N-30D 1 0001.txt Semiannual Report Small-Cap Stock Fund June 30, 2000 T. Rowe Price Report Highlights Small-Cap Stock Fund o Stocks were volatile in the last six months, but many reasonably priced small-cap stocks performed strongly. o Your fund posted a solid gain in the first half of 2000, exceeding the performance of both small-cap benchmarks. Twelve-month results were also strong. o Good stock selection in diverse sectors, including consumer discretionary, technology, and biotechnology, drove fund performance. o Investors focused on valuation and fundamentals during the period, and small-caps outperformed large-caps. We expect these trends to continue. 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 Amid extreme volatility and repeated Federal Reserve rate hikes in the first half of 2000, the Small-Cap Stock Fund delivered a solid gain. As the year opened, momentum carried last year's high-flying sectors such as technology, biotechnology, and telecom to even greater heights. These sectors fell sharply from mid-March through late May (at one point the Nasdaq Composite suffered a 37% correction) before rallying again in June. With sector and style rotation coming fast and furiously, our balanced approach served shareholders exceptionally well. Performance Comparison --------------------------------------------------------------------------- Periods Ended 6/30/00 6 Months 12 Months Small-Cap Stock Fund 11.36% 22.16% Russell 2000 Index 3.04 14.32 Lipper Small-Cap Core Fund Index 8.55 23.62 S&P 500 Stock Index -0.43 7.24 Absolute and relative performance shone in the first half. As stock picking and fundamental analysis replaced the market's Internet casino mentality, the strength of T. Rowe Price's research again gave us an edge. Your fund's 11.36% advance outstripped the Russell 2000 Index of smaller companies by more than eight percentage points, and as a result we regained all the ground lost in the tech- and Internet-crazed market of 1999. Performance also exceeded that of the Lipper Small-Cap Core Fund Index for the six months, as shown in the table. The fund's solid 12-month gain of 22.16% again topped the Russell index and was comparable to the Lipper benchmark. Small-cap stocks outperformed large-caps by a wide margin, after matching the large-cap advance last year for the first time in many years. Equally important for our shareholders, fundamentals such as earnings, cash flow, and financial viability once again became key determinants of stock market success. Small-cap valuations became too attractive for investors to ignore. The lack of profits at many Internet firms also became too glaring for the market to overlook, and the group remained generally out of favor for much of the period even as other sectors rebounded. In fact, while Internet stocks drove much of the Russell 2000's performance in 1999, they were a liability in the first half. INVESTMENT REVIEW Top sectors in the Russell 2000 Index included energy, which rose 57%, health care, which rose nearly 38%, and real estate investment trusts (REITs), which gained almost 11% in the half. Your fund was well cv represented in all three segments, as well as in the biotech sector. During the period we topped off our energy exploration and production holdings in time to ride the gusher of higher oil and gas prices. Our long-held, significant weighting in REITs finally paid off in 2000. Poor performing sectors in the index included consumer discretionary, which declined 17%, utilities, which fell almost 10%, and financials, which slipped more than 5%. Consumer discretionary stocks were spooked by fears of a Fed-engineered economic slowdown, and the rate hikes hurt financial and utility shares. Fortunately, we were significantly underweighted in both utilities and financials, and good stock selection helped us in the consumer discretionary and financial sectors. Advisor Share Class Created -------------------------------------------------------------------------------- T. Rowe Price has introduced a new class of shares for certain funds, including this one. The new Advisor Class shares will be sold exclusively by financial intermediaries, such as brokers and financial advisers, and will enhance our ability to reach a new group of investors through this expanding channel. Since the new share class has a modest 12b-1 fee (a distribution fee paid to the sales intermediary), its performance will likely vary somewhat from your fund shares even though both invest in the same portfolio. We want to emphasize that the new class will have no impact whatsoever on your investment in the fund or on the returns provided to you by the fund. The daily net asset value and expenses for the existing shares and the Advisor Class shares are calculated separately. In due course, you will see the Advisor Class share prices listed in newspapers and other print and electronic media. Certain expenses associated with the Advisor Class shares will be itemized in financial statements in your fund's shareholder reports. Stock selection drove about two-thirds of our performance advantage over the Russell 2000. Big winners included Inhale Therapeutics, Technitrol, and SCP Pool. Inhale Therapeutics rose 138% in the first half, adding almost $20 million to the fund's net asset value (NAV). This promising biotech firm with a unique pulmonary drug delivery system captured investors' fancy as they began to focus on its inhaleable diabetes drug currently under development with Pfizer. Technitrol rose 118% as Wall Street discovered its strong position in networking and telecom equipment components, and added $18.7 million to the fund. SCP Pool is a swimming pool supplies distributor with a deep management team led by Manny Perez, a seasoned executive well known to us. The stock rose 35% in the first half, adding $14 million to the fund. SCP Pool has strong fundamentals and is posting record