Item 1. Report to Shareholders
T. Rowe Price Tax-Efficient Balanced Fund
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February 29, 2004
Certified Annual 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 Tax-Efficient Balanced Fund
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Certified Annual Report
Performance Comparison
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This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
[Graphic Omitted]
T. Rowe Price Tax-Efficient Balanced Fund
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As of 2/29/04
T. Rowe Price Tax-Efficient Balanced Fund $16,014
Combined Index Portfolio* $15,223
Lipper Balanced Funds Index $14,800
T. Rowe Price
Combined Lipper Balanced Tax-Efficient
Index Portfolio* Funds Index Balanced Fund
6/30/97 10,000 10,000 10,000
2/98 11,316 11,318 11,496
2/99 12,807 12,335 13,157
2/00 13,398 13,184 14,528
2/01 13,713 13,624 14,655
2/02 13,590 13,222 14,517
2/03 12,586 11,727 13,366
2/04 15,223 14,800 16,014
* An unmanaged portfolio of 48% stocks (S&P 500 Stock Index) and 52% bonds
(Lehman Brothers Municipal Bond Index).
Standardized Calendar Quarter-End Returns
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Since
Inception
Periods Ended 2/29/04 1 Year 5 Years 6/30/97
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Tax-Efficient Balanced Fund 19.81% 4.01% 7.32%
Lipper Balanced Funds Index 26.21 3.71 6.06
Combined Index Portfolio * 20.95 3.52 6.51
* An unmanaged portfolio of 48% stocks (S&P 500 Stock Index) and 52% bonds
(Lehman Brothers Municipal Bond Index).
Returns do not reflect taxes that the shareholder may pay on fund distributions
or the redemption of fund shares. Past performance cannot guarantee future
results.
T. Rowe Price Tax-Efficient Balanced Fund
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Certified Annual Report
Dear Shareholder,
We are pleased to report that your fund returned 19.81% in the 12-month period
ended February 29, 2004. The fund lagged the Lipper Balanced Funds Index because
our percentage allocation to stocks was lower than that of typical balanced
funds. In addition, the fund slightly trailed a hypothetical portfolio of stocks
and municipal bonds.
As you know, the fund seeks to provide attractive long-term total returns on an
after-tax basis with a balanced portfolio of stocks and municipal bonds. The
fund invests a minimum of 50% of total assets in municipal bonds, primarily
long-term municipals with maturities generally exceeding 10 years and
investment-grade ratings. The balance is invested in large-cap stocks selected
mainly from the 1,000 largest U.S. companies as measured by their
capitalizations. Stock selection is based on a combination of fundamental,
bottom-up analysis and top-down quantitative strategies in an effort to identify
companies with superior long-term appreciation prospects.
Major Index Returns
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Period Ended 2/29/04 12-Month Return
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S&P 500 Stock Index 38.52%
S&P MidCap 400 Index 49.72
Russell 2000 Index 64.41
Nasdaq Composite Index 51.76
Lehman Brothers U.S. Aggregate Index 4.54
Lehman Brothers Municipal Bond Index 6.30
The Major Index Returns table shows how various domestic stock and bond market
indexes performed over the fund's fiscal year. As you can see, the small-cap
Russell 2000 Index produced very strong returns over the last 12 months.
Large-cap stocks, as measured by the S&P 500 Stock Index, were less robust. Bond
returns were positive but relatively low over the last year. Tax-free municipal
bonds outperformed taxable bonds, as measured by the Lehman indexes listed in
the table.
T. Rowe Price Tax-Efficient Balanced Fund
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Certified Annual Report
Top 5 Equity Sectors
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Percent of Percent of
Net Assets Net Assets
2/28/03 2/29/04
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Information Technology 9.3% 12.8%
Financials 10.0 10.0
Health Care 9.4 8.2
Consumer Discretionary 9.5 7.6
Consumer Staples 4.6 5.7
Historical weightings reflect current sector classifications.
The Top 5 Equity Sectors table shows how our largest stock sector allocations
have changed over the last year. As you can see, our exposure to information
technology and consumer staples companies increased over the last year, while
our allocations to the health care and consumer discretionary sectors decreased.
Top 5 Municipal Sectors
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Percent of Percent of
Net Assets Net Assets
2/28/03 2/29/04
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Water and Sewer Revenue 7.7% 7.7%
General Obligations - State 5.8 6.7
Hospital Revenue 6.8 5.9
Dedicated Tax Revenue 5.3 4.5
Electric Revenue 4.7 4.5
Historical weightings reflect current sector classifications.
