- --------------------------------------------------------------------------------
T. Rowe Price
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Annual Report
Tax-Efficient Balanced Fund
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February 28, 1999
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REPORT HIGHLIGHTS
================================================================================
* Despite the summer's financial market turmoil, both large-cap stocks and
tax-free bonds fared well over the past six and 12 months.
* The fund's solid returns exceeded the Lipper Balanced Funds Average and its
combined index benchmark for both periods.
* In the bond portfolio, we increased our modest exposure to high-yield
municipal bonds; in equities, we focused on quality growth stocks in
technology, financial services, and health care.
* Municipal bonds and quality growth stocks remain attractive, particularly
given our outlook for a slowing economy and more modest equity returns.
* At year-end 1998, the fund made no capital gains distribution, which
minimizes shareholders' tax burden. The fund was 99% tax-efficient.
================================================================================
FELLOW SHAREHOLDERS
- --------------------------------------------------------------------------------
Stocks and bonds were volatile during the fiscal year ended February 28,
but ultimately proved rewarding for those who held on. Large-cap growth stocks,
which your fund favors, delivered double-digit returns yet again. Municipal
bonds provided mainly coupon income, but at a very attractive level compared
with taxable alternatives. Over the past 6- and 12-month periods, and since
inception, the fund has outperformed both its peer group average and its
combined index benchmark.
================================================================================
MARKET ENVIRONMENT
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The past year was one of extremes. Extreme optimism pushed U.S. stocks to
record highs in mid-July. Extreme pessimism as summer ended contributed to the
first near 20% correction in major U.S. indices of the eight-year bull market,
and produced a true bear market for small-cap stocks. The Russell 2000 Index of
smaller companies fell nearly 37% peak to trough, its worst decline in 25 years.
Russia's debt default in August created havoc in many markets and caused a
global liquidity crisis that contributed to a flight to U.S. Treasuries. In
response to the credit crunch, the Federal Reserve cut interest rates three
times last fall to cushion the domestic economy from weakness abroad and restore
investor confidence.
[Line chart compares yields on 30-year AAA GO munis, 5-year AAA GOs, and
1-year MIG1 Note from 2/98 through 2/99]
<PAGE>
Yields on 30-year Treasuries fell to a record low of 4.72% in October from
5.92% in February 1998. Municipal bonds fared well amid the turmoil--yields
fell, but the decline was more muted as long-term rates dropped from 5.08% to
4.64% over the same period. As a result, municipal yields approached parity with
Treasury yields among longer maturities, an unusual event in a year when major
tax reform was not under discussion.
Bond yields and stock prices bounced back as the global financial crisis
eased and the U.S. economy remained remarkably strong. By November, most global
equity markets were back in full rally mode, and U.S. blue chips hit new highs
before Thanksgiving. Fear gave way once again to optimism, as on-line traders
whipped up a speculative frenzy over Internet stocks. The trend continued into
1999 as news of robust fourth quarter GDP growth (6.1%) supported stocks but
helped fuel a further rise in interest rates. Long-term Treasury yields ended
February nearly a full percentage point above their October lows and about a
half-point above their year-end level. Municipal yields also rose but, again,
not as much as Treasury yields, and the difference, or spread, between the two
began to widen to a more normal level. Interest rates on most municipal
securities ended virtually unchanged from February 1998 except among short-term
issues, as shown in the chart on page 1.
================================================================================
PERFORMANCE AND STRATEGY REVIEW
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PERFORMANCE COMPARISON
----------------------
Periods Ended 2/28/99 6 Months 12 Months
--------------------- -------- ---------
Tax-Efficient Balanced Fund 17.79% 14.45%
Lipper Balanced Funds Average* 14.47 6.96
Combined Index Portfolio** 15.90 12.67
- --------------------------------------------------------------------------------
* The fund's peer group benchmark was previously the Lipper Balanced Fund
Index, which gained 15.34% and 8.98% for the past six and 12 months,
respectively.
** An unmanaged portfolio of 48% stocks (S&P 500 Stock Index) and 52% bonds
(Lehman Municipal Bond Index).
================================================================================
Beginning with this report, your fund is changing its peer group from the
Lipper Balanced Fund Index to the Lipper Balanced Funds Average. We believe the
average is a more accurate gauge of our competition, since the index consists
only of the 30 largest funds in the category.
