Item 1. Report to Shareholders
T. Rowe Price Financial Services Fund
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June 30, 2004
Certified Semiannual Report
This report is certified under the Sarbanes-Oxley Act of 2002, which requires
that public companies, including mutual funds, affirm that the information
provided in their annual and semiannual shareholder reports fully and fairly
represents their financial position.
T. Rowe Price Financial Services Fund
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Certified Semiannual Report (Unaudited)
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
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6 Months Year
Ended Ended
6/30/04 12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
NET ASSET VALUE
Beginning
of period $ 21.86 $ 16.75 $ 18.84 $ 21.38 $ 16.12 $ 16.82
Investment
activities
Net investment
income (loss) 0.08 0.21 0.15 0.15 0.10 0.10
Net realized
and unrealized
gain (loss) 0.15 5.64 (2.05) (0.86) 5.80 0.15
Total from
investment
activities 0.23 5.85 (1.90) (0.71) 5.90 0.25
Distributions
Net investment
income -- (0.23) (0.13) (0.15) (0.09) (0.10)
Net realized
gain -- (0.51) (0.06) (1.68) (0.55) (0.85)
Total
distributions -- (0.74) (0.19) (1.83) (0.64) (0.95)
NET ASSET VALUE
End of
period $ 22.09 $ 21.86 $ 16.75 $ 18.84 $ 21.38 $ 16.12
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Ratios/
Supplemental
Data
Total return^ 1.05% 35.08% (10.10)% (3.13)% 36.76% 1.70%
Ratio of total
expenses to
average net
assets 0.92%! 0.97% 1.00% 0.97% 1.00% 1.14%
Ratio of net
investment
income (loss)
to average
net assets 0.72%! 1.16% 0.80% 0.69% 0.69% 0.50%
Portfolio
turnover
rate 36.2%! 50.8% 49.7% 54.8% 32.5% 37.1%
Net assets,
end of
period (in
thousands) $372,628 $371,595 $264,542 $308,635 $337,041 $159,031
^ 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.
! Annualized
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
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Certified Semiannual Report (Unaudited) June 30, 2004
PORTFOLIO OF INVESTMENTS (1) Shares Value
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(Cost and value in $ 000s)
COMMON STOCKS 99.9%
FINANCIALS 99.9%
Capital Markets 38.7%
Affiliated Managers Group * 18,000 907
AmeriTrade * 575,000 6,526
Bank of New York 537,000 15,831
Credit Suisse Group (CHF) * 120,000 4,265
Eaton Vance 132,000 5,044
Franklin Resources 256,000 12,820
Goldman Sachs Group 105,700 9,953
Legg Mason 67,000 6,098
Lehman Brothers 213,000 16,028
Mellon Financial 587,400 17,228
Merrill Lynch 261,000 14,089
Morgan Stanley 303,000 15,989
National Financial Partners 100,000 3,527
State Street 172,000 8,435
Waddell & Reed Financial, Class A 339,208 7,500
144,240
Commercial Banks 16.0%
Abbey National (GBP) 910,000 8,467
Boston Private Financial 147,000 3,405
Citizens Banking 88,000 2,732
Comerica 208,000 11,415
National Commerce Financial 110,000 3,575
Royal Bank of Scotland Group (GBP) 161,939 4,662
Silicon Valley Bancshares * 175,000 6,939
TCF Financial 18,000 1,045
Texas Capital Bancshares * 150,000 2,490
U.S. Bancorp 425,000 11,713
UCBH Holdings 82,000 3,241
59,684
Consumer Finance 1.8%
American Express 24,000 1,233
First Marblehead * 71,000 2,858
SLM Corporation 66,300 2,682
6,773
Diversified Financial Services 11.5%
Citigroup 341,200 15,866
J.P. Morgan Chase 466,000 18,067
Principal Financial Group 250,000 8,695
42,628
Insurance 18.4%
Ambac 20,200 1,483
American International Group 140,300 10,001
Assurant 93,000 2,453
Axis Capital Holdings 85,800 2,402
Berkshire Hathaway, Class A * 7 623
Bristol West Holdings 25,000 455
Conseco * 100,000 1,990
Genworth Financial, Class A * 187,000 4,292
Hartford Financial Services 163,000 11,205
Marsh & McLennan 48,000 2,178
Ohio Casualty * 462,000 9,300
Prudential 174,400 8,104
SAFECO 149,500 6,578
Scottish Annuity & Life 59,000 1,372
XL Capital 83,000 6,263
68,699
Thrifts & Mortgage Finance 13.5%
Fannie Mae 11,800 842
Freddie Mac 229,500 14,528
MGIC Investment 219,000 16,613
Radian Group 382,000 18,298
50,281
Total Financials 372,305
Total Common Stocks (Cost $299,735) 372,305
