Annual Report
Tax-Efficient
Balanced Fund
February 28, 1998
T. Rowe Price
Report Highlights
Tax-Efficient Balanced Fund
o Both stocks and bonds did well during the eight months
since the fund's inception, propelled by strong economic
growth and low inflation.
o Fund returns were 12.34% and 14.96% for the six- and
eight-month periods, respectively, well ahead of the
Lipper benchmark and the Combined Index Portfolio.
o In the bond portion of the portfolio, we extended
duration and diversified portfolio exposure among more
issuers.
o We emphasized a growth approach among stocks and took
advantage of weakness in the technology sector.
o We believe the environment is still favorable for stocks
and municipal bonds, although investors should lower
their expectations for equity returns in 1998.
Fellow Shareholders
The stock and bond markets enjoyed good returns since the
fund's inception eight months ago, fueled by strong economic
growth and low inflation. In the aftermath of the crises in
Southeast Asia, domestic bonds, including municipals,
benefited from a flight to the relative stability of U.S.
fixed income markets. Stocks rallied sharply in February
following weakness late last year and at the start of 1998.
MARKET ENVIRONMENT
The continuation of strong economic growth combined with low
inflation and rising corporate profits provided an ideal
environment for both stocks and bonds. The performance of
stocks during the past six months was particularly impressive
in light of the market's concern about the impact Asian
markets may have on U.S. equities. Equity returns over the
past 12 months were notable coming on the heels of
considerable market strength in 1995 and 1996. The 1995 to
1997 period, in fact, is the first time in modern history that
stock market returns have exceeded 20% in three consecutive
years.
Municipal Bond and Note Yields
1-Year Moody's
30-Year AAA 5-Year AAA Investment Grade
General Obligation General Obligation 1 Note
2/97 5.5 4.4 3.7
5.75 4.75 3.9
5.6 4.8 3.95
5/97 5.5 4.55 3.9
5.45 4.4 3.85
5.15 4.15 3.85
8/97 5.35 4.35 3.85
5.25 4.2 3.8
5.23 4.15 3.8
11/97 5.18 4.2 3.85
5.03 4.1 3.85
5 4 3.65
2/98 5.08 4.05 3.6
Municipal bond prices rose and yields declined over the past six months,
with long-term AAA-rated bond yields falling 27 basis points (100 basis
points equal one percent) and five-year maturities falling 30 basis points
from August through February. Short-term rates fell less sharply, and the
yield curve flattened throughout most of the past six months, except for
the last two weeks in February when long-term rates rose more than
short-term rates.
The tax-exempt market benefited from the positive impact of subdued
inflation on all fixed income investments. However, municipals
underperformed Treasuries as issuers rushed to the market to take
advantage of low borrowing costs, driving up supply. Municipal issuance
rose 20% in 1997, and supply so far in 1998 is the highest ever for the
first two months of the year.
PERFORMANCE AND STRATEGY REVIEW
During the fund's eight months of operation, its performance exceeded the
gains of the Lipper Balanced Fund Index and the Combined Index Portfolio.
We pursued our tax-efficient strategy, which minimizes capital gains
realization and emphasizes tax-free income. The result was a strong return
not only on a pretax but also on an after-tax basis. If we apply the
highest marginal income tax rate of 39.6% to the fund's taxable income
from stock dividends, the after-tax return would have been 14.87% over
eight months since there were no taxable capital gain distributions during
the period. For an investor paying the highest income tax on the taxable
distribution, this translates into a tax-efficiency of 99.4% (14.87%
divided by 14.96% equals 99.4%).
Performance Comparison
Since
Inception
Periods Ended 2/28/98 6 Months (6/30/97)
_____________________________________________________________________
Tax-Efficient Balanced Fund 12.34% 14.96%
Lipper Balanced Fund Index 10.45 13.04
Combined Index Portfolio* 11.08 13.14
* An unmanaged portfolio of 48% stocks (S&P 500) and 52% bonds (Lehman
Municipal Bond Index).