The Top 5 Municipal Sectors table shows our largest bond sector allocations at
the beginning and at the end of our fiscal year. As you can see, our exposure to
the sectors listed in the table changed very little.
Finally, I'm sure you are aware that mutual fund companies have recently come
under scrutiny for their trading policies. The investigations have led to
allegations that executives of several mutual fund companies permitted or
engaged in improper mutual fund trading. In addition, certain intermediaries
that process fund transactions are alleged to have assisted some investors in
executing improper mutual fund trades. I want T. Rowe Price shareholders to know
that we emphatically condemn the abuses that have been revealed or alleged
against other firms in our industry. Our firm has not entered and will not enter
into any agreements with any investors or intermediaries that authorize
after-hours trading or excessive short-term trading in any of our funds. T. Rowe
Price investors can be assured that our firm unequivocally opposes illegal or
inappropriate trading of any nature and has policies and procedures in place
designed to protect the best interests of our long-term shareholders.
We have reviewed trading by T. Rowe Price personnel in the T. Rowe Price mutual
funds over the last several years and did not uncover the existence of any of
the abusive trading practices described in recent regulatory enforcement actions
relating to fund portfolio managers and senior fund executives. You may find out
more about our trading policies and the steps we take to protect your interests
by visiting our Web site (troweprice.com). These policies are also spelled out
in your fund's prospectus.
Thank you for your continued support.
Respectfully submitted,
James S. Riepe
Chairman
March 30, 2004
T. Rowe Price Tax-Efficient Balanced Fund
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Certified Annual Report
Financial Highlights For a share outstanding throughout each period
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Year
Ended
2/29/04 2/28/03 2/28/02 2/28/01 2/29/00
NET ASSET VALUE
Beginning
of period $ 11.86 $ 13.17 $ 13.59 $ 13.76 $ 12.72
Investment activities
Net investment
income (loss) 0.26 0.28 0.25 0.29* 0.25*
Net realized
and unrealized
gain (loss) 2.08 (1.32) (0.42) (0.17) 1.06
Total from
investment
activities 2.34 (1.04) (0.17) 0.12 1.31
Distributions
Net investment
income (0.24) (0.27) (0.25) (0.29) (0.27)
NET ASSET VALUE
End of
period $ 13.96 $ 11.86 $ 13.17 $ 13.59 $ 13.76
-----------------------------------------------------------
Ratios/Supplemental Data
Total return^ 19.81% (7.93)% (0.94)% 0.87%* 10.42%*
Ratio of total
expenses to
average net
assets 1.08% 1.05% 0.98% 1.00%* 1.00%*
Ratio of net
investment
income (loss)
to average
net assets 1.96% 2.20% 2.19% 2.11%* 1.99%*
Portfolio
turnover rate 18.2% 21.3% 24.3% 19.1% 40.0%
Net assets,
end of period
(in thousands) $ 47,067 $ 40,831 $ 48,094 $ 51,050 $ 43,248
^ 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% contractual expense limitation in
effect through 2/28/01.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
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Certified Annual Report February 29, 2004
Portfolio of Investments (ss.) Shares/Par Value
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($ 000s)
COMMON STOCKS 47.7%
CONSUMER DISCRETIONARY 7.6%
Automobiles 0.2%
Harley-Davidson 2,000 107
107
Hotels, Restaurants & Leisure 0.3%
International Game Technology 2,000 78
Starbucks * 2,100 79
157
Internet & Catalog Retail 0.7%
eBay * 4,500 310
310
Media 4.4%
Clear Channel Communications 8,800 379
Disney 10,200 271
McGraw-Hill 3,000 234
Omnicom 3,100 254
Time Warner * 6,600 114
Univision Communications, Class A * 4,500 160
Viacom, Class B 11,839 455
WPP Group ADR 3,700 208
2,075
Multiline Retail 0.4%
Dollar General 4,906 107
Family Dollar Stores 2,200 84
191
Specialty Retail 1.3%
Bed Bath & Beyond * 2,100 86
Home Depot 8,700 316
Tiffany 2,700 113
Williams-Sonoma * 2,900 93
608
Textiles, Apparel, & Luxury Goods 0.3%
Nike, Class B 1,600 117
117