Your fund outperformed both peer groups over the past six months and
significantly outpaced both over the past year. The typical balanced fund
invests 60% in stocks and 40% in a mix of taxable (primarily corporate) bonds,
whereas our investment program mandates that we keep at least 50% of our assets
in tax-free bonds, which generally performed better than corporates during the
fiscal year.
<PAGE>
Our results over the past year were particularly pleasing given the higher
equity exposure of the typical balanced fund. Your fund also outperformed the
Combined Index Portfolio, which is more reflective of our asset mix and
investment style, over both periods. At the end of February our allocation was
48% equities and 52% tax-free securities (including cash reserves held in
tax-free money market investments). The fund has exceeded the returns of both
Lipper peer groups and the composite benchmark since inception on June 30, 1997,
driven by strong performance from both the stock and bond portions of the fund.
In that 20-month period, the fund has returned 31.57% cumulatively, compared
with 27.91% for the combined index, 23.35% for the Lipper Balanced Fund Index,
and 21.18% for the Lipper Balanced Funds Average.
==============================
IN GENERAL, WE DO NOT
MAKE SHIFTS IN PORTFOLIO
POSITIONS THAT RESULT IN
TAXABLE EVENTS SUCH AS
REALIZING CAPITAL GAINS.
==============================
The fixed income segment of the fund performed well over the past 6- and
12-month periods. We kept duration long for most of the past fiscal year, which
benefited performance as rates fell in the summer and early 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 as
a result of a one-percentage-point rise or fall in interest rates.) More
recently, we have modestly increased cash reserves and purchased
higher-yielding, shorter-duration bonds, which has caused the fund's duration to
drop from 8.8 years to about 8 years. In general, we do not make shifts in
portfolio positions that result in taxable events such as realizing capital
gains. The recent purchases allowed us to improve the diversification of the
portfolio--we now own 56 holdings, an increase of almost 30% since a year ago.
Our emphasis remains on owning noncallable bonds, which perform well over a
range of interest rate scenarios. In terms of sector diversification, we reduced
the fund's exposure to hospital bonds, as hospital operating margins are
eroding, and increased exposure to local general obligation bonds that have
benefited from robust tax collections and strong fiscal health.
The fund now holds its maximum allocation of below-investment-grade bonds
(10% of the bond portfolio). As credit quality spreads (the yield advantage of
lower-quality bonds over higher-quality bonds) widened during last fall's credit
crunch, we saw good values and an opportunity to increase the portfolio's yield.
As always, we are moving cautiously and diversifying our holdings in the
high-yield sector.
Though the equity portfolio has a 6% position in smaller and mid-cap
companies, our largest holdings continued to be in large-cap growth stocks such
as MICROSOFT, INTEL, and GE--the same types of stocks that powered the S&P 500
during the period. This emphasis on quality growth stocks that we expect to buy
and hold for the long term has enabled the equity portfolio to outperform the
S&P 500 over the past year and since inception. (We want to emphasize, however,
that given our growth bias and modest small-cap exposure, the equity portion of
the fund is not directly comparable to the S&P 500.) We have made no major
portfolio changes since our last report in August.
<PAGE>
[Pie chart with the following pieces: Investment-Grade Municipal Bonds 45%;
Noninvestment-Grade Municipal Bonds 5%; Large-Cap Stocks 45%; Mid- and Small-Cap
Stocks 3%; Other and Reserves 2%]
Both stock selection and sector weighting contributed to our results over
the past year, though sector selection has been a modest negative since
inception. Our overweight position in technology--the largest sector at about
25% of stocks--boosted returns over the past year as high-tech led the market.
Diversification is especially important in this dynamic sector, and our emphasis
was on semiconductors, software, and communications equipment. Other core
holdings in this area include CISCO SYSTEMS, a leader in computer networking
that is benefiting enormously from the growth of the Internet. (See the Largest
Holdings table on page 7.)
Our second-largest sector is financial services, at about 17% of the stock
portfolio. Here, top holdings include FANNIE MAE, FREDDIE MAC, and AMERICAN
EXPRESS. In banking, we focused on companies that derive a substantial portion
of revenues from fee income or that have strong niches. Examples include: BANK
ONE, a strong player in credit cards following its acquisition of First USA;
global giant CITIGROUP; and MELLON BANK, owner of Dreyfus mutual funds. We
avoided companies that stress low-margin, traditional banking businesses. Health
care is our third-largest sector, where we are also overweight compared with the
S&P 500 and other growth funds. Our investments in this area are almost
exclusively leaders in pharmaceutical research such as MERCK, PFIZER, and
AMERICAN HOME PRODUCTS.
