUMER CYCLICALS 0.5%
Real Estate 0.3%
Security Capital Group (Class B) * 3,700 $ 79
79
Consumer Durables 0.2%
Williams-Sonoma * 1,700 43
43
Total Consumer Cyclicals 122
TECHNOLOGY 10.2%
Electronic Components 2.8%
Altera * 1,800 52
Hubbell (Class B) 1,500 54
Intel 4,200 299
Linear Technology 1,300 61
Maxim Integrated Products * 2,200 61
Molex (Class A) 2,150 50
Texas Instruments 1,800 85
662
Telecommunications 1.1%
LM Ericsson (Class B) ADR 2,800 60
Lucent Technologies 1,800 128
Motorola 1,200 52
Tellabs * 600 25
265
Aerospace and Defense 0.6%
Boeing 2,900 90
Lockheed Martin 500 44
134
Computer Services 0.6%
Automatic Data Processing 1,400 89
HBO 2,000 43
132
Computer Software 2.3%
BMC Software * 1,100 47
Computer Associates 2,400 65
Microsoft * 3,100 298
Oracle * 2,950 59
PeopleSoft * 1,500 $ 42
Sterling Commerce * 1,300 42
553
Analytical Equipment 0.2%
Emerson Electric 1,000 57
57
Business Machines 1.5%
Dell Computer * 800 80
Hewlett-Packard 4,300 209
Pitney Bowes 1,300 64
353
Computer Communications 0.5%
Cisco Systems * 1,450 119
119
Computer Peripherals 0.5%
EMC * 1,100 50
Symbol Technologies 1,700 70
120
Electronic Manufacturing Equipment 0.1%
Applied Materials * 1,600 39
39
Total Technology 2,434
CAPITAL EQUIPMENT 1.7%
Industrial Manufacturing 1.7%
American Standard * 1,000 39
Dover 2,300 63
GE 3,200 256
Illinois Tool Works 1,100 53
Total Capital Equipment 411
BUSINESS SERVICES AND
TRANSPORTATION 1.8%
Service 1.3%
DeVry * 1,800 32
Equifax 1,400 50
IMS Health 900 50
Marsh & McLennan 1,050 $ 51
Paychex 700 27
Quintiles Transnational * 700 25
Robert Half International * 1,150 55
Service Corp. International 900 30
320
Advertising 0.5%
Interpublic Group 1,100 63
Omnicom 1,100 52
115
Total Business Services and Transportation 435
ENERGY 1.3%
Integrated Petroleum - International 0.9%
Exxon 1,600 104
Mobil 1,500 104
208
Gas Utilities 0.1%
Enron 800 34
34
Oil Refining Distribution 0.3%
Royal Dutch Petroleum ADR 1,900 76
76
Total Energy 318
PROCESS INDUSTRIES 1.0%
Specialty Chemicals 1.0%
PPG Industries 1,400 71
Rohm & Haas 700 60
Sigma Aldrich 1,700 47
Valspar 1,700 57
Total Process Industries 235
HEALTH CARE 7.9%
Drugs 7.6%
Abbott Laboratories 2,200 85
American Home Products 4,500 225
Amgen * 800 $ 49
Bristol-Myers Squibb 2,000 196
Cardinal Health 600 53
Eli Lilly 1,700 111
Glaxo Wellcome ADR 1,500 83
Human Genome Sciences * 800 20
Johnson & Johnson 2,600 179
Merck 1,900 220
Novartis (CHF) 40 62
Pfizer 2,200 205
Schering-Plough 1,200 103
SmithKline Beecham ADR 1,100 63
Warner-Lambert 1,300 85
Zeneca Group ADR 2,100 77
1,816
Health-Care (non-drug) 0.3%
Medtronic 1,200 62
62
Total Health Care 1,878
Total Common Stocks (Cost $10,739) 10,856
MUNICIPAL BONDS 57.0%
ALABAMA 0.9%
Jefferson County Sewer,
5.75%, 2/1/27 (FGIC Insured) $ 200,000 215
Total Alabama (Cost $200) 215
CONNECTICUT 1.3%
Connecticut Dev. Auth.,
Mystic Marinelife Aquarium
6.875%, 12/1/17 100,000 108
Mashantucket Western Pequot Tribe,
5.75%, 9/1/27 200,000 207
Total Connecticut (Cost $295) 315
DISTRICT OF COLUMBIA 0.9%
District of Columbia Hosp.,
Medlantic Healthcare Group
5.25%, 8/15/19 (MBIA Insured) 200,000 203
Total District of Columbia (Cost $188) 203
FLORIDA 0.8%
Florida Board of Ed., GO, VRDN
(Currently 3.45%) $ 100,000 $ 100
Jacksonville HFA,
Genesis Rehabilitation Hosp.