SHORT-TERM INVESTMENTS 0.0%
Money Market Fund 0.0%
T. Rowe Price Reserve Investment Fund, 1.16% # 1,000 1
Total Short-Term Investments (Cost $1) 1
Total Investments in Securities
99.9% of Net Assets (Cost $299,736) $372,306
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(1) Denominated in U.S. dollars unless otherwise noted
# Seven-day yield
* Non-income producing
CHF Swiss franc
GBP British pound
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
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Certified Semiannual Report (Unaudited) June 30, 2004
STATEMENT OF ASSETS AND LIABILITIES
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(In thousands except shares and per share amounts)
Assets
Investments in securities, at value (cost $299,736) $ 372,306
Other assets 1,761
Total assets 374,067
Liabilities
Total liabilities 1,439
NET ASSETS $ 372,628
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Net Assets Consist of:
Undistributed net investment income (loss) $ 1,393
Undistributed net realized gain (loss) 12,418
Net unrealized gain (loss) 72,570
Paid-in-capital applicable to 16,869,538 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares authorized 286,247
NET ASSETS $ 372,628
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NET ASSET VALUE PER SHARE $ 22.09
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The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
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Certified Semiannual Report (Unaudited)
STATEMENT OF OPERATIONS
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($ 000s)
6 Months
Ended
6/30/04
Investment Income (Loss)
Dividend income $ 3,143
Expenses
Investment management 1,277
Shareholder servicing 391
Custody and accounting 52
Prospectus and shareholder reports 21
Registration 16
Legal and audit 7
Directors 3
Miscellaneous 4
Total expenses 1,771
Net investment income (loss) 1,372
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 10,566
Foreign currency transactions (34)
Net realized gain (loss) 10,532
Change in net unrealized gain (loss) on securities (8,977)
Net realized and unrealized gain (loss) 1,555
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 2,927
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The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
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Certified Semiannual Report (Unaudited)
STATEMENT OF CHANGES IN NET ASSETS
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($ 000s)
6 Months Year
Ended Ended
6/30/04 12/31/03
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 1,372 $ 3,488
Net realized gain (loss) 10,532 8,439
Change in net unrealized gain (loss) (8,977) 81,065
Increase (decrease) in net assets
from operations 2,927 92,992
Distributions to shareholders
Net investment income -- (3,789)
Net realized gain -- (8,401)
Decrease in net assets from distributions -- (12,190)
Capital share transactions *
Shares sold 55,381 83,656
Distributions reinvested -- 11,654
Shares redeemed (57,275) (69,059)
Increase (decrease) in net assets from
capital share transactions (1,894) 26,251
Net Assets
Increase (decrease) during period 1,033 107,053
Beginning of period 371,595 264,542
End of period $ 372,628 $ 371,595
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(Including undistributed net investment income of
$1,393 at 6/30/04 and $21 at 12/31/03)
*Share information
Shares sold 2,463 4,334
Distributions reinvested -- 552
Shares redeemed (2,589) (3,687)
Increase (decrease) in shares outstanding (126) 1,199
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Financial Services Fund
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Certified Semiannual Report (Unaudited) June 30, 2004
NOTES TO FINANCIAL STATEMENTS
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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Financial Services Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end
management investment company and commenced operations on September 30, 1996.
The fund seeks long-term growth of capital and a modest level of income.