Total Consumer Discretionary 3,565
CONSUMER STAPLES 5.7%
Beverages 1.7%
Anheuser-Busch 1,900 101
Coca-Cola 8,000 400
PepsiCo 6,200 322
823
Food & Staples Retailing 2.3%
CVS 2,500 94
Sysco 4,000 158
Wal-Mart 11,300 673
Walgreen 4,200 150
1,075
Food Products 0.3%
General Mills 1,400 64
Wrigley 1,100 62
126
Household Products 1.0%
Colgate-Palmolive 2,200 122
Kimberly-Clark 800 52
Procter & Gamble 2,900 297
471
Personal Products 0.4%
Avon Products 1,200 85
Gillette 2,500 96
181
Total Consumer Staples 2,676
FINANCIALS 10.0%
Capital Markets 2.9%
Bank of New York 6,800 224
Charles Schwab 13,726 168
Franklin Resources 2,800 158
Mellon Financial 3,200 104
Northern Trust 7,500 372
State Street 6,900 371
1,397
Commercial Banks 0.7%
Wells Fargo 5,500 315
315
Consumer Finance 0.6%
American Express 3,900 208
SLM Corporation 1,500 63
271
Diversified Financial Services 1.7%
Citigroup 13,000 653
Moody's 2,100 141
794
Insurance 2.1%
Ambac 1,000 78
American International Group 7,304 541
Marsh & McLennan 7,400 355
974
Thrifts & Mortgage Finance 2.0%
Fannie Mae 6,800 510
Freddie Mac 6,900 427
937
Total Financials 4,688
HEALTH CARE 8.2%
Biotechnology 0.7%
Amgen * 4,700 299
299
Health Care Equipment & Supplies 1.2%
Baxter International 1,000 29
Guidant 2,000 136
Medtronic 7,200 338
Stryker 800 71
574
Health Care Providers & Services 1.9%
Cardinal Health 1,000 65
Medco * 759 25
UnitedHealth Group 7,000 434
WellPoint Health Networks * 3,500 381
905
Pharmaceuticals 4.4%
Abbott Laboratories 3,300 141
AstraZeneca ADR 1,500 73
Eli Lilly 2,500 185
GlaxoSmithKline ADR 4,983 212
Johnson & Johnson 8,100 437
Merck 4,100 197
Pfizer 19,581 718
Wyeth 2,900 114
2,077
Total Health Care 3,855
INDUSTRIALS & BUSINESS SERVICES 2.9%
Aerospace & Defense 0.1%
Boeing 1,100 48
48
Air Freight & Logistics 0.2%
Expeditors International of Washington 1,900 73
73
Commercial Services & Supplies 1.1%
Apollo Group, Class A * 1,250 95
ChoicePoint * 2,000 76
Cintas 2,250 96
Devry * 2,900 86
Equifax 2,200 58
Robert Half International * 4,500 101
512
Industrial Conglomerates 1.4%
3M 800 62
General Electric 19,100 621
683
Machinery 0.1%
Illinois Tool Works 900 71
71
Total Industrials & Business Services 1,387
INFORMATION TECHNOLOGY 12.8%
Communications Equipment 1.5%
Cisco Systems * 28,700 663
Nokia ADR 1,000 22
685
Computer & Peripherals 0.8%
Dell * 8,500 278
EMC * 5,900 84
362
Electronic Equipment & Instruments 0.1%
Molex, Class A 2,375 63
63
Internet Software & Services 0.6%
InterActiveCorp * 4,000 130
Monster Worldwide * 3,500 77
Yahoo! * 1,500 67
274
IT Services 1.2%
Automatic Data Processing 3,300 140
Certegy 1,100 38
First Data 6,000 246
Paychex 4,150 133
557
Semiconductor & Semiconductor Equipment 6.2%
Altera * 15,100 333
Analog Devices 6,000 299
Applied Materials * 6,700 142
Broadcom, Class A * 3,500 142
Intel 16,300 477
Linear Technology 10,400 416
Maxim Integrated Products 8,700 434
Microchip Technology 2,500 71
Texas Instruments 10,400 319
Xilinx * 7,300 307
2,940
Software 2.4%
BMC Software * 1,000 20
Computer Associates 4,500 119
Intuit * 2,100 93
Microsoft 26,400 700
Oracle * 16,700 215
1,147
Total Information Technology 6,028
MATERIALS 0.3%
Chemicals 0.3%
Ecolab 2,600 71
Valspar 1,500 75
Total Materials 146
TELECOMMUNICATION SERVICES 0.2%
Wireless Telecommunication Services 0.2%
Vodafone ADR 4,000 100
Total Telecommunication Services 100
Total Common Stocks (Cost $13,945) 22,445
MUNICIPAL BONDS 51.8%
ALABAMA 0.2%
Birmingham Water & Sewer, 5.25%, 1/1/22
(MBIA Insured) 100,000 109
Total Alabama (Cost $103) 109
ARIZONA 1.3%
Phoenix, 5.875%, 7/1/18
(Prerefunded 7/1/10!) 500,000 594
Total Arizona (Cost $510) 594
CALIFORNIA 5.8%
Beverly Hills Unified School Dist.,
5.00%, 8/1/26 200,000 210
California
5.00%, 2/1/33 250,000 249
5.25%, 11/1/26 250,000 257
California Dept. of Water Resources
5.25%, 5/1/10 (MBIA Insured) 250,000 288
5.50%, 5/1/14 (AMBAC Insured) 100,000 115
California Infrastructure & Economic Dev. Bank
5.00%, 7/1/33 (AMBAC Insured) 250,000 263
5.25%, 7/1/21 (FSA Insured) 250,000 275
Capistrano Unified School Dist.,
5.875%, 9/1/23 100,000 103
Golden State Tobacco Securitization Corp.
