-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vws7030f1bsRM1MSMBIcZuFO6nb+/B8Bpi363j+DUhPShThsGvSKVtIH9/cWsaM+ OAnAgvWZCHiNUKAIy6CEVA== 0000075170-00-000003.txt : 20000214 0000075170-00-000003.hdr.sgml : 20000214 ACCESSION NUMBER: 0000075170-00-000003 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE SMALL CAP STOCK FUND INC CENTRAL INDEX KEY: 0000075170 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 231622210 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-00696 FILM NUMBER: 533484 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT ST STREET 2: C/O T ROWE PRICE ASSOCIATES INC CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 2156432510 MAIL ADDRESS: STREET 1: 100 EAST PRATT STRE STREET 2: NULL CITY: BALTIMORE STATE: MD ZIP: 21202 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE OTC FUND INC DATE OF NAME CHANGE: 19930210 FORMER COMPANY: FORMER CONFORMED NAME: OVER THE COUNTER SECURITIES GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: OVER THE COUNTER SECURITIES FUND INC DATE OF NAME CHANGE: 19890108 N-30D 1 Annual Report Small-Cap Stock Fund December 31, 1999 T. Rowe Price Report Highlights - -------------------------------------------------------------------------------- Small-Cap Stock Fund o Growth stocks powered market averages to record highs in 1999, but value stocks lagged far behind. o Your fund returned 9.70% and 14.66% for the 6- and 12-month periods ended December 31, respectively, behind its benchmarks due to our value emphasis. o Technology and wireless telecom stocks topped our winners list, led by Applied Micro Circuits, Rural Cellular, and Western Wireless. o Small-caps outperformed large-caps last year for the first time since 1993, although the average small-cap stock underperformed. o We remain confident that small-cap value stocks will finally reassert themselves, too. UPDATES AVAILABLE For updates on T. Rowe Price funds following the end of each calendar quarter, please see our Web site at www.troweprice.com. Fellow Shareholders Wow! What a year! Life was fabulous for growth investors in 1999 yet miserable for value investors. For us, it felt like manic depression. The hallmark of the Small-Cap Stock Fund is that we blend growth and value strategies, with an emphasis on value. As a result, your fund posted solid-but less than spectacular-performance. Performance Comparison --------------------------------------------------------------------------- Periods Ended 12/31/99 6 Months 12 Months --------------------------------------------------------------------------- Small-Cap Stock Fund 9.70% 14.66% Russell 2000 Index 10.96 21.26 Lipper Small-Cap Core Fund Index 13.88 20.17 S&P 500 Stock Index 7.71 21.04 Russell 2000 Growth Index 26.83 43.09 Russell 2000 Value Index -6.41 -1.49 PERFORMANCE COMPARISON The fund's return of 9.70% for the six months ended December 31, 1999, was comparable to that of the unmanaged Russell 2000 Index of smaller companies, but lagged the Lipper Small-Cap Core Fund Index, as shown in the table. With this report, we are introducing the fund's new Lipper category. Previously, Lipper Inc. asigned a fund to a category based on its objective as outlined in its prospectus. The new categories are based on the major characteristics of each fund's actual portfolio holdings, such as market capitalization, price/earning ratios, earnings growth rates, and so on. Our full-year gain of 14.66% was strong in absolute terms but again behind our benchmarks. The reason: the unbelievably large gap between the performance of value and growth stocks. Your fund's value core-long a huge asset to performance-kept us in check in 1999. During the year the Russell 2000 Growth Index rose over 43% while the Russell 2000 Value Index actually fell 1.49%. A huge late-December surge in Internet and technology stocks propelled the broad Russell 2000 past the Standard & Poor's 500 Stock Index for the first time since 1993. Why the extraordinary spread between growth and value? The market in 1999 was the narrowest I've seen in my 16 years in the business. Technology, the Internet, telecommunications, and biotech were the sectors to invest in during the year, but more traditional business models failed to excite investors. While we were well represented in technology, biotech, and telecom, we have been underrepresented in the Internet sector. We believe in the Internet as a transforming force for business and the economy; it is the great technological innovation of our time. However, as fundamental investors (as opposed to momentum investors), we find it difficult to throw valuation to the wind and join such a speculative frenzy. The incremental buyer of today's Internet stock has little understanding of business models, financial yardsticks, or valuation techniques. Day traders only know the stocks are very volatile and have tended to rise during their brief history. Thus, valuation goes by the