At the end of February, our asset mix was 48% equities and 52% municipal
securities (including tax-free money market securities). In reviewing fund
performance relative to the benchmarks shown in the table, it is important
to understand that the Lipper Balanced Fund Index is made up of funds that
generally have a higher allocation of stocks and also employ taxable
bonds, which have higher pretax yields. Our goal of delivering strong
after-tax returns led us to choose municipal bonds for the fixed income
component. Over time, the advantage of this asset mix should be apparent
from after-tax return comparisons.
The bond portion of the portfolio performed well for several reasons.
First, we followed a long duration strategy to benefit from the higher
yields of long-term bonds as well as the price appreciation generated by
falling interest rates. We continued to overweight noncallable bonds that
allow us to better manage our interest rate exposure. Second, we took full
advantage of our in-house credit research to buy lower-quality bonds that
benefit from a strong economy. Our exposure to noninvestment-grade bonds
was 5% of the portfolio at the end of February, which helped as the yield
difference between higher- and lower-quality bonds narrowed, resulting in
further price appreciation. At the same time we worked to diversify credit
risk as the fund grew and now have 38 individual bond issuers in the
portfolio compared with 17 six months ago. Finally, low turnover in a
generally declining- rate environment helped maintain the higher yields of
bonds purchased last summer and early fall.
Security Diversification
Investment-Grade Municipal Bonds 44%
Large-Cap Stocks 42%
Mid- and Small-Cap Stocks 6%
Noninvestment-Grade Municipal Bonds 5%
Other and Reserves 3%
The equity portion of the fund reflects our best buy-and-hold ideas. We
use a growth stock approach designed for investors looking to maximize
their after-tax returns. Consistent with this objective, we believe the
realization of capital gains must be kept at modest levels. There-fore, we
invest in companies that we expect to hold over the long term. The fund is
well diversified and owns the stocks of market leaders with strong growth
prospects and lower dividend yields than S&P 500 companies in order to
keep taxable income to a minimum.
We made no major realignments in positions since our first report to you
for the two-month period ended August 31, 1997. However, we did take
advantage of several opportunities. During the fourth quarter, technology
was one of the worst-performing equity sectors, largely due to concerns
about the impact the turmoil in Asia would have on various technology
companies. We used this period of uncertainty to increase our positions in
several companies we believe have excellent potential for growth over the
long term.
As a result, technology was the fund's largest sector weighting at the end
of February, representing 22% of total equity exposure. Our largest
technology holdings include Intel, Microsoft, and Hewlett-Packard.
Financial and health care are other sectors well represented in the
portfolio. Included among the stocks we hold in these areas are Fannie
Mae, Merck, and Pfizer. In addition, we also added to Disney, which is now
your fund's second-largest stock holding.
On the sale side of the ledger, we recognized losses in some holdings.
Losses are valuable in a fund like this, since they offset any gains we
incur, keeping taxable distributions to a minimum.
OUTLOOK
The problems in Asia could affect the U.S. economy and slice a bit
off 1998 growth, but the so-called Asian flu does not appear serious
enough to precipitate a downturn while domestic consumer demand remains
healthy. The recent Congressional testimony of Federal Reserve officials
suggests that the Fed will leave monetary policy unchanged until it fully
appraises the impact of Asia's problems on the U.S. economy.
Municipal bonds and U.S. equities produced good results over the last 12
months. However, the municipal market has come under some pressure from
both a heavy supply of new issuance and the recent rise in Treasury
yields. Compared with Treasuries on an after-tax basis, municipals are
attractive and could entice investors looking to take advantage of their
relative appeal. We expect municipals to do well in 1998 as long as
inflation remains benign. The environment is also favorable for further
stock market gains, but we believe it is prudent to have more modest
expectations for equity market performance in the year ahead.