Tobacco Settlement, 5.50%, 6/1/33 250,000 256
San Diego Public Fac. Fin. Auth.
5.00%, 8/1/24 (MBIA Insured) 170,000 179
San Diego Unified School Dist.,
5.25%, 7/1/24 (FSA Insured) 250,000 274
Univ. of California Regents, 5.00%,
5/15/36 (AMBAC Insured) 250,000 262
Total California (Cost $2,602) 2,731
CONNECTICUT 0.9%
Mashantucket Western Pequot Tribe
5.50%, 9/1/28 200,000 205
144A, 5.75%, 9/1/27 200,000 207
Total Connecticut (Cost $360) 412
DISTRICT OF COLUMBIA 3.9%
District of Columbia, 6.00%,
6/1/15 - 6/1/17 (MBIA Insured) 1,500,000 1,826
Total District of Columbia (Cost $1,525) 1,826
GEORGIA 3.5%
Atlanta Water And Wastewater
5.00%, 11/1/38 (FGIC Insured) 190,000 196
Georgia, 6.25%, 8/1/13 1,000,000 1,247
Griffin Combined Public Utility
5.00%, 1/1/25 (AMBAC Insured) 200,000 213
Total Georgia (Cost $1,466) 1,656
INDIANA 0.5%
Goshen, Greencroft Obligated Group,
5.75%, 8/15/28 250,000 244
Total Indiana (Cost $246) 244
LOUISIANA 0.5%
West Feliciana Parish, PCR, Entergy
5.65%, 9/1/28 (Tender 9/1/04) 250,000 255
Total Louisiana (Cost $250) 255
MARYLAND 0.8%
Maryland HHEFA
Mercy Ridge Retirement Community,
6.00%, 4/1/28 100,000 102
Univ. of Maryland Medical System,
6.625%, 7/1/20 250,000 283
Total Maryland (Cost $374) 385
MASSACHUSETTS 3.8%
Massachusetts, 5.25%, 8/1/16
(Prerefunded 8/1/13!) 250,000 290
Massachusetts Water Pollution Abatement Trust
6.00%, 8/1/18 1,000,000 1,240
Massachusetts Water Resources Auth.
5.125%, 8/1/27 (MBIA Insured) 250,000 264
Total Massachusetts (Cost $1,541) 1,794
MICHIGAN 2.3%
Michigan Hosp. Fin. Auth., Ascension Health
5.20%, 11/15/33 (Tender 11/15/05) 1,000,000 1,065
Total Michigan (Cost $1,000) 1,065
NEW JERSEY 0.8%
New Jersey Economic Dev. Auth.
Franciscan Oaks, 5.75%, 10/1/23 100,000 90
New Jersey Housing & Mortgage Fin. Agency
Multi-Family Housing, 5.55%, 11/1/09
(FSA Insured) 260,000 284
Total New Jersey (Cost $359) 374
NEW MEXICO 0.7%
Jicarilla Apache Nation, 5.50%, 9/1/23 100,000 106
New Mexico Mortgage Fin. Auth.,
6.00%, 3/1/27 220,000 235
Total New Mexico (Cost $322) 341
NEW YORK 2.7%
New York City Transitional Fin. Auth.
5.75%, 11/15/20 455,000 527
5.875%, 11/1/16 30,000 35
5.875%, 11/1/16 (Prerefunded 5/1/10!) 470,000 566
5.75%, 11/15/20 (Prerefunded 5/15/10!) 45,000 54
United Nations Dev. Corp., 5.25%, 7/1/15 100,000 106
Total New York (Cost $1,100) 1,288
NORTH CAROLINA 0.7%
Eastern Municipal Power Agency,
6.00%, 1/1/05 300,000 304
Total North Carolina (Cost $301) 304
OHIO 1.2%
Ohio State Univ.