wayside. Price/earnings (P/E) ratios give way to price/revenue ratios or, more often, wildly inflated price targets. These "new era" manias-witnessed in the past century in automobile, radio, airplane, television, personal computer, and biotech stocks-always end badly. This will likely be little different. YEAR-END DISTRIBUTIONS Your fund's Board of Directors declared a year-end income distribution of $0.08 per share and a capital gain distribution of $0.89, of which $0.42 was long term and $0.47 was short term. These distributions were paid on December 16 to shareholders of record on December 14. You should already have received your check or statement reflecting them as well as our Form 1099-DIV summarizing this information for 1999 tax purposes. INVESTMENT REVIEW The top sectors for the Russell 2000 last year included technology, up 101.63% for the period; producer durables, up nearly 41%; and utilities (bolstered by the telecom sector), up almost 40%. Leading losers included consumer staples, down over 20%; financial services, down 4.70%; and REITs, down 9.02%. Technology, in fact, accounted for two-thirds of the Russell 2000's return (Internet stocks alone accounted for a third of the gain). Without Internet stocks the Russell 2000 rose only 13.61%, roughly in line with the 12.40 % return of the S&P 600 Index of small-cap stocks. S&P largely excludes Internet shares from its small-cap indices. We were well represented in the wireless telecom sector, which enabled our utility holdings to shine. Fortunately, we were also underweighted in REITs and financial services. The bottom line: We were not rewarded for holding shares of companies with solid revenues and earnings prospects. As the chart on page 3 clearly shows, investors made money in companies with no earnings and lost money in companies with earnings. This is most likely an anomaly that will not stand the test of time. Earnings Did Not Matter --------------------------------------------------------------------------- Large-Cap Mid-Cap Small-Cap Micro-Cap Negative EPS (442 Companies) 56.2 47 -6.2 0.9 Positive EPS (2,953 companies) -0.8 -9.1 -10 -8.8 Study includes 3,395 stocks with the following characteristics: price greater than $5 as of 12/31/98; market cap greater than $50 million as of 12/31/98; excludes IPOs and companies taken over in 1999; earnings per share (EPS) is current fiscal year. Several of our growth holdings made spectacular moves in 1999. All of our largest contributors were technology and telecom holdings. The biggest contributor, Applied Micro Circuits, rose over 600% and added almost $24 million to the fund's net asset value (NAV). The company designs and manufactures high-performance, high-bandwidth semiconductors for the communications industry and is therefore in the sweet spot of the bandwidth build-out for advanced communications and Internet services. We bought Applied Micro in the fall of 1998 for $6.50 to $12 per share and the stock closed last year at $127.50. In early 1997 we made a significant bet on wireless telecom. The market was anticipating disruption due to competition between wireless analog and digital personal communications services (PCS) providers. Consequently, the shares reached attractive levels and we purchased Rural Cellular and Western Wireless. This bet paid off in 1999. A spate of mergers and acquisitions in the sector, plus the realization that wireless communications and Internet services would converge, led to a huge rally in the shares. Rural Cellular rose 761% and Western Wireless gained 240%. VoiceStream Wireless, the PCS spin-off from Western Wireless, increased 769%. Combined, this sector added almost $49 million to the fund. Emmis Communications is the sixth-largest radio operator in the country and was the third-largest contributor to the fund last year, adding over $19 million to NAV. Emmis derives 65% of its cash flow from radio, 30% from TV broadcasting, and 5% from publishing. Last July the shares traded at approximately half the cash flow multiple of the radio broadcast group as investors were still miffed at the firm's past purchase of TV assets. The company's asset value was easily north of $80 per share based on an average multiple for radio broadcasters. In July, the shares were trading in the $45 range. Great fundamentals and renewed investor attention due to a secondary offering in late summer pushed Emmis shares above $124 by the end of the year. For the second half, Emmis and Rural Cellular were also our top two contributors. Progress Software was our third-best contributor on the half year and added almost $16 million to NAV. Progress rose over 100% in the half on strong fundamentals and investor interest in its technology, which enables independent software developers to distribute products via the Internet. Unfortunately, not all of our ideas were so successful. Our leading losers were New England Business Services, Consolidated