The success of our equity investments is the result of a team effort.
Stephen W. Boesel and William J. Stromberg, two of the firm's senior equity
portfolio managers, have made valued contributions. In addition, the insights of
T. Rowe Price equity analysts have also greatly aided our ability to create and
maintain a buy-and-hold portfolio that not only produces strong returns but also
is extremely tax-efficient.
For an investor in the top federal tax rate of 39.6%, the fund was 99%
tax-efficient in the past year, reflecting no realized capital gains and a small
taxable dividend distribution. (The tax-efficiency ratio is the relationship of
the fund's after-tax return to its pretax return.) The fund has never made a
capital gains distribution to shareholders despite its solid total return since
inception.
Overall, the fund's strategy fit very well with the type of market we
experienced over the past 12 months. Large-cap growth stocks outperformed value
and small-cap stocks, and municipal bonds outperformed corporates as a group,
even on a before-tax basis. Our long duration was a benefit for much of the
period as interest rates declined, and we successfully reduced duration and
captured higher yields as we shifted modestly toward lower-quality bonds near
year-end.
<PAGE>
================================================================================
OUTLOOK
- --------------------------------------------------------------------------------
Despite the economy's strong momentum, we expect a decline in growth toward
a more modest and sustainable level later this year. The Federal Reserve appears
to have adopted a neutral monetary bias in the belief that the economy contains
an equal measure of upside and downside risks. We believe the forces supporting
low inflation will remain intact for the foreseeable future. Disinflation and
deflation will continue to pose challenges for policymakers and businesses in
the year ahead, as excess capacity, advancing technology, and consolidation
erode pricing power.
So far this year, decreasing municipal issuance, strong demand, and
better-than-expected economic growth have helped tax-exempt bonds outperform
Treasuries, where yields have continued to rise from last year's lows. As a
result, municipal yields are no longer near parity with taxable yields. Overall,
however, the taxable-equivalent yields available on tax-free bonds are still
very appealing, and our outlook for bonds and especially tax-free securities is
positive for the year ahead.
Stocks are trading at historically high valuations, and we expect returns
to moderate from those of the last four years. As the Dow approaches the 10000
level at this writing, it's easy to forget that six months ago, in the wake of
the August 31 stock market plunge, the big question was whether the Dow would
hold above 7500. The dramatic reversals of the past year demonstrate, in our
view, that market timing is folly, and we intend to remain fully invested. All
in all, the current environment is an excellent fit for a balanced,
growth-oriented, and tax-efficient investment vehicle such as this one.
Respectfully submitted,
/s/
Mary J. Miller
Cochairman of the Investment Advisory Committee
/s/
Donald J. Peters
Cochairman of the Investment Advisory Committee
March 23, 1999
================================================================================
<PAGE>
T. Rowe Price Tax-Efficient Balanced Fund
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Portfolio Highlights
LARGEST HOLDINGS
Percent of
Net Assets
2/28/99
-------
STOCKS
- ------
Microsoft 1.6%
Intel 1.5
GE 1.2
Merck 1.1
Wal-Mart 1.0
Cisco Systems 1.0
Pfizer 1.0
Hewlett-Packard 0.9
Fannie Mae 0.9
Disney 0.9
- ------ ---
Total 11.1%
Percent of
Net Assets
2/28/99
-------
Illinois Health Facilities Authority 2.6%
New Jersey State Transportation
Trust Fund Authority 2.5
Middlesex New Jersey Sewer Authority 1.7
Mississippi State Capital Improvements 1.6
Wisconsin Health &Education
Facilities Authority 1.6
Piedmont Municipal Power Agency 1.6
Kalamazoo Health Facilities Authority 1.6
New York State Dormitory Authority 1.6
Detroit City School District 1.6
Intermountain Power Agency 1.6
- -------------------------- ---
Total 18.0%
<PAGE>
================================================================================
T. Rowe Price Tax-Efficient Balanced Fund
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Portfolio Highlights
SECTOR DIVERSIFICATION
- ----------------------
Percent of Percent of
Net Assets Net Assets
8/31/98 2/28/99
------- -------
STOCKS
- ------
Technology 10% 12%
Financial 7 8
Health Care 8 8
Consumer Services 7 7
Consumer Nondurables 6 7
Business Services and Transportation 2 2
Capital Equipment 2 2
All Other 4 2
Total 46% 48%
BONDS AND RESERVES
- ------------------
Hospital Revenue 14% 9%
General Obligation - Local 6 7
Nuclear Revenue 5 5
Electric Revenue 6 4
Lease Revenue 3 4
Water and Sewer Revenue 4 3
Housing Finance Revenue 2 3
Ground Transportation Revenue 3 2
Life Care/Nursing Home Revenue 2 2
General Obligation - State - 2
Escrowed to Maturity 4 2
Other Revenue 2 2
All Other 2 5
Reserves 1 2
Total 54% 52%
<PAGE>
================================================================================
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.