Respectfully submitted,
Mary J. Miller
Cochairman, Investment Advisory Committee
Donald J. Peters
Cochairman, Investment Advisory Committee
March 20, 1998
T. Rowe Price Tax-Efficient Balanced Fund
Portfolio Highlights
LARGEST HOLDINGS
Percent of
Net Assets
2/28/98
Stocks
________________________________________________________________
Intel 1.2%
Disney 1.1
Microsoft 1.1
GE 1.0
Fannie Mae 1.0
Merck 0.9
Hewlett-Packard 0.8
Sony 0.8
Pfizer 0.7
Johnson & Johnson 0.7
________________________________________________________________
Total 9.3%
Percent of
Net Assets
2/28/98
Bonds
________________________________________________________________
Piedmont Municipal Power Agency 3.0%
Illinois Development Finance Authority 2.8
New York State Urban Development 2.8
Illinois Educational Facilities Authority 2.3
Buffalo New York Schools 2.0
Maryland Health and Higher
Education Facilities Authority 2.0
Illinois Health Facilities Authority 1.9
Maine Housing Authority 1.8
New Jersey Transportation
Funding Authority 1.7
Connector 2000 Association Toll Road 1.6
________________________________________________________________
Total 21.9%
T. Rowe Price Tax-Efficient Balanced Fund
Portfolio Highlights
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
8/31/97 2/28/98
Stocks
_______________________________________________________________________
Technology 9.4% 10.7%
Financial 6.7 7.6
Health Care 6.8 7.2
Consumer Nondurables 5.9 6.2
Consumer Services 5.7 6.1
Business Services and Transportation2.6 3.0
Energy 2.9 2.0
Capital Equipment 2.6 1.7
Consumer Cyclicals 1.1 1.7
Process Industries 1.3 1.2
Utilities - 0.8
Basic Materials 0.3 0.2
_______________________________________________________________________
Total 45.3% 48.4%
Bonds and Reserves
________________________________________________________________________
General Obligation - Local 10.8% 8.5%
Hospital Revenue 16.9 8.2
Nuclear Revenue 2.0 7.2
Lease Revenue 4.6 4.2
Educational Revenue - 3.8
Ground Transportation Revenue - 2.9
Other Revenue 5.7 2.9
Housing Finance Revenue 5.9 2.8
Water and Sewer Revenue 4.0 2.6
Life Care/Nursing Home Revenue - 2.0
Escrowed to Maturity - 1.7
Reserves 2.8 3.3
All Other 2.0 3.8
Other Assets Less Liabilities - - 2.3
_______________________________________________________________________
Total 54.7% 51.6%
T. Rowe Price Tax-Efficient Balanced 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.
Combined Index Portfolio
(48% S&P 500 stocks and
52% Lehman Municipal Tax-Efficient
Bond Index) Balanced Fund
6/30/97 $ 10,000 $10,000
2/28/98 11,314 11,496
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
Period Ended 2/28/98 Inception Date
_______________________________________________________________________
Tax-Efficient Balanced Fund 14.96% 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
For a share outstanding throughout the period
Financial Highlights
6/30/97
through
2/28/98
NET ASSET VALUE
Beginning of period $ 10.00
Investment activities
Net investment income 0.15*
Net realized and
unrealized gain (loss) 1.34
Total from
investment activities 1.49
Distributions
Net investment income (0.15)
NET ASSET VALUE
End of period $ 11.34
___________
Ratios/Supplemental Data
Total return 14.96%*
Ratio of expenses to
average net assets 1.00%*!
Ratio of net investment
income to average
net assets 2.31%*!
Portfolio turnover rate 12.5%!
Average commission rate paid $ 0.0280