Graphics, and Comfort Systems. New England Business Services, a leading direct marketer of supplies to small businesses, fell 25% when the company preannounced an earnings disappointment. We believe the market overreacted to the shortfall. Since then, NEBS has met all earnings estimates, has repurchased almost one million shares, and continues to generate the high margins, attractive returns, and strong cash flow that attracted us in the first place. Sector Diversification --------------------------------------------------------------------------- Business Services and Transportation 28 Consumer Services, Cyclicals, and Education 16 Consumer Nondurables 14 Financials 10 Capital Equipment, Process Industries, and Basic Materials 7 Technology 12 Energy and Utilities 5 Reserves 8 Based on net assets as of 12/31/99. An unexpected slowdown in the graphics industry contributed to Consolidated Graphics missing earnings expectations in its last two quarters. Wall Street has been unforgiving, and the stock has fallen from the upper $30s to the mid-teens. While the stock appears to be cheap given our earnings per share estimate of over $2 this year, we are monitoring this holding carefully due to uncertainty about industry growth and questions about management credibility. Comfort Systems' shares collapsed in October when management pre-announced disappointing results for the September quarter. Slowing revenues, rising labor costs, higher sales, general and administrative expenses, selected materials shortages, and a few cost overruns squeezed margins. Comfort Systems, a heating and cooling services provider, is experiencing a classic top-of-the-economic-cycle cost squeeze. Moreover, its recent $7 price discounts a significant slowdown in its business-and no such slowdown is visible. Comfort Systems and Consolidated Graphics were also the leading losers in the second half. International Multifoods was the third-largest loser in the half, declining over 40% and costing us more than $7 million after also preannouncing disappointing third quarter earnings. We believe the company continues to work hard at improving the business' return on capital and are holding the shares. PORTFOLIO HIGHLIGHTS Our top purchase in the second half was E.W. Blanch, a leading participant in the high-return, high-margin insurance brokerage business. If there is any firmness in property-casualty premium pricing, these shares have significant upside potential. Blanch doesn't underwrite insurance, therefore it has no balance sheet risk-a good thing in today's competitive insurance market. Another large new holding was Chittenden Trust, a Vermont bank well positioned in the northern New England market. Chittenden had an $871 million market cap, a 2.86% dividend yield, and traded at 2.5 times book value when we bought it. The bank would make an attractive acquisition candidate, though this possibility was not our main focus in buying the stock. We also made a major new commitment to Arch Chemicals, spun off from Olin Industries earlier this year. Arch has a presence in electronic and water treatment chemicals. The stock was trading at about five times cash flow and 10 times earnings. Given the recovery in the semiconductor industry, Arch is a very cheap stock. Largest sales in the second half included ALLTEL, VoiceStream, and PMC-Sierra. ALLTEL acquired our holding Alliant Telecom last year, and at a $24 billion market cap is out of our small-cap range. VoiceStream's rapid rise, noted earlier, pushed the company to an $11 billion market cap (and an excessive valuation) in a very short time following its spin-off. We also eliminated PMC-Sierra, a semi-conductor firm, after its huge runup. The stock is no longer small at $12 billion and no longer cheap at 123 times trailing earnings. OUTLOOK Lowest P/E Quitile Was Not the Place to Be in 1999 --------------------------------------------------------------------------- Year to date return Q1 -10.59 Q2 -8.95 Q3 -7.64 Q4 10.87 Q5 68.03 Nonearnings stories 85.34 Source: Frank Russell Company; Prudential Securities, Inc. The 40-percentage-point spread between small-cap growth and small-cap value returns has no historic precedent. The technology sector's unbelievable returns in 1999 also have no precedent and are even more extraordinary since they came during a time of relatively poor sales and earnings growth for the group. Today, however, it seems that only concepts matter. The accompanying chart further illustrates how horribly out of favor value investing was in the period. The cheapest stocks in the Russell 2000 Index, as measured by price/ earnings ratio, had solidly negative returns, while the most expensive shares rose over 68%. Moreover, as mentioned earlier, companies with no earnings at all performed best. Is fundamental investing dead? Call us old-fashioned, but we still believe in earnings and cash flow. Historically, the best returns in small-cap