[SEC Chart Shown here]
AVERAGE ANNUAL COMPOUND TOTAL RETURN
- ------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 2/28/99 1 Year Inception Date
- --------------------- ------ --------- ----
Tax-Efficient Balanced Fund 14.45% 17.90% 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 each period
Financial Highlights
6/30/97
Through
2/28/99 2/28/98
------- -------
NET ASSET VALUE
- ---------------
Beginning of period $11.34 $10.00
Investment activities
Net investment income 0.24* 0.15*
Net realized and
unrealized gain (loss) 1.38 1.34
Total from
investment activities 1.62 1.49
Distributions
Net investment income (0.24) (0.15)
<PAGE>
NET ASSET VALUE
- ---------------
End of period $12.72 $11.34
Ratios/Supplemental Data
Total return# 14.45%* 14.96%*+
Ratio of total expenses to
average net assets 1.00%* 1.00%*+
Ratio of net investment
income to average
net assets 2.03%* 2.31%*+
Portfolio turnover rate 19.8% 12.5%
Net assets, end of period
(in thousands) $ 33,767 $ 17,714
- --------------------------------------------------------------------------------
# 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
- --------------------------------------------------------------------------------
February 28, 1999
PORTFOLIO OF INVESTMENTS
Shares/Par Value
In thousands
COMMON STOCKS 47.8%
FINANCIAL 8.1%
Bank and Trust 3.7%
Bank of New York 3,300 $ 115
Bank One 1,870 101
BankAmerica 1,900 124
Citigroup 3,650 215
Mellon Bank 2,100 142
Northern Trust 2,200 197
State Street 2,100 161
Wells Fargo 5,100 187
1,242
Life Insurance 0.1%
American General 600 44
44
Other Insurance 1.0%
AMBAC 700 39
American International Group 1,925 220
Xl Capital 1,000 61
320
Mortgage Finance 1.7%
Fannie Mae 4,400 308
Freddie Mac 4,400 259
<PAGE>
567
Miscellaneous Finance 1.6%
American Express 2,200 239
Charles Schwab 3,075 229
Franklin Resources 2,300 73
541
Total Financial 2,714
UTILITIES 1.2%
Telephone Services 1.2%
MCI WorldCom * 2,900 239
Vodafone ADR 800 146
Total Utilities 385
CONSUMER NONDURABLES 6.6%
Cosmetics 1.0%
Avon 2,500 $ 104
Procter & Gamble 2,600 233
337
Beverages 1.3%
Coca-Cola 4,300 275
PepsiCo 4,600 173
448
Food Processing 1.0%
General Mills 500 40
Heinz 1,100 60
Pioneer Hi-Bred 1,500 35
Sara Lee 2,200 60
Unilever N.V. ADR 1,000 72
Wrigley 900 84
351
Entertainment and Leisure 0.9%
Carnival (Class A) 3,200 142
Mattel 5,400 143
285
Textiles and Apparel 0.3%
NIKE (Class B) 1,900 102
102
Soaps and Housewares 1.3%
Colgate-Palmolive 1,600 136
Gillette 4,000 215
Kimberly-Clark 1,100 52
Ralston Purina 1,800 48
451
Tobacco 0.4%
Philip Morris 3,200 125
125
Liquor 0.4%
Anheuser-Busch 1,700 130
130
Total Consumer Nondurables 2,229
<PAGE>
CONSUMER SERVICES 6.7%
Media and Communications 2.2%
CBS * 4,000 $ 148
Clear Channel Communications * 1,300 78
Disney 8,300 292
Time Warner 3,600 232
750
Retail - Food 0.9%
Albertson's 1,300 74