5.00%, 6/1/33 250,000 261
5.25%, 6/1/15 250,000 284
Total Ohio (Cost $521) 545
OKLAHOMA 0.2%
Oklahoma Dev. Fin. Auth., Inverness Village,
8.00%, 2/1/32 100,000 98
Total Oklahoma (Cost $97) 98
OREGON 1.2%
Portland Sewer, 5.75%, 8/1/20
(FGIC Insured) 500,000 578
Total Oregon (Cost $509) 578
PENNSYLVANIA 2.6%
Beaver County IDA, PCR, FirstEnergy
4.85%, 6/1/30 (Tender 6/1/04) 500,000 502
Bucks County IDA, Chandler Hall,
6.30%, 5/1/29 250,000 237
Montgomery County HHEFA,
Foulkeways at Gwynedd
6.75%, 11/15/24 200,000 212
West Shore Area Auth.,
Holy Spirit Hosp., 6.20%, 1/1/26 250,000 262
Total Pennsylvania (Cost $1,154) 1,213
RHODE ISLAND 0.2%
Rhode Islands Economic Dev. Corp.
5.25%, 6/15/09 (FSA Insured) 100,000 114
Total Rhode Island (Cost $112) 114
SOUTH CAROLINA 1.8%
South Carolina Public Service,
5.00%, 1/1/21 (FSA Insured) 250,000 268
South Carolina Transportation Infrastructure
Bank 5.50%, 10/1/22 (Prerefunded 10/1/11!)
(AMBAC Insured) 500,000 593
Total South Carolina (Cost $765) 861
TEXAS 5.6%
Dallas County Utility & Reclamation Dist.
5.875%, 2/15/29 (AMBAC Insured) 1,000,000 1,041
Harris County Health Fac. Dev. Corp.
Memorial Hermann Healthcare,
6.375%, 6/1/29 250,000 272
Texas Childrens Hosp.
VRDN (Currently 0.87%) (MBIA Insured) 100,000 100
Houston, 6.40%, 6/1/27 250,000 275
Houston Water & Sewer System
5.375%, 12/1/27 (FGIC Insured) 500,000 541
5.75%, 12/1/16 (AMBAC Insured) 250,000 294
Sabine River Auth., PCR,
TXU Energy, 6.15%, 8/1/22 100,000 106
Total Texas (Cost $2,392) 2,629
VIRGINIA 5.2%
Arlington County IDA, Virginia Hosp. Center,
5.50%, 7/1/18 500,000 539
Fredericksburg IDA, Medicorp Health System
5.25%, 6/15/27 250,000 256
Henrico County Economic Dev. Auth.,
6.125%, 11/1/19 250,000 300
Richmond Metropolitan Auth.,
5.25%, 7/15/10 (FGIC Insured) 250,000 289
Univ. of Virginia, 5.00%, 6/1/23 250,000 266
Virginia HDA, Multi Family,
5.60%, 11/1/18 500,000 533
York County IDA, Virginia Electric & Power,
5.50%, 7/1/09 250,000 270
Total Virginia (Cost $2,268) 2,453
WASHINGTON 2.9%
Port of Seattle, 5.50%, 2/1/26
(MBIA Insured) 1,000,000 1,097
Washington, 5.00%, 1/1/26 (AMBAC Insured) 250,000 263
Total Washington (Cost $1,227) 1,360
WEST VIRGINIA 2.5%
West Virginia, 5.75%, 6/1/15 1,000,000 1,153
Total West Virginia (Cost $1,026) 1,153
Total Municipal Bonds (Cost $22,130) 24,382
Total Investments in Securities
99.5% of Net Assets (Cost $36,075) $46,827
-------
(ss.) Denominated in U.S. dollar unless otherwise noted
* Non-income producing
! Used in determining portfolio maturity
144A Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration only to
qualified institutional buyers--total of such securities at period-end
amounts to $207,000 and represents 0.4% of net assets
ADR American Depository Receipts
AMBAC AMBAC Assurance Corp.
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance Inc.
HDA Housing Development Authority
HHEFA Health & Higher Educational Facility Authority
IDA Industrial Development Authority/Agency
MBIA MBIA Insurance Corp.