investing have come from the smallest and cheapest stocks. We do not believe "it's different this time," and we will continue to remain true to our valuation discipline and look forward to better times in 2000. Respectfully submitted, Greg A. McCrickard President and Chairman of the Investment Advisory Committee January 14, 2000 T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Change to Prospectus - -------------------------------------------------------------------------------- The prospectus of the Small-Cap Stock Fund has been amended to reflect the increasing market capitalization of the companies that compose the unmanaged Russell 2000 Index of smaller companies. (Market capitalization equals total number of shares outstanding multiplied by the share price.) For some time the market cap of the average Russell 2000 company has been above our traditional small-cap definition of $1 billion or less. We think this adjustment is in the best interest of our shareholders. The prospectus previously stated that the fund would invest at least 65% of total assets in companies with a market cap of less than $1 billion. The relevant passage in the prospectus now states: The fund will invest at least 65% of total assets in stocks and equity-related securities of small companies. A small company is defined as having a market capitalization that falls within the range of companies in the Russell 2000 Index, a widely used benchmark for small-cap stock performance. This updates the Small-Cap Stock Fund prospectus dated May 1, 1999. Portfolio Highlights - -------------------------------------------------------------------------------- MAJOR PORTFOLIO CHANGES Listed in descending order of size 6 Months Ended 12/31/99 Ten Largest Purchases --------------------------------------------------------------------------- E. W. Blanch * Chittenden * Arch Chemicals * Consolidated Graphics * International Multifoods Progress Software F. Y. I. * United Stationers * Midwest Express Holdings SCP Pool Ten Largest Sales --------------------------------------------------------------------------- ALLTEL ** Coach USA ** VoiceStream Wireless ** PMC-Sierra ** Holophane ** Richfood Holdings ** SteriGenics International ** ditech Communications Rural Cellular Maxim Integrated Products ** * Position added ** Position eliminated T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Portfolio Highlights - -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 12/31/99 --------------------------------------------------------------------------- Progress Software 2.0% Emmis Broadcasting 1.5 Shorewood Packaging 1.5 Methode Electronics 1.5 Technitrol 1.4 --------------------------------------------------------------------------- Matthews International 1.3 A.O. Smith 1.3 Eagle USA Air Freight 1.2 New England Business Service 1.2 Mentor 1.2 --------------------------------------------------------------------------- US Can 1.2 Cleco 1.2 Parkway Properties 1.2 Inhale Therapeutic Systems 1.1 E. W. Blanch 1.1 --------------------------------------------------------------------------- Brown and Brown 1.0 Insituform Technologies 1.0 Applied Micro Circuits 1.0 Downey Financial 1.0 Chittenden 0.9 --------------------------------------------------------------------------- Arch Chemicals 0.9 Littelfuse 0.9 Casey's General Stores 0.9 Burr Brown 0.9 F. Y. I. 0.8 --------------------------------------------------------------------------- Total 29.2% Note: Table excludes reserves. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Performance Comparison - -------------------------------------------------------------------------------- This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with 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. SMALL-CAP STOCK FUND --------------------------------------------------------------------------- Russell 2000 Small-Cap Index Stock Fund 12/89 10,000 10,000 12/90 8,052 7,953 12/91 11,760 11,023 12/92 13,925 12,555 12/93 16,554 14,866 12/94 16,252 14,878 12/95 20,876 19,914 12/96 24,319 24,107 12/97 29,757 31,052 12/98 29,000 29,980 12/99 35,164 34,375 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. Periods Ended 12/31/99 1 Year 3 Years 5 Years 10 Years --------------------------------------------------------------------------- Small-Cap Stock Fund 14.66% 12.56% 18.23% 13.14% 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 Small-Cap Stock Fund - -------------------------------------------------------------------------------- Financial Highlights For a share outstanding throughout each period - -------------------------------------------------------------------------------- Year Ended 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 NET ASSET VALUE Beginning of period $ 20.79 $ 22.20 $ 18.07 $ 16.32 $ 13.80 Investment activities Net investment income (loss) 0.09 0.08 0.05 0.09 0.12 Net realized and unrealized gain (loss) 2.89 (0.89) 5.13 3.33 4.53 Total