Net assets, end of period
(in thousands) $ 17,714
* 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
February 28, 1998
Portfolio of Investments
Shares/Par Value
In thousands
Common Stocks 48.4%
FINANCIAL 7.6%
Bank and Trust 2.8%
BANC ONE 770 $ 44
Bank of New York 700 41
Citicorp 700 93
Mellon Bank 1,200 75
NationsBank 900 62
Northern Trust 400 30
Norwest 1,100 45
State Street 700 43
Wells Fargo 200 64
497
Insurance 1.8%
Aetna 500 44
AMBAC 700 37
American General 600 35
American International Group 750 90
Chubb 500 40
EXEL 500 33
MGIC Investment 500 37
316
Financial Services 3.0%
American Express 1,200 108
Charles Schwab 850 32
Fannie Mae 2,700 172
Franklin Resources 1,400 72
Freddie Mac 1,500 71
Travelers Group 1,600 89
544
Total Financial 1,357
UTILITIES 0.8%
Telephone Services 0.8%
Vodafone ADR 800 71
WorldCom 1,800 69
Total Utilities 140
CONSUMER NONDURABLES 6.2%
Cosmetics 0.8%
Avon 600 $ 42
Procter & Gamble 1,200 102
144
Beverages 1.1%
Anheuser-Busch 700 33
Coca-Cola 1,100 76
PepsiCo 2,500 91
200
Food Processing 1.2%
General Mills 500 36
Heinz 600 34
Pioneer Hi-Bred 300 31
Sara Lee 700 39
Unilever N.V. ADR 600 39
Wrigley 400 31
210
Miscellaneous Consumer Products 2.5%
Colgate-Palmolive 700 57
Gillette 800 86
Kimberly-Clark 1,000 56
Newell 900 41
NIKE 1,000 44
Philip Morris 2,800 122
Ralston Purina 400 40
446
Entertainment and Leisure 0.6%
Carnival ADR (Class A) 600 35
Mattel 1,400 59
94
Total Consumer Nondurables 1,094
CONSUMER SERVICES 6.1%
General Merchandisers 0.9%
Dollar General 800 37
Wal-Mart 2,500 116
153
Specialty Merchandisers 1.0%
Albertson's 800 $ 37
Circuit City Stores 900 35
Safeway * 1,000 35
Starbucks * 900 36
Sysco 900 42
185
Entertainment and Leisure 0.5%
McDonald's 1,000 55
Mirage Resorts * 1,100 25
80
Media and Communications 2.6%
CBS 1,800 56
Clear Channel Communications * 400 36
Disney 1,800 201
McGraw-Hill 1,300 98
Time Warner 1,000 68
459
Retail 1.1%
AutoZone * 1,000 30
Home Depot 1,000 64
Tiffany 1,400 66
Walgreen 1,200 44
204
Total Consumer Services 1,081
CONSUMER CYCLICALS 1.7%
Miscellaneous Consumer Durables 1.7%
American Standard * 900 40
Bed Bath & Beyond * 800 35
Sherwin-Williams 1,300 43
Sony ADR 1,500 136
Williams Sonoma * 800 41
Total Consumer Cyclicals 295
TECHNOLOGY 10.7%
Electronic Components 3.2%
Altera * 1,200 $ 52
EMC * 1,000 38
Hubbell (Class B) 700 35
Intel 2,400 215
Linear Technology 700 53
Maxim Integrated Products * 1,500 61
Molex (Class A) 1,550 44
Texas Instruments 1,000 58
556
Electronic Systems 1.0%
Applied Materials * 900 33
Hewlett-Packard 2,200 147
180
Information Processing 0.3%
Dell Computer * 400 56
56
Specialized Computer 0.2%
Symbol Technologies 800 41
41
Telecommunications Equipment 1.5%
Cisco Systems * 1,350 89
LM Ericsson ADR (Class B) 1,000 46
Lucent Technologies 500 54
Motorola 700 39
Tellabs * 600 36
264
Aerospace and Defense 0.6%
Boeing 800 44
Lockheed Martin 500 58
102
Electrical Equipment 0.3%
Emerson Electric 900 57
57
Computer Service and Software 3.3%
Adobe Systems 700 31
Automatic Data Processing 1,300 79
BMC Software * 500 $ 38
Computer Associates 1,100 52
HBO 600 33
Microsoft * 2,200 187
Oracle * 2,250 56
PeopleSoft * 900 40
Primark* 500 21
Sterling Commerce * 900 41
578
Office Automation 0.3%
Pitney Bowes 1,200 56
56
Total Technology 1,890
CAPITAL EQUIPMENT 1.7%
Electrical Equipment 1.2%
AlliedSignal 900 38
GE 2,300 179
217