Safeway * 1,600 92
Starbucks * 1,300 69
Sysco 2,500 71
306
Retail - All Other 1.4%
Bed Bath & Beyond * 1,800 53
Home Depot 2,800 167
Tiffany & Company 2,800 160
Walgreen 3,400 109
489
Retail - General Department 1.2%
Dollar General 2,500 75
Wal-Mart 3,900 337
412
Hotels and Restaurants 0.3%
McDonald's 1,100 93
93
Publishing 0.7%
McGraw-Hill 2,000 219
219
Total Consumer Services 2,269
CONSUMER CYCLICALS 0.3%
Consumer Durables 0.3%
Williams-Sonoma * 3,200 109
Total Consumer Cyclicals 109
TECHNOLOGY 11.9%
Electronics 3.6%
Altera * 2,300 $ 112
Intel 4,200 504
Linear Technology 4,200 184
Maxim Integrated Products * 4,700 195
Molex (Class A) 2,150 50
Texas Instruments 1,800 160
1,205
Telecommunications Equipment 1.5%
LM Ericsson (Class B) ADR 4,300 112
Lucent Technologies 2,300 234
Motorola 1,200 84
Tellabs * 1,100 88
518
Aerospace and Defense 0.2%
Boeing 1,500 53
53
Computer Services 0.3%
Automatic Data Processing 2,800 111
111
<PAGE>
Computer Software 2.7%
BMC Software * 1,500 61
Computer Associates 2,900 122
Microsoft * 3,600 540
Oracle * 2,950 165
Sterling Commerce * 1,000 26
914
Electronic Manufacturing Equipment 0.2%
Applied Materials * 1,300 72
72
Computer Communications 1.0%
Cisco Systems * 3,375 330
330
Business Machines 1.6%
Dell Computer * 2,000 160
Hewlett-Packard 4,700 313
Pitney Bowes 1,300 82
555
Computer Peripherals 0.6%
EMC * 1,100 $ 113
Symbol Technologies 1,700 90
203
Analytical Equipment 0.2%
Emerson Electric 1,000 58
58
Total Technology 4,019
CAPITAL EQUIPMENT 1.7%
Industrial Manufacturing 1.7%
Dover 2,000 68
GE 4,200 422
Illinois Tool Works 1,400 95
Total Capital Equipment 585
BUSINESS SERVICES AND
TRANSPORTATION 2.0%
Service 1.4%
DeVry * 2,400 60
Equifax 1,400 53
Marsh & McLennan 2,450 173
Mutual Risk Management 1,400 51
Paychex 700 30
Quintiles Transnational * 1,200 52
Robert Half International * 1,150 41
460
Advertising 0.6%
Interpublic Group 1,400 105
Omnicom 1,600 106
211
Total Business Services and Transportation 671
<PAGE>
ENERGY 0.8%
Integrated Petroleum - International 0.7%
Exxon 1,600 107
Mobil 1,400 116
223
Gas Utilities 0.1%
Enron 800 $ 52
52
Total Energy 275
PROCESS INDUSTRIES 0.5%
Specialty Chemicals 0.5%
PPG Industries 1,500 78
Rohm & Haas 1,500 47
Valspar 1,500 49
Total Process Industries 174
HEALTH CARE 8.0%
Drugs 7.6%
Abbott Laboratories 2,700 125
American Home Products 4,800 286
Amgen * 800 100
Bristol-Myers Squibb 2,200 277
Cardinal Health 900 65
Eli Lilly 1,700 161
Glaxo Wellcome ADR 1,500 96
Johnson & Johnson 2,600 222
McKesson 740 50
Merck 4,400 360
Novartis (CHF) 40 70
Pfizer 2,500 330
Schering-Plough 2,400 134
SmithKline Beecham ADR 1,100 78
Warner-Lambert 1,700 118
Zeneca Group ADR 2,100 86
2,558
Health Care (non-drug) 0.2%
Medtronic 1,200 85
85
HMO/Hospital Management 0.2%
IMS Health 1,800 64
64
Total Health Care 2,707
Total Common Stocks (Cost $11,513) 16,137
MUNICIPAL BONDS 52.0%