VRDN (Currently 3.35%) 100,000 100
Total Florida (Cost $200) 200
GEORGIA 1.9%
Municipal Electric Auth. of Georgia
Zero Coupon, 1/1/09 585,000 337
5.70%, 1/1/19 (MBIA Insured) 100,000 111
Total Georgia (Cost $432) 448
HAWAII 1.1%
Hawaii Dept. of Budget and Finance,
Hawaiian Electric
4.95%, 4/1/12 (MBIA Insured) 250,000 258
Total Hawaii (Cost $250) 258
IDAHO 0.4%
Idaho HFA, St. Lukes
Regional Medical Center
VRDN (Currently 3.30%) 100,000 100
Total Idaho (Cost $100) 100
ILLINOIS 6.6%
Chicago Water Revenue,
Capital Appreciation
Zero Coupon, 11/1/11 (FGIC Insured) 500,000 267
Illinois EFA, Northwest Univ.,
5.25%, 11/1/32 400,000 418
Illinois HFA
Loyola Univ. Health
6.00%, 7/1/14 (MBIA Insured) 300,000 341
Riverside Health Systems,
6.00%, 11/15/18 500,000 534
Total Illinois (Cost $1,498) 1,560
LOUISIANA 1.2%
Jefferson Parish, GO, Drainage Improvement
6.15%, 9/1/05 (FGIC Insured) 250,000 277
Total Louisiana (Cost $268) 277
MAINE 1.3%
Maine Housing Auth.,
Mortgage Purchase, 5.70%, 11/15/15 $ 300,000 $ 314
Total Maine (Cost $301) 314
MARYLAND 0.4%
Maryland-National Capital Park
and Planning Commission, GO
Prince George's County
VRDN (Currently 3.30%) 100,000 100
Total Maryland (Cost $100) 100
MASSACHUSETTS 3.0%
Massachusetts HEFA,
Southcoast Health System
4.75%, 7/1/27 (MBIA Insured) 500,000 476
Massachusetts Turnpike Auth.,
5.00%, 1/1/37 (MBIA Insured) 250,000 246
Total Massachusetts (Cost $691) 722
MICHIGAN 4.6%
Flint Hosp. Building Auth.,
Hurley Medical Center, 5.25%, 7/1/16 250,000 250
Kalamazoo HFA,
Bronson Methodist Hosp.,
5.50%, 5/15/12 500,000 531
Michigan Strategic Fund, Dow Chemical
VRDN (Currently 3.30%) 200,000 200
Univ. of Michigan Hosp., VRDN
(Currently 3.30%) 100,000 100
Total Michigan (Cost $1,053) 1,081
NEW JERSEY 7.7%
Middlesex County Utilities Auth., Sewer
6.25%, 8/15/10 (MBIA Insured) 500,000 584
New Jersey Economic Dev. Auth.,
Franciscan Oaks
5.75%, 10/1/23 100,000 102
New Jersey Transportion Auth. Trust Fund
4.50%, 6/15/00 (Escrowed to Maturity) 300,000 304
New Jersey Turnpike Auth.
10.375%, 1/1/03 (Escrowed to Maturity) 500,000 573
Newark, GO, School Qualified Bond Act
5.30%, 9/1/11 (MBIA Insured) 250,000 264
Total New Jersey (Cost $1,803) 1,827
NEW YORK 8.9%
Dormitory Auth. of the
State of New York
Champlain Valley Physicians,
5.00%, 7/1/17$ 200,000 $ 200
State Univ. Ed. Fac., 5.40%, 5/15/23 250,000 256
Long Island Power Auth., 5.25%, 12/1/26 250,000 252
New York City, GO
5.00%, 8/1/23 250,000 244
7.50%, 2/1/01 100,000 108
7.625%, 2/1/15 235,000 263
New York State Urban Dev.,
Correctional Capital Fac.