from investment activities 2.98 (0.81) 5.18 3.42 4.65 Distributions Net investment income (0.08) (0.10) (0.04) (0.09) (0.12) Net realized gain (0.89) (0.50) (1.01) (1.58) (2.01) Total distributions (0.97) (0.60) (1.05) (1.67) (2.13) NET ASSET VALUE End of period $ 22.80 $ 20.79 $ 22.20 $ 18.07 $ 16.32 Ratios/Supplemental Data Total return (diamond) 14.66% (3.46)% 28.81% 21.05% 33.85% Ratio of total expenses to average net assets 0.96% 1.01% 1.02% 1.07% 1.11% Ratio of net investment income (loss) to average net assets 0.47% 0.46% 0.33% 0.56% 0.74% Portfolio turnover rate 42.3% 25.9% 22.9% 31.1% 57.8% Net assets, end of period (in millions) $ 1,740 $ 1,153 $ 816 $ 416 $ 279 (diamond) 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. The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- December 31, 1999 Portfolio of Investments Shares/Par Value - -------------------------------------------------------------------------------- In thousands Common Stocks 92.4% FINANCIAL 10.0% Bank and Trust 4.9% Charter One Financial 238,140 $ 4,554 Chittenden 550,000 16,294 Citizens Banking 545,000 12,092 Downey Financial 820,000 16,554 First Bell Bancorp 100,000 1,506 First Mariner Bancorp 47,500 377 First Security 168,750 4,308 Frankfort First Bancorp! 75,000 1,139 Glacier Bancorp 472,900 7,685 Marshall & Ilsley 30,000 1,884 Summit Bancorp 214,800 6,578 UST 300,000 9,516 WestAmerica 133,100 3,723 86,210 Insurance 4.4% Brown and Brown 447,700 17,153 E.W. Blanch 300,000 18,375 Harleysville Group 218,100 3,081 London Pacific Group ADR 202,500 7,290 Medical Assurance * 375,000 7,945 PartnerRe Holdings 433,200 14,052 Selective Insurance 155,000 2,664 W. R. Berkley 298,100 6,260 76,820 Financial Services 0.7% Delta Financial * 300,000 1,238 Financial Federal * 350,000 7,984 ITLA Capital * 179,900 2,243 11,465 Total Financial 174,495 UTILITIES 2.9% Electric Utilities 1.2% Cleco 635,000 $ 20,360 20,360 Water Utilities 0.2% United Water Resources 110,600 3,781 3,781 Telephone 1.5% Commnet Cellular * 119,550 3,837 Rural Cellular (Class A) * 123,300 11,174 Western Wireless (Class A) * 165,000 11,003 26,014 Total Utilities 50,155 CONSUMER NONDURABLES 14.0% Food Processing 1.8% American Italian Pasta (Class A) * 334,100 10,274 International Multifoods ! 1,050,000 13,912 Makepeace 164 2,214 Seneca Foods (Class A) * 174,900 2,039 Seneca Foods (Class B) * 74,700 875 United Natural Foods * 175,400 2,121 31,435 Hospital Supplies/Hospital Management 2.8% Cephalon * 100,000 3,469 Mentor 801,600 20,791 Molecular Devices * 75,100 3,915 Quorum Health Group * 360,000 3,364 Renal Care Group * 474,250 11,130 Steris * 525,600 5,420 48,089 Pharmaceuticals 1.4% Aurora Biosciences * 130,000 3,429 Boron Lepore & Associates * 112,000 742 Collagenex Pharmaceuticals * 24,000 593 Emisphere Technologies * 39,000 1,171 Imclone Systems * 75,000 2,967 Incyte Pharmaceuticals * 80,000 $ 4,732 Liposome * 93,300 1,134 Noven Pharmaceuticals * 100,000 1,819 NPS Pharmaceuticals * 167,000 2,093 Triangle Pharmaceuticals * 445,000 5,688 24,368 Biotechnology 3.6% Abegenix * 41,200 5,377 Alkermes * 215,000 10,548 Anesta * 230,000 3,939 COR Therapeutics * 100,000 2,694 Coulter Pharmaceutical * 200,000 4,550 Cubist Pharmaceuticals * 100,000 1,937 Gilead Sciences * 50,000 2,703 Inhale Therapeutic Systems * 459,400 19,568 Millennium Pharmaceuticals * 15,000 1,829 Neurocrine Biosciences * 106,300 2,618 Northfield Laboratories * 220,000 2,399 PathoGenesis * 12,900 275 Serologicals * 420,000 2,559 Viropharma * 64,600 2,402 63,398 Health Care Services 0.7% AmeriPath * 675,000 5,548 Orthodontic Centers of America * 300,000 3,581 US Oncology * 568,500 2,771 11,900 Miscellaneous Consumer Products 3.3% Coinmach Laundry * 280,700 2,965 Cone Mills * 574,400 2,585 Culp 275,300 1,738 Dan River (Class A) * 1,010,000 5,176 Reebok * 289,500 2,370 Sola * 609,200 8,453 Stride Rite 900,000 5,850 Unifi * 482,700 5,943 US Can * ! 1,035,000 20,571 WestPoint Stevens 150,000 2,625 58,276 Cosmetics 0.4% Chattem * 342,400 $ 6,441 6,441 Total Consumer Nondurables 243,907 CONSUMER SERVICES 7.3% Restaurants 0.5% Buca * 400,000 4,025 PJ America * ! 290,600 4,595 8,620 General Merchandisers 1.6% Bon-Ton Stores * ! 740,700 2,801 Casey's General Stores 1,456,100 15,243 Columbia Sportswear * 487,500 10,512 28,556 Specialty Merchandisers 1.2% CompuCom Systems * 1,261,200 5,281 Goody's Family Clothing * 342,000 1,833 O'Charley's * 635,700 8,264 Urban Outfitters * 202,300 5,905 21,283 Entertainment and Leisure 0.1% Sonic * 32,900 928 928 Media and Communications 3.9% American Tower Systems (Class A) * 60,000 1,834 Classic Communications (Class A) * 293,000 10,749 Emmis Broadcasting (Class A) * 215,000 26,801 Pegasus Communications (Class A) * 89,400 8,661 Sinclair Broadcast Group (Class A) * 586,400 7,165 Young Broadcasting (Class A) * 259,400 13,221 68,431 Total Consumer Services 127,818 CONSUMER CYCLICALS 8.5% Automobiles and Related 2.9% A.O. Smith (Class B) 1,055,000 23,078 Adrian Steel ! 