- ----------------------
ALABAMA 0.6%
Jefferson County Sewer, 5.75%, 2/1/27 (FGIC Insured) $ 200 $ 214
Total Alabama (Cost $200) 214
<PAGE>
ALASKA 1.2%
Anchorage, GO, 5.00%, 12/1/03 400 420
Total Alaska (Cost $421) 420
CONNECTICUT 0.9%
Connecticut Dev. Auth., Mystic Marinelife Aquarium
6.875%, 12/1/17 100 106
Mashantucket, 5.75%, 9/1/27 200 205
Total Connecticut (Cost $295) 311
DISTRICT OF COLUMBIA 0.6%
District of Columbia Hosp., Medlantic Healthcare Group
5.25%, 8/15/19 (MBIA Insured) 200 203
Total District of Columbia (Cost $188) 203
GEORGIA 1.4%
Municipal Electric Auth. of Georgia
Zero Coupon, 1/1/09 585 349
5.70%, 1/1/19 (MBIA Insured) 100 109
Total Georgia (Cost $440) 458
HAWAII 0.8%
Hawaii Dept. of Budget and Finance, Hawaiian Electric
4.95%, 4/1/12 (MBIA Insured) 250 259
Total Hawaii (Cost $250) 259
ILLINOIS 6.2%
Chicago Water Revenue, Capital Appreciation
Zero Coupon, 11/1/11 (FGIC Insured) 500 275
Chicago Board of Ed., Chicago School Reform
5.25%, 12/1/23 (FGIC Insured) $ 500 $ 516
Illinois EFA, Northwest Univ., 5.25%, 11/1/32 400 421
Illinois HFA
Loyola Univ. Health, 6.00%, 7/1/14 (MBIA Insured) 300 339
Riverside Health Systems, 6.00%, 11/15/18 500 533
Total Illinois (Cost $2,024) 2,084
INDIANA 0.7%
Goshen, Greencroft Obligation Group, 5.75%, 8/15/28 250 240
Total Indiana (Cost $246) 240
LOUISIANA 1.5%
Calcasieu Parish IDA, Entergy Gulf States, 5.45%, 7/1/10 250 249
Jefferson Parish, GO, Drainage Improvement
6.15%, 9/1/05 (FGIC Insured) 250 274
Total Louisiana (Cost $518) 523
MAINE 0.9%
Maine Housing Auth., Mortgage Purchase, 5.70%, 11/15/15 300 314
Total Maine (Cost $301) 314
<PAGE>
MASSACHUSETTS 2.1%
Massachusetts HEFA, Southcoast Health System
4.75%, 7/1/27 (MBIA Insured) 500 466
Massachusetts Turnpike Auth., 5.00%, 1/1/37 (MBIA Insured) 250 241
Total Massachusetts (Cost $691) 707
MICHIGAN 3.8%
Detroit City School Dist., 5.25%, 5/1/14 500 529
Flint Hosp. Building Auth., Hurley Medical
Center, 5.25%, 7/1/16 250 238
Kalamazoo HFA, Bronson Methodist Hosp., 5.50%, 5/15/12 500 532
Total Michigan (Cost $1,276) 1,299
MINNESOTA 0.7%
Minneapolis, Walker Methodist Senior Services,
5.875%, 11/15/18 $ 250 $ 251
Total Minnesota (Cost $246) 251
MISSISSIPPI 1.6%
Mississippi, GO, Capital Improvements, 5.00%, 11/1/05 515 546
Total Mississippi (Cost $541) 546
NEW JERSEY 5.3%
Middlesex County Utilities Auth., Sewer
6.25%, 8/15/10 (MBIA Insured) 500 585
New Jersey Economic Dev. Auth.,
Franciscan Oaks, 5.75%, 10/1/23 100 98
New Jersey Transportation Auth., Trust Fund
4.50%, 6/15/00 (Escrowed to Maturity) 300 305
5.00%, 6/15/04 500 527
Newark, GO, School Qualified Bond Act
5.30%, 9/1/11 (MBIA Insured) 250 265
Total New Jersey (Cost $1,748) 1,780
NEW YORK 8.8%
Dormitory Auth. of the State of New York
Court Fac. Westchester County, 5.00%, 8/1/09 500 531
State Univ. Ed. Fac., 5.40%, 5/15/23 250 255
Long Island Power Auth.