5.00%, 1/1/13 500,000 502
New York Thruway Auth.,
Local Highway and Bridge
6.25%, 4/1/07 (Prerefunded 4/1/02!) 40,000 43
North Hempstead, GO, 4.75%, 1/15/18
(FGIC Insured) 250,000 244
Total New York (Cost $2,030) 2,112
NORTH DAKOTA 2.2%
Oliver County PCR,
Square Butte Electric Cooperative
5.30%, 1/1/27 (AMBAC Insured) 500,000 516
Total North Dakota (Cost $500) 516
OHIO 0.4%
Montgomery County Health Care Fac.,
Friendship Village
6.25%, 2/1/22 100,000 104
Total Ohio (Cost $99) 104
SOUTH CAROLINA 3.4%
Connector 2000 Assoc.,
Greenville Toll Road
Zero Coupon, 1/1/09 500,000 284
Piedmont Municipal Power Agency
5.25%, 1/1/09 (MBIA Insured) 500,000 531
Total South Carolina (Cost $809) 815
TENNESSEE 0.8%
Tennessee Housing Dev.
Agency, Homeownership
Zero Coupon, 7/1/16 $ 500,000 $ 184
Total Tennessee (Cost $183) 184
TEXAS 0.4%
Harris County Health Fac. Dev.,
St. Luke's Episcopal Hosp.
VRDN (Currently 3.375%) 100,000 100
Total Texas (Cost $100) 100
UTAH 2.2%
Intermountain Power Agency,
5.25%, 7/1/14 (MBIA Insured) 510,000 529
Total Utah (Cost $523) 529
VIRGINIA 2.7%
Henrico County IDA,
Bon Secours Health, St. Mary's Hosp.
6.00%, 8/15/16 (MBIA Insured) 185,000 211
Hopewell IDA,
Westport Convalescent Center,
6.00%, 10/1/06 145,000 152
Pocahontas Parkway Assoc.,
Toll Road, Zero Coupon, 8/15/18 900,000 274
Total Virginia (Cost $616) 637
WASHINGTON 0.4%
Washington, GO, 5.375%, 9/1/02 100,000 106
Total Washington (Cost $103) 106
WEST VIRGINIA 0.8%
West Virginia Building Commission,
GO, Lottery
5.00%, 7/1/04 (MBIA Insured) 190,000 199
Total West Virginia (Cost $191) 199
WISCONSIN 2.3%
Wisconsin Health and Ed. Fac.,
Childrens Hosp. of Wisconsin
5.625%, 2/15/15 (AMBAC Insured) 500,000 541
Total Wisconsin (Cost $523) 541
WYOMING 0.4%
Sweetwater County Pollution Control,
VRDN (Currently 3.30%) $ 100,000 $ 100
Total Wyoming (Cost $100) 100
Total Municipal Bonds (Cost $13,156) 13,563
Total Investments in Securities
102.6% of Net Assets (Cost $23,895) $24,419
Other Assets Less Liabilities (622)
NET ASSETS $ 23,797
----------
* Non-income producing
! Used in determining portfolio maturity
ADR American Depository Receipt
AMBAC AMBAC Indemnity Corp.