PCR Pollution Control Revenue
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
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Certified Annual Report February 29, 2004
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
($ 000s)
Assets
Investments in securities, at value (cost $36,075) $ 46,827
Other assets 428
Total assets 47,255
Liabilities
Total liabilities 188
NET ASSETS $ 47,067
--------------------
Net Assets Consist of:
Undistributed net investment income (loss) $ 105
Undistributed net realized gain (loss) (3,627)
Net unrealized gain (loss) 10,752
Paid-in-capital applicable to 3,370,812 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares of the Corporation authorized 39,837
NET ASSETS $ 47,067
--------------------
NET ASSET VALUE PER SHARE $ 13.96
--------------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Statement of Operations
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
2/29/04
Investment Income (Loss)
Income
Interest $ 1,115
Dividend 241
Total income 1,356
Expenses
Investment management 231
Custody and accounting 122
Registration 58
Shareholder servicing 47
Legal and audit 14
Directors 5
Miscellaneous 5
Total expenses 482
Net investment income (loss) 874
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 214
Change in net unrealized gain (loss) on securities 6,905
Net realized and unrealized gain (loss) 7,119
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 7,993
--------------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
2/29/04 2/28/03
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 874 $ 975
Net realized gain (loss) 214 (1,193)
Change in net unrealized gain (loss) 6,905 (3,646)
Increase (decrease) in net assets
from operations 7,993 (3,864)
Distributions to shareholders
Net investment income (809) (953)
Capital share transactions *
Shares sold 4,311 4,704
Distributions reinvested 599 711
Shares redeemed (5,860) (7,864)
Redemption fees received 2 3
Increase (decrease) in net assets from capital
share transactions (948) (2,446)
Net Assets
Increase (decrease) during period 6,236 (7,263)
Beginning of period 40,831 48,094
End of period $ 47,067 $ 40,831
--------------- ---------------
*Share information
Shares sold 329 378
Distributions reinvested 46 58
Shares redeemed (445) (648)
Increase (decrease) in shares
outstanding (70) (212)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Certified Annual Report February 29, 2004
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Tax-Efficient Funds, Inc. (the corporation) is registered under
the Investment Company Act of 1940 (the 1940 Act). The Tax-Efficient Balanced
Fund (the fund), a diversified, open-end management investment company, is one
portfolio established by the corporation and commenced operations on June 30,
1997. The fund seeks to provide attractive long-term total returns on an
after-tax basis with a balanced portfolio of stocks and municipal bonds.
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. Debt securities are generally traded in the
over-the-counter market. Securities are valued at prices 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 or in the
over-the-counter market are valued at the last quoted sale price, or official
closing price for certain markets, at the time the valuations are made. 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 ask prices for domestic securities and the last quoted sale price
for international securities.
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.
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.
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.
Redemption Fees
A 1% fee is assessed on redemptions of fund shares held less than 1 year. Such
fees are withheld from redemption proceeds and retained by the fund, and have
the primary effect of increasing paid-in capital.
Investment Transactions, Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Premiums and discounts on
debt securities are amortized for financial reporting purposes. 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 on a daily
basis and paid monthly. 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 $8,000,000 and $9,196,000, respectively, for the year ended February
29, 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 income and
gains. Federal income tax regulations differ from generally accepted accounting
principles; therefore, distributions determined in accordance with tax
regulations may differ significantly 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.
Distributions during the year ended February 29, 2004 were characterized as
follows for tax purposes:
- --------------------------------------------------------------------------------
Ordinary income $ 135,000
Tax-exempt income 674,000
Total distributions $ 809,000
--------------------
At February 29, 2004, the tax-basis components of net assets were as follows:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 10,782,000
Unrealized depreciation (20,000)
Net unrealized appreciation (depreciation) 10,762,000
Undistributed ordinary income 36,000
Undistributed tax-exempt income 59,000
Capital loss carryforwards (3,627,000)
Paid-in capital 39,837,000
Net assets $ 47,067,000
--------------------
The fund intends to retain realized gains to the extent of available capital
loss carryforwards for federal income tax purposes. As of February 29, 2004, the
fund had $17,000 of capital loss carryforwards that expire in fiscal 2006,
$425,000 that expire in fiscal 2007, and $3,185,000 that expire thereafter
through fiscal 2012.
At February 29, 2004, the cost of investments for federal income tax purposes
was $36,065,000.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Certified Annual Report
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 0.20% 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 February 29,
2004, the effective annual group fee rate was 0.32%, and investment management
fee payable totaled $19,000.
In addition, the fund has entered into service agreements with Price Associates
and a wholly owned subsidiary 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.