13,000 $ 4,973 Keystone Automotive * 259,100 1,518 Littelfuse * 630,000 15,297 Strattec Security * 165,800 5,409 50,275 Building and Real Estate 4.3% Apartment Investment & Management, REIT 149,400 5,948 Arden Realty, REIT 325,000 6,520 EastGroup Properties, REIT 608,500 11,257 First Washington Realty Trust, REIT 325,000 6,073 Glenborough Realty Trust, REIT 423,000 5,658 JP Realty, REIT 414,300 6,474 Parkway Properties, REIT ! 702,700 20,247 Reckson Associates Realty (Class B), REIT 228,150 5,190 Woodhead Industries ! 600,000 7,163 74,530 Miscellaneous Consumer Durables 1.3% CompX (Class A) ! 485,000 8,912 Harman International 245,800 13,795 22,707 Total Consumer Cyclicals 147,512 TECHNOLOGY 11.7% Electronic Components 5.1% American Superconductor * 167,400 4,682 Analogic 419,600 13,768 Benchmark Electronics * 429,200 9,845 Burr Brown * 412,500 14,876 Exar * 100,000 5,894 Methode Electronics (Class A) 799,400 25,631 Planar Systems * 227,400 1,492 QuickLogic * 177,000 2,948 SIPEX * 350,000 8,586 87,722 Electronic Systems 2.0% Applied Micro Circuits * 130,000 16,559 Armor Holdings * 553,100 7,260 EMS Technologies * 119,500 1,374 Lifeline Systems * ! 350,000 $ 5,217 Lo-Jack * 631,100 4,299 34,709 Telecommunications 1.4% Aether Systems * 19,000 1,364 Airgate PCS * 80,300 4,246 Airnet Commerce * 23,000 838 Avant * 343,500 5,163 ditech Communications * 60,000 5,603 West TeleServices * 299,800 7,355 24,569 Aerospace and Defense 0.3% DONCASTERS ADR * 100,000 900 Woodward Governor 160,000 4,400 5,300 Information Processing 1.4% F. Y. I. * 425,000 14,463 Source Information Management * 565,000 9,393 23,856 Specialized Computer 0.1% Virata * 79,000 2,355 2,355 Office Automation 1.4% Technitrol 556,000 24,742 24,742 Total Technology 203,253 CAPITAL EQUIPMENT 1.9% Electrical Equipment 1.0% hi/fn * 165,000 6,389 LSI Industries 455,900 9,773 16,162 Machinery 0.9% Kennametal 400,000 13,450 NN Ball & Roller 350,000 2,406 Toolex Alpha * 9,300 154 16,010 Total Capital Equipment 32,172 BUSINESS SERVICES AND TRANSPORTATION 28.3% Computer Service and Software 10.3% Analysts International 480,000 $ 6,000 BISYS Group * 90,000 5,867 Cambridge Technology Partners * 200,000 5,256 Concord Communications * 180,000 8,038 Digital Impact * 22,800 1,146 Electronic Arts * 50,000 4,203 Great Plains Software * 140,000 10,469 Jack Henry & Associates 100,000 5,272 Loislaw * 100,000 3,956 Mastech * 400,000 9,912 MMC Networks * 80,000 2,753 NetIQ * 200,000 10,562 Netsolve * 54,000 1,698 Ondisplay * 15,000 1,356 Peerless Systems * 398,000 3,147 PeopleSoft * 61,875 1,317 Phoenix Technologies * 119,600 1,884 Progress Software * 600,000 33,975 PSINet * 110,000 6,803 Quest Software * 29,000 2,924 SalesLoggix * 215,600 8,853 SPSS * 260,000 6,663 SunGard Data Systems * 38,400 912 Synopsys * 30,000 1,998 Viasoft * ! 968,000 5,460 Visio * 163,800 7,780 WebTrends * 133,800 10,804 Wind River Systems * 113,100 4,146 Zebra Technologies (Class A) * 105,700 6,134 179,288 Distribution Services 3.9% Aviation Sales * 243,300 4,014 MSC (Class A) * 421,800 5,589 Performance Food Group * 182,400 4,435 Primesource 289,000 1,458 SCP Pool * 555,000 $ 14,413 SunSource 215,000 914 U.S. Foodservice * 835,600 13,996 United Stationers * 500,000 14,328 Watsco 505,699 5,847 Wilmar Industries * 232,700 4,029 69,023 Environmental 0.7% CUNO * 378,300 7,838 IT Group * 298,100 2,739 Waterlink * 467,000 1,167 11,744 Transportation Services 3.4% C.H. Robinson Worldwide 350,000 13,923 Comfort Systems USA * 775,000 5,716 Eagle USA Air Freight * 492,800 21,298 Expeditors International of Washington 291,300 12,708 Frozen Food Express 88,700 352 Heartland Express * 80,827 1,293 Hub Group (Class A) * 98,000 1,985 International Shipholding 141,562 1,646 58,921 Miscellaneous Business Services 9.3% Consolidated Graphics * 545,000 8,141 CORT Business Services * 430,400 7,505 Ebenx * 15,000 680 Electro Rent * 575,000 6,684 G & K Services (Class A) 68,100 2,185 Insituform Technologies (Class A) * 609,300 17,098 Iron Mountain * 275,250 10,821 Ivex Packaging * 849,900 8,499 Maximus * 405,000 13,745 McGrath Rent 304,000 5,434 Metamor Worldwide * 180,000 5,254 MPW Industrial Services Group * ! 575,000 4,492 New England Business Service ! 871,000 21,285 Romac International * 403,868 5,440 Shorewood Packaging *! 1,399,900 26,511 Strayer Education 391,400 7,828 Tetra Tech * 704,750 $ 10,879 162,481 Airlines 0.7% Midwest Express Holdings * 364,500 11,618 11,618 Total Business Services and Transportation 493,075 ENERGY 1.9% Energy Services 0.9% Cooper Cameron * 93,100 4,556 Smith International * 100,000 4,969 Weatherford International * 137,850 5,505 15,030 Exploration and Production 1.0% Chieftain International * 436,400 7,528 Key Energy * 1,100,000 5,706 National Oilwell * 331,300 5,198 18,432 Total Energy 33,462 PROCESS INDUSTRIES 2.8% Specialty Chemicals 0.2% A. Schulman 202,900 3,304 Hauser * 90,000 278 3,582 Paper and Paper Products 0.3% Smurfit-Stone Container * 200,000 4,894 4,894 Building and Construction 1.4% Layne Christensen * 360,000 2,565 Simpson Manufacturing * 137,300 6,007 Trex * 397,100 10,622 U.S. Aggregates 385,300 4,624 23,818 Diversified Chemicals 0.9% Arch Chemicals 768,000 16,080 16,080 Total Process Industries 48,374 BASIC MATERIALS 2.4% Metals 2.0% Gibraltar Steel 198,800 $ 4,622 Material Sciences * 725,300 7,389 Matthews International (Class A) ! 