earnings under Mr. Perez's stewardship. These three stocks combined added about $53 million to NAV. We also benefited from strong stock selection in the materials sector. For example, Trex, a manufacturer of synthetic wood for decking that we purchased at its initial public offering last year, rose over 86% in the first half on great results. In technology, our holdings were well diversified, and we made opportunistic purchases of attractive stocks during the spring correction. This enabled us to keep up with the rising tide late in the half as market strength spread beyond last year's favored Internet sector. Stock selection was also strong in the biotech sector, driven by the excellent fundamental work of our team member Dr. Kris Jenner, and added greatly to performance. Sectors Diversification --------------------------------------------------------------------------- Business Services and Transportation 22 Consumer Services, Cyclicals, and Education 19 Consumer Nondurables 15 Technology 13 Financial 9 Energy and Utilities 8 Capital Equipment, Process Industries, and Basic Materials 6 Reserves 8 Based on net assets as of 6/30/00. Weaker portfolio holdings in many cases did not suffer from poor fundamentals but succumbed to gravity after spectacular runs in 1999. Our biggest loser, Progress Software, which nearly doubled in the fourth quarter, fell back to earth in the first half as declining European currencies slowed its revenue growth. Despite a weaker-than-expected top line, Progress Software met earnings estimates cleanly and we continue to commit to the stock. Progress stock fell 35% in the half, costing the fund $15 million. Iron Mountain declined 13.5% as investors showed caution following a merger with its largest competitor, Pierce Leahy. Finally, we suffered a disappointing $12 million loss in insurance broker E.W. Blanch after the firm badly missed first quarter earnings estimates. We eliminated the shares. PORTFOLIO HIGHLIGHTS Major purchases in the first half included Neiman Marcus Group, Keynote Systems, and Harsco. We also significantly increased our energy holdings, beginning late in the first quarter. Neiman Marcus-well positioned as the dominant high-end retailer with two principal department stores, Neiman Marcus and Bergdorf Goodman-was the largest purchase during the period. Excellent same-store sales growth and a well-thought-out expansion strategy have led to solid double digit earnings growth. We find the stock very attractive at 9.4 times next year's earnings. Some investors are concerned that Neiman Marcus' wealthy customer base could be hurt by a declining stock market. Historically this hasn't been the case, so we are comfortable owning the shares. Keynote Systems provides Web site performance measurement services to more than 1,000 customers in the U.S. The company evaluates the quality of service a consumer receives from the Web site, which is valuable information for the managers of that site. Following a 75% drop in the stock, we started purchasing Keynote Systems in early March. Though the company is small, it is growing more than 400% annually and expects to become profitable in 2001. Keynote quickly produced a 93% gain for the fund. Harsco is a small-cap conglomerate that provides industrial services to steel companies and also manufactures propane tanks, rail equipment, and bridge decking. The company is recovering along with the steel industry from price weakness created by a large inflow of cheap imported steel in 1998-99. Harsco is also benefiting from increased federal spending on transportation projects and from a large backlog of necessary railroad infrastructure upgrades around the world. We were able to buy this high-quality company at a low price/earnings (P/E) ratio of 10. Earnings growth is expected to be 15% this year, and a recently closed acquisition could boost growth expectations for the next fiscal year. We added to our positions in the energy industry to take advantage of rising commodity prices and improving fundamentals. Two of our new holdings, oil and gas exploration and production companies Barrett Resources and Noble Affiliates, gained 16% and 29% for the fund, respectively. Late in the second quarter we invested in Cross Timbers Oil, another exploration and production company with-despite its name-a focus on natural gas in Texas and Oklahoma. We purchased Cross Timbers at under six times cash flow, a sizable discount to its peers. Companies with exposure to natural gas are performing well due to positive long-term forecasts for supply-and-demand and gas prices. On the sell side, we significantly reduced positions in Technitrol and Applied Micro Circuits, and eliminated U.S. Foodservice. The latter was acquired by Royal Ahold for $26 per share in April. Other stocks sold due to acquisition were Wilmar Industries, bought by its management for $18.25 a share, and Coinmach Laundry, to be acquired by its management team for $14.25 per share. Applied Micro Circuits and Technitrol are examples of technology stocks with outstanding performance that we trimmed as they met or exceeded our valuation targets. We also reduced Trex-the maker of decking boards from recycled plastics-which rose 31% in the second quarter alone. OUTLOOK The first half of 2000 was accompanied by record market volatility and aggressive, seemingly hourly rotation into and out of hot sectors like technology, biotech, and telecom. Keith Mullins, the well-respected small-cap strategist at Salomon Smith Barney, recently wrote that year-to-date through late June, the Nasdaq Composite had posted 13 single-day moves of 5% or more. No wonder our antacid consumption reached record highs in recent months. However, volatility provides opportunity. As the market's enthusiasm for the latest hot sectors waxes and wanes rapidly, we find opportunities to nimbly acquire excellent companies at bargain