Expenses incurred pursuant to these service agreements totaled $113,000 for the
year ended February 29, 2004, of which $9,000 was payable at period-end.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Report of Independent Auditors
- --------------------------------------------------------------------------------
To the Board of Directors of T. Rowe Price Tax-Efficient Funds, Inc. and
Shareholders of T. Rowe Price Tax-Efficient Balanced Fund
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 (one of the portfolios comprising T. Rowe Price Tax-Efficient
Funds, Inc., hereafter referred to as the "Fund") at February 29, 2004, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
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 29, 2004 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 22, 2004
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Certified Annual Report
Tax Information (Unaudited) for the Tax Year Ended 2/29/04
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code. The
amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included $670,000 which qualified as
exempt-interest dividends.
For taxable non-corporate shareholders, $155,000 of the fund's income and
short-term capital gains represents qualified dividend income subject to the 15%
rate category.
For corporate shareholders, $155,000 of the fund's income and short-term capital
gains qualified for the dividends-received deduction.
Information on Proxy Voting
- --------------------------------------------------------------------------------
A description of the policies and procedures that the T. Rowe Price
Tax-Efficient Balanced 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.
T. Rowe Price Tax-Efficient Balanced Fund
- --------------------------------------------------------------------------------
Certified Annual Report
About the Fund's Directors and Officers
- --------------------------------------------------------------------------------
Your fund is governed by a Board of Directors that meets regularly to review
investments, performance, expenses, and other business matters, and is
responsible for protecting the interests of shareholders. The majority of the
fund's directors are independent of T. Rowe Price Associates, Inc. (T. Rowe
Price); "inside" directors are officers of T. Rowe Price. The Board of Directors
elects the fund's officers, who are listed in the final table. The business
address of each director and officer is 100 East Pratt Street, Baltimore, MD
21202. The Statement of Additional Information includes additional information
about the fund directors and is available without charge by calling a T. Rowe
Price representative at 1-800-225-5132.
- --------------------------------------------------------------------------------
Independent Directors
Name
(Year of Birth)
Year Elected*
Principal Occupation(s) During Past 5 Years and Directorships of Other Public
Companies
Anthony W. Deering
(1945)
2001
Director, Chairman of the Board, President, and Chief Executive Officer, The
Rouse Company, real estate developers; Director, Mercantile Bank (4/03 to
present)
Donald W. Dick, Jr.
(1943)
1997
Principal, EuroCapital Advisors, LLC, an acquisition and management advisory
firm
David K. Fagin
(1938)
1997
Director, Golden Star Resources Ltd., Canyon Resources Corp. (5/00 to
present), and Pacific Rim Mining Corp. (2/02 to present); Chairman and
President, Nye Corp.
Karen N. Horn
(1943)
2003
Managing Director and President, Global Private Client Services, Marsh Inc.;
Managing Director and Head of International Private Banking, Bankers Trust;
Director, Eli Lilly and Company
F. Pierce Linaweaver
(1934)
2001
President, F. Pierce Linaweaver & Associates, Inc., consulting environmental
and civil engineers
John G. Schreiber
(1946)
2001
Owner/President, Centaur Capital Partners, Inc., a real estate investment
company; Senior Advisor and Partner, Blackstone Real Estate Advisors, L.P.;
Director, AMLI Residential Properties Trust, Host Marriott Corp., and The
Rouse Company
* Each independent director oversees 111 T. Rowe Price portfolios and serves
until retirement, resignation, or election of a successor.
- --------------------------------------------------------------------------------
Inside Directors
Name
(Year of Birth)
Year Elected*
[Number of T. Rowe Price Portfolios Overseen]
Principal Occupation(s) During Past 5 Years and Directorships of Other Public
Companies
James A.C. Kennedy, CFA
(1953)
1997
[43]
Director and Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
James S. Riepe
(1943)
1997
[111]
Director and Vice President, T. Rowe Price; Vice Chairman of the Board,
Director, and Vice President, T. Rowe Price Group, Inc.; Chairman of the Board
and Director, T. Rowe Price Global Asset Management Limited, T. Rowe Price
Global Investment Services Limited, T. Rowe Price Investment Services, Inc.,
T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Services,
Inc.; Chairman of the Board, Director, President, and Trust Officer, T. Rowe
Price Trust Company; Director, T. Rowe Price International, Inc.; Chairman of
the Board, Tax-Efficient Funds
M. David Testa, CFA, CIC
(1944)
1997
[111]
Director and Vice President, T. Rowe Price and T. Rowe Price Trust Company;
Vice Chairman of the Board, Director, and Vice President, T. Rowe Price Group,
Inc.; Chairman of the Board and Director, T. Rowe Price International, Inc.;
Director, T. Rowe Price Global Asset Management Limited and T. Rowe Price
Global Investment Services Limited
*Each inside director serves until retirement, resignation, or election of a
successor.