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates made by fund management.
Valuation
The fund values its investments and computes its net asset value per share at
the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day
that the NYSE is open for business. Equity securities listed or regularly traded
on a securities exchange or in the over-the-counter market are valued at the
last quoted sale price or, for certain markets, the official closing price at
the time the valuations are made, except for OTC Bulletin Board securities,
which are valued at the mean of the latest bid and asked prices. A security that
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 are valued at the mean of the latest
bid and asked prices for domestic securities and the last quoted sale price for
international securities.
Investments in mutual funds are valued at the mutual fund's closing net asset
value per share on the day of valuation.
Other investments and those 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 the T. Rowe Price Valuation Committee,
established by the fund's Board of Directors.
Most foreign markets close before the close of trading on the NYSE. If the fund
determines that developments between the close of a foreign market and the close
of the NYSE will, in its judgment, materially affect the value of some or all of
its portfolio securities, which in turn will affect the fund's share price, the
fund will adjust the previous closing prices to reflect the fair value of the
securities as of the close of the NYSE, as determined in good faith by the T.
Rowe Price Valuation Committee, established by the fund's Board of Directors. A
fund may also fair value securities in other situations, such as
when a particular foreign market is closed but the fund is open. In deciding
whether to make fair value adjustments, the fund reviews a variety of factors,
including developments in foreign markets, the performance of U.S. securities
markets, and the performance of instruments trading in U. S. markets that
represent foreign securities and baskets of foreign securities. The fund uses
outside pricing services to provide it with closing market prices and
information used for adjusting those prices. The fund cannot predict how often
it will use closing prices and how often it will adjust those prices. As a means
of evaluating its fair value process, the fund routinely compares closing market
prices, the next day's opening prices in the same markets, and adjusted prices.
Currency Translation
Assets, including investments, and liabilities denominated in foreign currencies
are translated into U.S. dollar values each day at the prevailing exchange rate,
using the mean of the bid and asked prices of such currencies against U.S.
dollars as quoted by a major bank. Purchases and sales of securities, income,
and expenses are translated into U.S. dollars at the prevailing exchange rate on
the date of the transaction. The effect of changes in foreign currency exchange
rates on realized and unrealized security gains and losses is reflected as a
component of security gains and losses.
Rebates and Credits
Subject to best execution, the fund may direct certain security trades to
brokers who have agreed to rebate a portion of the related brokerage commission
to the fund in cash. Commission rebates are included in realized gain on
securities in the accompanying financial statements and totaled $8,000 for the
six months ended June 30, 2004. Additionally, the fund earns credits on
temporarily uninvested cash balances at the custodian that reduce the fund's
custody charges. Custody expense in the accompanying financial statements is
presented before reduction for credits.
Investment Transactions, Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Dividends received from
mutual fund investments are reflected as dividend income; capital gain
distributions are reflected as realized gain/loss. Dividend income and capital
gain distributions are recorded on the ex-dividend date. Investment transactions
are accounted for on the trade date. Realized gains and losses are reported on
the identified cost basis. Distributions to shareholders are recorded on the
ex-dividend date. Income distributions are declared and paid on an annual basis.
Capital gain distributions, if any, are declared and paid by the fund, typically
on an annual basis.
Other
In the normal course of business, the fund enters into contracts that provide
general indemnifications. The fund's maximum exposure under these arrangements
is dependent on claims that may be made against the fund in the future and,
therefore, cannot be estimated; however, based on experience, the risk of
material loss from such claims is considered remote.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $71,137,000 and $68,685,000, respectively, for the six months ended
June 30, 2004.
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 under Subchapter M of the
Internal Revenue Code and distribute to shareholders all of its taxable income
and gains. Federal income tax regulations differ from generally accepted
accounting principles; therefore, distributions determined in accordance with
tax regulations may differ in amount or character from net investment income and
realized gains for financial reporting purposes. Financial reporting records are
adjusted for permanent book/tax differences to reflect tax character. Financial
records are not adjusted for temporary differences. The amount and character of
tax-basis distributions and composition of net assets are finalized at fiscal
year-end; accordingly, tax-basis balances have not been determined as of June
30, 2004.