5.00%, 4/1/02 250 258
5.25%, 12/1/26 250 251
New York City, GO
VRDN (Currently 3.65%) (FGIC Insured) 500 500
7.50%, 2/1/01 100 107
7.625%, 2/1/15 (Prerefunded 1/2/02+) 235 264
New York State Urban Dev., Correctional Capital Fac.
5.00%, 1/1/13 500 505
New York Thruway Auth., Local Highway and Bridge
6.25%, 4/1/07 (Prerefunded 4/1/02+) 40 44
North Hempstead, GO, 4.75%, 1/15/18 (FGIC Insured) 250 242
Total New York (Cost $2,889) 2,957
<PAGE>
NORTH DAKOTA 2.3%
Burleigh County, Medcenter One,
5.00%, 5/1/06 (MBIA Insured) $ 260 $ 273
Oliver County PCR, Square Butte Electric Cooperative
5.30%, 1/1/27 (AMBAC Insured) 500 509
Total North Dakota (Cost $767) 782
OHIO 0.3%
Columbus, GO, VRDN (Currently 2.75%) 100 100
Total Ohio (Cost $100) 100
SOUTH CAROLINA 2.4%
Connector 2000 Assoc., Greenville Toll Road
Zero Coupon, 1/1/09 500 288
Piedmont Municipal Power Agency
5.25%, 1/1/09 (MBIA Insured) 500 533
Total South Carolina (Cost $816) 821
TENNESSEE 0.6%
Tennessee Housing Dev. Agency, Homeownership
Zero Coupon, 7/1/16 500 192
Total Tennessee (Cost $188) 192
TEXAS 0.9%
San Antonio Electric and Gas, 4.50%, 2/1/21 325 300
Total Texas (Cost $298) 300
UTAH 1.6%
Intermountain Power Agency, 5.25%, 7/1/14 (MBIA Insured) 510 528
Total Utah (Cost $522) 528
VIRGINIA 3.1%
Harrisonburg Redev. & Housing Auth., 4.20%, 3/1/04 400 400
Henrico County IDA, Bon Secours Health
St. Mary's Hosp., 6.00%, 8/15/16 (MBIA Insured) 185 210
Hopewell IDA, Westport Convalescent Center,
6.00%, 10/1/06 $ 145 $ 152
Pocahontas Parkway Assoc., Toll Road,
Zero Coupon, 8/15/18 900 279
Total Virginia (Cost $1,023) 1,041
<PAGE>
WASHINGTON 0.9%
Washington, GO, 5.375%, 9/1/02 100 106
Washington HFA, Fred Hutchinson Cancer Research Center
VRDN (Currently 3.60%) 200 200
Total Washington (Cost $303) 306
WEST VIRGINIA 0.6%
West Virginia Building Commission, GO, Lottery
5.00%, 7/1/04 (MBIA Insured) 190 200
Total West Virginia (Cost $191) 200
WISCONSIN 2.2%
Nekoosa, Nekoosa Papers, 5.35%, 7/1/15 200 197
Wisconsin HEFA, Childrens Hosp. of Wisconsin
5.625%, 2/15/15 (AMBAC Insured) 500 539
Total Wisconsin (Cost $722) 736
Total Municipal Bonds (Cost $17,204) 17,572
Total Investments in Securities
99.8% of Net Assets (Cost $28,717) $ 33,709
Other Assets Less Liabilities 58
NET ASSETS $ 33,767
* 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.