860,800 23,296 35,307 Mining 0.4% Battle Mountain Gold * 2,285,700 4,714 Coal Creek ! 9,295 795 Lihir Gold * 1,930,000 1,406 6,915 Total Basic Materials 42,222 EDUCATION 0.2% Education 0.2% ITT Educational Service * 200,000 3,088 Total Education 3,088 Miscellaneous Common Stocks 0.5% 8,400 Total Common Stocks (Cost $1,392,478) 1,607,933 Convertible Bonds 0.1% Vantive, 4.75%, 9/1/02 $3,000,000 2,595 Total Convertible Bonds (Cost $2,295) 2,595 Short-Term Investments 7.3% Money Market Funds 7.3% Reserve Investment Fund, 6.16% # 126,694,882 126,695 Total Short-Term Investments (Cost $126,695) 126,695 Total Investments in Securities 99.8% of Net Assets (Cost $1,521,468) $1,737,223 Other Assets Less Liabilities 3,103 NET ASSETS $1,740,326 ---------- # Seven-day yield ! Affiliated company * Non-income producing ADR American Depository Receipt REIT Real Estate Investment Trust The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- December 31, 1999 Statement of Assets and Liabilities - -------------------------------------------------------------------------------- In thousands Assets Investments in securities, at value Affiliated companies (cost $181,201) $ 171,369 Other companies (cost $1,340,267) 1,565,854 Total investments in securities 1,737,223 Other assets 13,031 Total assets 1,750,254 Liabilities Total liabilities 9,928 NET ASSETS $1,740,326 ---------- Net Assets Consist of: Accumulated net investment income - - net of distributions $ 310 Accumulated net realized gain/loss - - net of distributions 74,029 Net unrealized gain (loss) 215,755 Paid-in-capital applicable to 76,318,530 shares of $0.50 par value capital stock outstanding; 200,000,000 shares authorized 1,450,232 NET ASSETS $1,740,326 ---------- NET ASSET VALUE PER SHARE $ 22.80 ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Statement of Operations In thousands Year Ended 12/31/99 Investment Income (Loss) Income Dividend (includes $2,773 from affiliated companies) $ 12,347 Interest 6,740 Total income 19,087 Expenses Investment management 10,276 Shareholder servicing 1,995 Prospectus and shareholder reports 181 Custody and accounting 174 Registration 127 Legal and audit 15 Directors 9 Miscellaneous 9 Total expenses 12,786 Expenses paid indirectly (36) Net expenses 12,750 Net investment income (loss) 6,337 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 131,903 Foreign currency transactions 2 Net realized gain (loss) 131,905 Change in net unrealized gain or loss on securities 77,185 Net realized and unrealized gain (loss) 209,090 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 215,427 ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Statement of Changes in Net Assets - -------------------------------------------------------------------------------- In thousands Year Ended 12/31/99 12/31/98 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 6,337 $ 4,641 Net realized gain (loss) 131,905 26,975 Change in net unrealized gain or loss 77,185 (67,486) Increase (decrease) in net assets from operations 215,427 (35,870) Distributions to shareholders Net investment income (5,845) (5,359) Net realized gain (65,022) (26,791) Decrease in net assets from distributions (70,867) (32,150) Capital share transactions* Shares sold 918,700 789,814 Distributions reinvested 66,463 28,541 Shares redeemed (541,991) (414,115) Increase (decrease) in net assets from capital share transactions 443,172 404,240 Net Assets Increase (decrease) during period 587,732 336,220 Beginning of period 1,152,594 816,374 End of period $1,740,326 $1,152,594 *Share information Shares sold 44,046 36,695 Distributions reinvested 3,120 1,472 Shares redeemed (26,285) (19,500) Increase (decrease) in shares outstanding 20,881 18,667 The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- December 31, 1999 Notes to Financial Statements - -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Small-Cap Stock 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 1, 1956. Prior to May 1, 1997, the name of the fund was T. Rowe Price OTC Fund, Inc. The accompanying financial statements are prepared in accordance with generally accepted accounting principles for the investment company industry; these principles may require the use of estimates by fund management. Valuation 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. Debt securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independent pricing service. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. 