Machinery 0.5%
Dover 1,100 43
Illinois Tool Works 600 36
79
Total Capital Equipment 296
BUSINESS SERVICES AND
TRANSPORTATION 3.0%
Miscellaneous Business Services 2.6%
Cendant * 900 34
Cognizant 800 40
DeVry * 800 27
Equifax 1,100 40
Interpublic Group 700 38
Manpower 1,000 42
Marsh & McLennan 500 43
Omnicom 1,000 46
Paychex 400 21
Quintiles Transnational * 700 34
Robert Half International * 1,050 $ 47
Service Corp. International 800 30
Vincam Group * 750 20
462
Real Estate 0.4%
Security Capital Group (Class B) * 2,200 68
68
Total Business Services and
Transportation 530
ENERGY 2.0%
Exploration and Production 0.2%
Apache 900 30
30
Gas Transmission 0.2%
Enron 700 33
33
Integrated Petroleum - International 1.6%
Exxon 1,500 96
Mobil 1,400 101
Royal Dutch Petroleum 1,800 98
295
Total Energy 358
PROCESS INDUSTRIES 1.2%
Specialty Chemicals 1.2%
Morton International 1,000 33
PPG Industries 700 45
Rohm & Haas 500 51
Sigma Aldrich 1,200 47
Valspar 1,100 39
Total Process Industries 215
BASIC MATERIALS 0.2%
Metals 0.2%
Nucor 700 36
Total Basic Materials 36
HEALTH CARE 7.2%
Hospital Supplies/Hospital Management 0.8%
Abbott Laboratories 1,000 $ 75
Baxter International 600 34
Medtronic 800 42
151
Pharmaceuticals 5.9%
American Home Products 500 47
Amgen * 800 43
Bristol-Myers Squibb 1,200 120
Cardinal Health 600 49
Eli Lilly 700 46
Glaxo Wellcome ADR 1,000 54
Johnson & Johnson 1,700 128
Merck 1,300 166
Novartis (CHF) 25 46
Pfizer 1,500 133
Schering-Plough 800 61
SmithKline Beecham ADR 600 37
Warner-Lambert 400 59
Zeneca Group ADR 500 66
1,055
Health Care Services 0.3%
United HealthCare 800 48
48
Biotechnology 0.2%
Human Genome Sciences * 700 30
30
Total Health Care 1,284
Total Common Stocks (Cost $7,296) 8,576
MUNICIPAL BONDS 53.9%
ALABAMA 1.2%
Jefferson County Sewer, 5.75%, 2/1/27
(FGIC Insured) $ 200,000 $ 212
Total Alabama (Cost $200) 212
ALASKA 0.6%
Valdez Marine Terminal, Exxon Pipeline
VRDN (Currently 3.65%) $ 100,000 $ 100
Total Alaska (Cost $100) 100
CALIFORNIA 1.7%
California, GO, RAN, 4.50%, 6/30/98 300,000 301
Total California (Cost $301) 301
CONNECTICUT 1.7%
Connecticut Dev. Auth., Mystic Marinelife Aquarium
6.875%, 12/1/17 100,000 107
Mashantucket Western Pequot Tribe,
5.75%, 9/1/27 200,000 204
Total Connecticut (Cost $295) 311
DISTRICT OF COLUMBIA 1.1%
District of Columbia Hosp., Medlantic Healthcare Group
5.25%, 8/15/19 (MBIA Insured) 200,000 199
Total District of Columbia (Cost $188) 199
FLORIDA 1.7%
Florida Board of Ed., GO, Capital Outlay
VRDN (Currently 3.65%) 100,000 100
Jacksonville HFA, Genesis Rehabilitation Hosp.
VRDN (Currently 3.70%) 200,000 200
Total Florida (Cost $300) 300
GEORGIA 2.0%
Monroe County Dev. Auth., PCR, Georgia Power
VRDN (Currently 3.90%) 100,000 100
Municipal Electric Auth. of Georgia
Zero Coupon, 1/1/09 260,000 144
5.70%, 1/1/19 (MBIA Insured) 100,000 108
Total Georgia (Cost $346) 352
ILLINOIS 8.5%
Chicago Water Revenue, Capital Appreciation
Zero Coupon, 11/1/11 (FGIC
Insured) $ 500,000 $ 257
Illinois Dev. Fin. Auth., Pollution Control
4.40%, 12/1/06 (AMBAC Insured) 500,000 497
Illinois EFA, Northwest Univ., 5.25%,
11/1/32 400,000 413
Illinois HFA, Loyola Univ. Health
6.00%, 7/1/14 (MBIA Insured) 300,000 336
Total Illinois (Cost $1,465) 1,503
INDIANA 0.6%
Indiana Dev. Fin. Auth., Inland Project,
5.75%, 10/1/11 100,000 105
Total Indiana (Cost $100) 105
KENTUCKY 1.1%
Kentucky Economic Dev. Fin. Auth.