<PAGE>
================================================================================
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
February 28, 1999
Statement of Assets and Liabilities
In thousands
ASSETS
- ------
Total investments in securities, at value (cost $28,717) $ 33,709
Securities lending collateral 2,631
Other assets 249
Total assets 36,589
Liabilities
Obligation to return securities lending collateral 2,631
Other liabilities 191
Total liabilities 2,822
NET ASSETS $ 33,767
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 42
Accumulated net realized gain/loss - net of distributions (500)
Net unrealized gain (loss) 4,992
Paid-in-capital applicable to 2,654,440 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares authorized 29,233
NET ASSETS $ 33,767
NET ASSET VALUE PER SHARE $ 12.72
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
In thousands
Year
Ended
2/28/99
-------
INVESTMENT INCOME
INCOME
Interest $ 651
Dividend 123
Total income 774
EXPENSES
Custody and accounting 92
Organization 43
Shareholder servicing 43
Registration 27
Prospectus and shareholder reports 17
Investment management 14
Legal and audit 11
Directors 6
Miscellaneous 2
Total expenses 255
Net investment income 519
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities (426)
Futures 4
Net realized gain (loss) (422)
Change in net unrealized gain or loss on securities 3,510
Net realized and unrealized gain (loss) 3,088
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 3,607
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
In thousands
Year 6/30/97
Ended Through
2/28/99 2/28/98
------- -------
Increase (Decrease) in Net Assets
Operations
Net investment income $ 519 $ 154
Net realized gain (loss) (422) (78)
Change in net unrealized gain or loss 3,510 1,482
Increase (decrease) in net assets
from operations 3,607 1,558
Distributions to shareholders
Net investment income (536) (144)
Capital share transactions *
Shares sold 14,811 16,373
Distributions reinvested 450 95
Shares redeemed (2,293) (270)
Redemption fees received 14 2
Increase (decrease) in net assets
from capital share transactions 12,982 16,200
Net Assets
Increase (decrease) during period 16,053 17,614
Beginning of period 17,714 100
====== ===
End of period $ 33,767 $ 17,714
* Share information
Shares sold 1,242 1,568
Distributions reinvested 38 9
Shares redeemed (188) (25)
Increase (decrease) in shares outstanding 1,092 1,552
The accompanying notes are an integral part of these financial statements.
================================================================================
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
February 28, 1999
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.
<PAGE>
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. Credits earned on daily, uninvested cash
balances at the custodian are used to reduce the fund's custody charges.
Effective June 30, 1998, the fund recognized in expense its remaining
unamortized organization costs. Results of operations and net assets were not
affected by this change, due to the expense limitation.
<PAGE>
================================================================================
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. government 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, 1999, the value of
loaned securities was $2,532,000; aggregate collateral consisted of $2,631,000
in the securities lending collateral pool.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $17,566,000 and $4,894,000, respectively, for the year
ended February 28, 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
income. As of February 28, 1999, the fund has capital loss carryforwards for
federal income tax purposes of $442,000, of which $17,000 expires in 2006, and
$425,000 in 2007.
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, 1999. The results
of operations and net assets were not affected by the increases/(decreases) to
these accounts.
================================================================================
Undistributed net investment income $ 43,000
Paid-in-capital (43,000)
================================================================================
At February 28, 1999, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$28,717,000. Net unrealized gain aggregated $4,992,000 at period-end, of which
$5,120,000 related to appreciated investments and $128,000 to depreciated
investments.
1
<PAGE>
================================================================================
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 $9,000 was payable at February 28, 1999. 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
February 28, 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.
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,
$119,000 of management fees were not accrued by the fund for the year ended
February 28, 1999. Additionally, $81,000 of unaccrued management fees and
expenses remains subject to reimbursement through February 28, 2001.
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 $98,000 for the year ended
February 28, 1999, of which $8,000 was payable at period-end.
================================================================================
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 2/28/99
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 dividend income included $398,000 which qualified as
exempt-interest dividends.
For corporate shareholders, $97,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
2
<PAGE>
================================================================================
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Shareholders of
T. Rowe Price Tax-Efficient Balanced Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, 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 Tax-Efficient
Balanced Fund, Inc. (the "Fund") at February 28, 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 generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes 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 February 28, 1999 by correspondence with
custodians, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 17, 1999
================================================================================
FOR YIELD, PRICE, LAST TRANSACTION,
CURRENT BALANCE, OR TO CONDUCT
TRANSACTIONS, 24 HOURS, 7 DAYS
A WEEK, CALL TELE*ACCESS [REGISTRATION MARK]:
1-800-638-2587 toll free
FOR ASSISTANCE
WITH YOUR EXISTING
FUND ACCOUNT, CALL:
shareholder service center
1-800-225-5132 toll free
410-625-6500 Baltimore area
TO OPEN A BROKERAGE ACCOUNT
OR OBTAIN INFORMATION, CALL:
1-800-638-5660 toll free
<PAGE>
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 Small-Cap Value 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
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor. F19-050 2/28/99