Officers
Name (Year of Birth)
Title and Fund(s) Served
Principal Occupation(s)
Stephen V. Booth, CPA (1961)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price
Trust Company
Joseph A. Carrier, CPA (1960)
Treasurer, Tax-Efficient Funds
Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price
Investment Services, Inc.
Roger L. Fiery III, CPA (1959)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price Trust
Company, and T. Rowe Price International, Inc.
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
- --------------------------------------------------------------------------------
Officers (continued)
Name (Year of Birth)
Title and Fund(s) Served
Principal Occupation(s)
Jill L. Hauser (1958)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Henry H. Hopkins (1942)
Vice President, Tax-Efficient Funds
Director and Vice President, T. Rowe Price Group, Inc., T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, T. Rowe Price, T. Rowe Price International,
Inc., and T. Rowe Price Retirement Plan Services, Inc.
Thomas J. Huber, CFA (1966)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Patricia B. Lippert (1953)
Secretary, Tax-Efficient Funds
Assistant Vice President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
Hugh D. McGuirk, CFA (1960)
Executive Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Mary J. Miller, CFA (1955)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Donald J. Peters (1959)
President, Tax-Efficient Funds
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
William T. Reynolds, CFA, CIC (1948)
Vice President, Tax-Efficient Funds
Director and Vice President, T. Rowe Price and T. Rowe Price Group, Inc.;
Director, T. Rowe Price Global Asset Management Limited
William J. Stromberg, CFA (1960)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Julie L. Waples (1970)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price
Mark R. Weigman, CFA, CIC (1962)
Vice President, Tax-Efficient Funds
Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price
Trust Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Item 2. Code of Ethics.
As of the end of the period covered by this report, the registrant has adopted 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. A copy of this code of
ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were
approved or waivers were granted to this code of ethics during the period
covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Directors/Trustees has determined that Mr. David K.
Fagin qualifies as an audit committee financial expert, as defined in Item 3 of
Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form
N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal years
for professional services rendered by the registrant's principal accountant were
as follows:
2004 2003
Audit Fees $7,517 $7,732
Audit-Related Fees 674 --
Tax Fees 2,096 1,955
All Other Fees 124 129
Audit fees include amounts related to the audit of the registrant's annual
financial statements and services normally provided by the accountant in
connection with statutory and regulatory filings. Audit-related fees include
amounts reasonably related to the performance of the audit of the registrant's
financial statements, specifically the issuance of a report on internal
controls. Tax fees include amounts related to tax compliance, tax planning, and
tax advice. Other fees include the registrant's pro-rata share of amounts for
agreed-upon procedures in conjunction with service contract approvals by the
registrant's Board of Directors/Trustees.
(e)(1) The registrant's audit committee has adopted a policy whereby audit and
non-audit services performed by the registrant's principal accountant for the
registrant, its investment adviser, and any entity controlling, controlled by,
or under common control with the investment adviser that provides ongoing
services to the registrant require pre-approval in advance at regularly
scheduled audit committee meetings. If such a service is required between
regularly scheduled audit committee meetings, pre-approval may be authorized by
one audit committee member with ratification at the next scheduled audit
committee meeting. Waiver of pre-approval for audit or non-audit services
requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) - (d) above were approved pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) The aggregate fees billed for the most recent fiscal year and the preceding
fiscal year by the registrant's principal accountant for non-audit services
rendered to the registrant, its investment adviser, and any entity controlling,
controlled by, or under common control with the investment adviser that provides
ongoing services to the registrant were $719,000 and $671,000, respectively, and
were less than the aggregate fees billed for those same periods by the
registrant's principal accountant for audit services rendered to the T. Rowe
Price Funds.
(h) All non-audit services rendered in (g) above were pre-approved by the
registrant's audit committee. Accordingly, these services were considered by the
registrant's audit committee in maintaining the principal accountant's
independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable.
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
attached.
(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) 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 Tax-Efficient Funds, Inc.
By /s/ James S. Riepe
James S. Riepe
Principal Executive Officer
Date April 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 April 16, 2004
By /s/ Joseph A. Carrier
Joseph A. Carrier
Principal Financial Officer
Date April 16, 2004