CHF Swiss franc
EFA Educational Facility Authority
FGIC Financial Guaranty Insurance Company
GO General Obligation
HEFA Health & Educational Facility Authority
HFA Health Facility Authority
IDA Industrial Development Authority
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Unaudited August 31, 1998
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
In thousands
Assets
Total investments in securities,
at value (cost $23,895) $ 24,419
Securities lending collateral pool 2,349
Other assets 423
Total assets 27,191
Liabilities
Securities lending collateral 2,349
Other liabilities 1,045
Total liabilities 3,394
NET ASSETS $ 23,797
---------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 51
Accumulated net realized gain/loss -
net of distributions (214)
Net unrealized gain (loss) 524
Paid-in-capital applicable to 2,178,992
shares of $0.0001 par value capital
stock outstanding; 1,000,000,000
shares authorized 23,436
NET ASSETS $ 23,797
---------
NET ASSET VALUE PER SHARE $ 10.92
---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
8/31/98
Investment Income
Income
Interest $ 290
Dividend 55
Total income 345
Expenses
Custody and accounting 47
Organization 43
Shareholder servicing 22
Registration 12
Prospectus and shareholder reports 9
Legal and audit 7
Directors 3
Miscellaneous 1
Reimbursed by manager (32)
Total expenses 112
Net investment income 233
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities (140)
Futures 4
Net realized gain (loss) (136)
Change in net unrealized gain or loss on securities (958)
Net realized and unrealized gain (loss) (1,094)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ (861)
---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Month s 6/30/97
Ended Through
8/31/98 2/28/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 233 $ 154
Net realized gain (loss) (136) (78)
Change in net unrealized gain or loss (958) 1,482
Increase (decrease) in
net assets from operations (861) 1,558
Distributions to shareholders
Net investment income (198) (144)
Capital share transactions*
Shares sold 7,392 16,373
Distributions reinvested 151 95
Shares redeemed (404) (270)
Redemption fees received 3 2
Increase (decrease) in
net assets from capital
share transactions 7,142 16,200
Net Assets
Increase (decrease) during period 6,083 17,614
Beginning of period 17,714 100
End of period $ 23,797 $ 17,714
---------------------------------
*Share information
Shares sold 639 1,568
Distributions reinvested 13 9
Shares redeemed (35) (25)
Increase (decrease) in shares outstanding 617 1,552
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Unaudited August 31, 1998
Notes to Financial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Tax-Efficient Balanced 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 June 30, 1997.
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 Debt securities are generally traded in the over-the-counter
market. Investments in securities are stated at fair value as furnished by
dealers who make markets in such securities or by an independent pricing
service, which considers yield or price of bonds of comparable quality,
coupon, maturity, and type, as well as prices quoted by dealers who make
markets in such securities.
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.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the
officers of the fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated
into U.S. dollars at the prevailing exchange rate on the dates of such
transactions. The effect of changes in foreign exchange rates on realized
and unrealized security gains and losses is reflected as a component of
such gains and losses.
Premiums and Discounts Premiums and original issue discounts on municipal
securities are amortized for both financial reporting and tax purposes.
Market discounts are recognized upon disposition of the security as gain or
loss for financial reporting purposes and as ordinary income for tax
purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with federal income tax regulations and may differ from those determined in
accordance with generally accepted accounting principles.
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.
Securities Lending The fund lends its securities to approved brokers to
earn additional income and receives cash and U.S. Treasury securities as
collateral against the loans. Cash collateral received is invested in a
money market pooled account by the fund's lending agent. Collateral is
maintained over the life of the loan in an amount not less than 100% of the
value of loaned securities. Although risk is mitigated by the collateral,
the fund could experience a delay in recovering its securities and a
possible loss of income or value if the borrower fails to return them. At
August 31, 1998, the value of loaned securities was $2,120,000; aggregate
collateral consisted of $2,349,000 in the securities lending collateral
pool.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $9,706,000 and $2,220,000, respectively, for the six
months ended August 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 income. The fund has unused realized capital loss carryforwards for
federal income tax purposes of $17,000, all of which expires in 2006. The
fund intends to retain gains realized in future periods that may be offset
by available capital loss carryforwards.
At August 31, 1998, the aggregate cost of investments for federal income
tax and financial reporting purposes was $23,895,000, and net unrealized
gain aggregated $524,000, of which $1,325,000 related to appreciated
investments and $801,000 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. The fee is computed daily and paid monthly, and consists of an
individual fund fee equal to 0.20% 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 August 31, 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 February 28, 1999, which would cause
the fund's ratio of expenses to average net assets to exceed 1.00%.
Thereafter, through February 28, 2001, 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 1.00%.
Pursuant to this agreement, $58,000 of management fees were not accrued by
the fund for the six months ended August 31, 1998, and $32,000 of other
expenses were borne by the manager. Additionally, $81,000 of management
fees and expenses remains unaccrued from a prior period.
In addition, the fund has entered into agreements with the manager and a
wholly owned subsidiary 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. The fund incurred
expenses pursuant to these related party agreements totaling approximately
$49,000 for the six months ended August 31, 1998, of which $9,000 was
payable at period-end.
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 Tax-Efficient Balanced Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor. F19-051 8/31/98