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. Affiliated Companies As defined by the Investment Company Act of 1940, an affiliated company is one in which the fund owns at least 5% of the outstanding voting securities. Premiums and Discounts Premiums and discounts on debt securities are amortized for both financial reporting and 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. Expenses paid indirectly reflect credits earned on daily uninvested cash balances at the custodian and are used to reduce the fund's custody charges. NOTE 2 - INVESTMENT TRANSACTIONS Purchases and sales of portfolio securities, other than short-term securities, aggregated $871,242,000 and $518,707,000, respectively, for the year ended December 31, 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 taxable income. At December 31, 1999, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $1,521,468,000. Net unrealized gain aggregated $215,755,000 at period-end, of which $423,496,000 related to appreciated investments and $207,741,000 to depreciated investments. NOTE 4 - RELATED PARTY TRANSACTIONS The investment management agreement between the fund and T. Rowe Price Associates, Inc. (the manager) provides for an annual investment management fee, of which $1,075,000 was payable at December 31, 1999. The fee is computed daily and paid monthly, and consists of an individual fund fee equal to 0.45% 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 0.295% for assets in excess of $120 billion. At December 31, 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. In addition, the fund has entered into agreements with the manager and two wholly owned subsidiaries 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. T. Rowe Price Retirement Plan Services, Inc. provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. The fund incurred expenses pursuant to these related party agreements totaling approximately $1,582,000 for the year ended December 31, 1999, of which $139,000 was payable at period-end. The fund may invest in the Reserve Investment Fund and Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds are offered as cash management options only to mutual funds and other accounts managed by T. Rowe Price and its affiliates and are not available to the public. The Reserve Funds pay no investment management fees. Distributions from the Reserve Funds to the fund for the year ended December 31, 1999, totaled $6,378,000 and are reflected as interest income in the accompanying Statement of Operations. Report of Independent Accountants - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of T. Rowe Price Small-Cap Stock 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 Small-Cap Stock Fund, Inc. (the "Fund") at December 31, 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 accounting principles generally accepted in the United States. 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, 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 December 31, 1999 by correspondence with custodians, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Baltimore, Maryland January 20, 2000 T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Tax Information (Unaudited) for the Tax Year Ended 12/31/99 - -------------------------------------------------------------------------------- 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 distributions to shareholders included: o $34,337,000 from short-term capital gains, o $30,685,000 from long-term capital gains, subject to the 20% rate gains category. For corporate shareholders, $6,735,000 of the fund's distributed income and short-term capital gains qualified for the dividends-received deduction. For fund and account information or to conduct transactions, 24 hours, 7 days a week By touch-tone telephone Tele*Access 1-800-638-2587 By Account Access on the Internet www.troweprice.com/access For assistance with your existing fund account, call: Shareholder Service Center 1-800-225-5132 To open a brokerage account or obtain information, call: 1-800-638-5660 Internet address: www.troweprice.com Plan Account Lines for retirement plan participants: The appropriate 800 number appears on your retirement account statement. 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 appropriate to the fund or funds covered in this report. Walk-In Investor Centers: For directions, call 1-800-225-5132 or visit our Web site Baltimore Area Downtown 101 East Lombard Street Owings Mills Three Financial Center 4515 Painters Mill Road Boston Area 386 Washington Street Wellesley Colorado Springs 4410 ArrowsWest Drive Los Angeles Area Warner Center 21800 Oxnard Street, Suite 270 Woodland Hills Tampa 4200 West Cypress Street 10th Floor Washington, D.C. 900 17th Street N.W. Farragut Square T. Rowe Price, Invest with confidence (registered trademark) T. Rowe Price Investment Services, Inc., Distributor. F65-050 12/31/99 -----END PRIVACY-ENHANCED MESSAGE-----