Sisters of Charity of Nazareth
VRDN (Currently 3.75%) 200,000 200
Total Kentucky (Cost $200) 200
LOUISIANA 1.6%
Jefferson Parish, GO, Drainage Improvement
6.15%, 9/1/05 (FGIC Insured) 250,000 276
Total Louisiana (Cost $270) 276
MAINE 1.8%
Maine Housing Auth., Mortgage Purchase,
5.70%, 11/15/15 300,000 311
Total Maine (Cost $301) 311
MARYLAND 2.0%
Maryland HHEFA, Helix Health
5.125%, 7/1/12 (AMBAC Insured) 350,000 358
Total Maryland (Cost $353) 358
MASSACHUSETTS 2.8%
Massachusetts HEFA, Institute of Tech.,
5.20%, 1/1/28 $ 250,000 $ 260
Massachusetts Turnpike Auth.
5.00%, 1/1/37 (MBIA Insured) 250,000 241
Total Massachusetts (Cost $493) 501
MISSISSIPPI 0.9%
Mississippi Hosp. Equip. and Fac.
Rush Medical Foundation, 5.40%, 1/1/07150,000 154
Total Mississippi (Cost $150) 154
NEW JERSEY 3.8%
New Jersey Economic Dev. Auth.
Franciscan Oaks, 5.75%, 10/1/23 100,000 101
New Jersey Transport Auth.
4.50%, 6/15/00 9 (Escrowed to
Maturity) 300,000 305
Newark, GO, School Qualified Bond Act
5.30%, 9/1/11 (MBIA Insured) 250,000 260
Total New Jersey (Cost $652) 666
NEW YORK 11.0%
Buffalo New York, GO, School Improvement,
5.25%, 2/1/14 350,000 359
Dormitory Auth. of the State of New York
Champlain Valley Physicians, 5.00%,
7/1/17 200,000 197
State Univ. Ed. Fac., 5.40%, 5/15/23250,000 251
New York City, GO
5.00%, 8/1/23 250,000 240
7.50%, 2/1/01 100,000 109
7.625%, 2/1/15 235,000 264
New York State Urban Dev., Correctional
Capital Fac.
5.00%, 1/1/13 500,000 487
New York Thruway Auth., Local Highway and Bridge
6.25%, 4/1/07 (Prerefunded 4/1/02!)40,000 44
Total New York (Cost $1,911) 1,951
OHIO 0.6%
Montgomery County Health Care Fac.
Friendship Village, 6.25%, 2/1/22$ 100,000 $ 102
Total Ohio (Cost $99) 102
SOUTH CAROLINA 4.5%
Connector 2000 Assoc., Greenville Toll Road
Zero Coupon, 1/1/09 500,000 281
Piedmont Municipal Power Agency
5.25%, 1/1/09 (MBIA Insured) 500,000 523
Total South Carolina (Cost $802) 804
TENNESSEE 1.0%
Tennessee Housing Dev. Agency, Homeownership
Zero Coupon, 7/1/16 500,000 181
Total Tennessee (Cost $178) 181
VIRGINIA 2.0%
Henrico County IDA, Bon Secours Health
St. Mary's Hosp.