At June 30, 2004, the cost of investments for federal income tax purposes was
$299,736,000. Net unrealized gain aggregated $72,570,000 at period-end, of which
$74,869,000 related to appreciated investments and $2,299,000 related to
depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price
Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The
investment management agreement between the fund and the manager provides for
an annual investment management fee, which is computed daily and paid
monthly. The fee consists of an individual fund fee, equal to 0.35% of the
fund's average daily net assets, and the fund's pro-rata share of a group fee.
The group fee is calculated based on the combined net assets of certain mutual
funds sponsored by Price Associates (the group) applied to a graduated fee
schedule, with rates ranging from 0.48% for the first $1 billion of assets to
0.295% for assets in excess of $120 billion. The fund's portion of the group fee
is determined by the ratio of its average daily net assets to those of the
group. At June 30, 2004, the effective annual group fee rate was 0.31%, and
investment management fee payable totaled $202,000.
In addition, the fund has entered into service agreements with Price Associates
and two wholly owned subsidiaries of Price Associates (collectively, Price).
Price Associates computes the daily share price and maintains the financial
records of the fund. T. Rowe Price Services, Inc., provides shareholder and
administrative services in its capacity as the fund's transfer and dividend
disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides
subaccounting and recordkeeping services for certain retirement accounts
invested in the fund. Expenses incurred pursuant to these service agreements
totaled $291,000 for the six months ended June 30, 2004, of which $60,000 was
payable at period-end.
Additionally, the fund is one of several mutual funds in which certain college
savings plans managed by Price Associates may invest. As approved by the fund's
Board of Directors, shareholder servicing costs associated with each college
savings plan are borne by the fund in proportion to the average daily value of
its shares owned by the college savings plan. For the six months ended June 30,
2004, the fund was charged $20,000 for shareholder servicing costs related to
the college savings plans, of which $15,000 was for services provided by Price.
At June 30, 2004, approximately 2.7% of the outstanding shares of the fund were
held by college savings plans.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe
Price Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by Price Associates. The
Reserve Funds are offered as cash management options to mutual funds, trusts,
and other accounts managed by Price Associates and/or its affiliates, and are
not available for direct purchase by members of the public. The Reserve Funds
pay no investment management fees. During the six months ended June 30, 2004,
dividend income from the Reserve Funds totaled $29,000.
T. Rowe Price Financial Services Fund
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Certified Semiannual Report
INFORMATION ON PROXY VOTING
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A description of the policies and procedures that the T. Rowe Price Financial
Services Fund uses to determine how to vote proxies relating to portfolio
securities is available, without charge, upon request by calling 1-800-225-5132.
It also appears in the fund's Statement of Additional Information (Form 485B),
which can be found on the SEC's Web site, www.sec.gov.
Item 2. Code of Ethics.
A code of ethics, as defined in Item 2 of Form N-CSR, applicable to its
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions is filed as an
exhibit to the registrant's annual Form N-CSR. No substantive amendments were
approved or waivers were granted to this code of ethics during the registrant's
most recent fiscal half-year.
Item 3. Audit Committee Financial Expert.
Disclosure required in registrant's annual Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Disclosure required in registrant's annual Form N-CSR.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of
this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have evaluated the registrant's disclosure controls and procedures within 90
days of this filing and have concluded that the registrant's disclosure controls
and procedures were effective, as of that date, in ensuring that information
required to be disclosed by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) The registrant's principal executive officer and principal financial officer
are aware of no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11. Exhibits.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is filed
with the registrant's annual Form N-CSR.
(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end
companies: not applicable.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940,
is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price Financial Services Fund, Inc.
By: /s/ James S. Riepe
James S. Riepe
Principal Executive Officer
Date: August 16, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ James S. Riepe
James S. Riepe
Principal Executive Officer
Date: August 16, 2004
By: /s/ Joseph A. Carrier
Joseph A. Carrier
Principal Financial Officer
Date: August 16, 2004