6.00%, 8/15/16 (MBIA Insured) 185,000 207
Hopewell IDA, Westport Convalescent Center
6.00%, 10/1/06 145,000 146
Total Virginia (Cost $342) 353
WASHINGTON 0.6%
Washington, GO, 5.375%, 9/1/02 100,000 105
Total Washington (Cost $103) 105
WEST VIRGINIA 1.1%
West Virginia Building Commission, GO
Lottery, 5.00%, 7/1/04 (MBIA Insured)190,000 198
Total West Virginia (Cost $192) 198
Total Municipal Bonds (Cost $9,341) 9,543
Total Investments in Securities
102.3% of Net Assets (Cost $16,637) $ 18,119
Other Assets Less Liabilities (405)
NET ASSETS $ 17,714
__________
* Non-income producing
! Used in determining portfolio maturity
ADR American Depository Receipt
AMBACAMBAC 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
HHEFAHealth & Higher Educational Facility Authority
IDA Industrial Development Authority
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
RAN Revenue Anticipation Note
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
February 28, 1998
Statement of Assets and Liabilities
In thousands
Assets
Total investments in securities, at value
(cost $16,637) $ 18,119
Security lending collateral pool 1,735
Other assets 211
Total assets 20,065
Liabilities
Security lending collateral 1,735
Other liabilities 616
Total liabilities 2,351
NET ASSETS $ 17,714
___________
Net Assets Consist of:
Accumulated net investment income - net of
distributions $ 16
Accumulated net realized gain/loss - net
of distributions (78)
Net unrealized gain (loss) 1,482
Paid-in-capital applicable to 1,561,874 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares authorized 16,294
NET ASSETS $ 17,714
___________
NET ASSET VALUE PER SHARE $ 11.34
___________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
Statement of Operations
In thousands
6/30/97
through
2/28/98
Investment Income
Income
Interest $ 176
Dividend 43
Other 2
Total income 221
Expenses
Custody and accounting 60
Registration 17
Shareholder servicing 16
Legal and audit 9
Directors 4
Prospectus and shareholder reports 1
Miscellaneous 6
Reimbursed by manager (46)
Total expenses 67
Net investment income 154
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (78)
Change in net unrealized gain or loss on securities 1,482
Net realized and unrealized gain (loss) 1,404
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 1,558
___________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
Statement of Changes in Net Assets
In thousands
6/30/97
through
2/28/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 154
Net realized gain (loss) (78)
Change in net unrealized gain or loss 1,482
Increase (decrease) in net assets from
operations 1,558
Distributions to shareholders
Net investment income (144)
Capital share transactions*
Shares sold 16,373
Distributions reinvested 95
Shares redeemed (270)
Redemption fees received 2
Increase (decrease) in net assets
from capital share transactions 16,200
Net Assets
Increase (decrease) during period 17,614
Beginning of period 100
End of period $ 17,714
___________
*Share information
Shares sold 1,568
Distributions reinvested 9
Shares redeemed (25)
Increase (decrease) in shares outstanding 1,552
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
February 28, 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 February 28, 1998, the value of loaned securities was $1,680,000;
aggregate collateral consisted of $1,735,000 in the securities lending
collateral pool.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $16,534,000 and $824,000, respectively, for the
period ended February 28, 1998.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends
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, which expires in 2006. The fund intends to retain
gains realized in future periods that may be offset by available capital
loss carryforwards.
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 February 28, 1998. The
results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
Undistributed net investment income $ 6,000
Paid-in-capital (6,000)
At February 28, 1998, the aggregate cost of investments for federal income
tax and financial reporting purposes was $16,637,000, and net unrealized
gain aggregated $1,482,000, of which $1,517,000 related to appreciated
investments and $35,000 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, consisting 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 February 28,
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.
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, $35,000 of management fees were
not accrued by the fund for the period ended February 28, 1998, and
$46,000 of other expenses were borne by the manager.
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 $50,000 for the period ended February 28, 1998, of which
$7,000 was payable at period-end.
Tax Information (Unaudited) for the Tax Year Ended 2/28/98
We are providing this information as required by the Internal Revenue
Service. The amounts shown may differ from those reported in a fund's
financial statements because of differences between IRS and financial
statement reporting requirements.
The fund dividend income included $75,000 which qualified as
exempt-interest dividends.
For corporate shareholders, $24,000 of the fund's distributed income
qualified for the dividends-received deduction.
T. Rowe Price Tax-Efficient Balanced Fund
Report of Independent Accountants
To the Shareholders and Board of Directors of
T. Rowe Price Tax-Efficient Balanced Fund, Inc.
We have audited the accompanying statement of assets and liabilities of T.
Rowe Price Tax-Efficient Balanced Fund, Inc., including the portfolio of
investments, as of February 28, 1998, and the related statement of
operations, statement of changes in net assets and the financial
highlights for the period June 30, 1997 (commencement of operations)
through February 28, 1998. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of investments owned as of February 28, 1998, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of T. Rowe Price Tax-Efficient Balanced Fund, Inc. as of February 28,
1998, the results of its operations, the changes in its net assets and
financial highlights for the period stated in the first paragraph, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 18, 1998
T. Rowe Price Shareholder Services
Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark)
and T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and
results.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial
markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
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.
F19-050 2/28/98