prices. To illustrate the market's skittishness, consider the case of Keynote Systems, a recent purchase as discussed earlier. Keynote is a well-managed software company in the hot area of e-commerce. Studies show that if a Web surfer experiences even a minor delay in site performance, he'll move elsewhere quickly, taking his business with him. Investors bid Keynote up to a high of $177 early in March only to cut it down as low as $26.50 in April. We picked up shares in the $30s at that time, and by the end of the first half the stock traded at $65. Fickle investors give patient investors great opportunities, but the ride can be rough. Despite the recent strong performance of small-cap shares, the valuations remain very attractive compared with large-caps, and we continue to see excellent long-term value in the sector. These valuations should drive continued outperformance. Positive earnings surprises could also serve as a catalyst for the sector. After the past year of robust large-cap earnings growth, investors now expect large-cap earnings to continue growing at nearly the same rate as small-cap earnings-a historically unsustainable feat. Merrill Lynch's small-cap strategist recently published an interesting chart, reproduced here, that illustrates relative earnings expectations for large-caps versus small-caps. A rising line indicates investors expect great small-cap earnings. Conversely, a falling line indicates investors are expecting relatively stronger large-cap earnings. This chart shows that small-cap earnings growth expectations are at a record low. Therefore, we have reason to believe that the likelihood of positive earnings surprises going forward is much greater with small-caps than with large companies. Small-Cap Expectations -------------------------------------------------------------------------------- 1984 1.44 1.47 1986 1.47 1.50 1988 1.41 1.44 1990 1.40 1.32 1992 1.33 1.50 1994 1.46 1.50 1.51 1.39 1.41 6/95 1.42 1.40 1.46 1.48 6/96 1.48 1.49 1.53 1.48 6/97 1.46 1.44 1.47 1.42 6/98 1.41 1.39 1.39 1.28 6/99 1.27 1.29 1.41 1.17 6/00 1.14 Source: Merrill Lynch Small Cap Research, I/B/E/S Chart shows projected five-year earnings per share (EPS) growth for small-capitalization stocks divided by projected five-year EPS growth for large-cap stocks at various dates over the past 16 years. The ratio's current very low level may indicate that investors are overly optimistic about large-cap earnings growth and unduly pessimistic about small-caps' future growth potential. As the market comes back to fundamentals, we expect that our small-cap research team here at T. Rowe Price can continue to produce the strong relative performance witnessed in the first half. We believe our blend of growth and value strategies will continue to serve us well in the future as over the past nearly eight years. Thank you for your continued support. Respectfully submitted, Greg A. McCrickard President and Chairman of the Investment Advisory Committee July 17, 2000 T. Rowe Price Small-Cap Stock Fund Portfolio Highlights TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 6/30/00 ---------------------------------------------------------------------------- Burr Brown 1.7% Littelfuse 1.6 Technitrol 1.4 Inhale Therapeutic Systems 1.4 Downey Financial 1.4 ---------------------------------------------------------------------------- Keynote Systems 1.4 Matthews International 1.3 Cleco 1.2 Methode Electronics 1.2 Mentor 1.2 ---------------------------------------------------------------------------- Brown and Brown 1.1 Progress Software 1.1 A.O. Smith 1.1 Chittenden 1.1 Parkway Properties 1.0 ---------------------------------------------------------------------------- SCP Pool 1.0 Noble Affiliates 1.0 Southwest Bancorp 1.0 Insituform Technologies 0.9 Arch Chemicals 0.9 ---------------------------------------------------------------------------- Barrett Resources 0.9 F.Y.I 0.9 International Multifoods 0.9 Neiman Marcus Group 0.9 Emmis Broadcasting 0.9 ---------------------------------------------------------------------------- Total 28.5% Note: Table excludes reserves. T. Rowe Price Small-Cap Stock Fund Portfolio Highlights -------------------------------------------------------------------------------- MAJOR PORTFOLIO CHANGES Listed in descending order of size 6 Months Ended 6/30/00 Ten Largest Purchases -------------------------------------------------------------------------------- Barrett Resources* Noble Affiliates* Neiman Marcus Group* Lincare* Keynote Systems* Harsco* WestAmerica Southwest Bancorp Cross Timbers Oil* Papa John's International* Ten Largest Sales -------------------------------------------------------------------------------- Shorewood Packaging** Technitrol Applied Micro Circuits U.S. Foodservice** Inhale Therapeutic Systems Trex CORT Business Services** UST** Medical Assurance** Methode Electronics * Position added ** Position eliminated 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 --------------------------------------------------------------------------- As of 6/30/00 Russell 2000 Small-Cap Index Stock Fund 9/30/90 10,000 10,000 6/91 10,133 9,691 6/92 11,606 10,955 6/93 14,624 13,499 6/94 15,259 14,473 6/95 18,328 17,290 6/96 22,706 22,984 6/97 26,413 27,224 6/98 30,773 32,911 6/99 31,235 31,766 6/00 35,709 38,806 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 6/30/00 1 Year 3 Years 5 Years 10 Years Small-Cap Stock Fund 22.16% 12.54% 17.55% 14.52% 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 Unaudited Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- Small-Cap Stock shares 6 Months Year Ended Ended 6/30/00 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 NET ASSET VALUE Beginning of period $ 22.80 $ 20.79 $ 22.20 $ 18.07 $ 16.32 $ 13.80 Investment activities Net investment income (loss) 0.07 0.09 0.08 0.05 0.09 0.12 Net realized and unrealized gain (loss) 2.52 2.89 (0.89) 5.13 3.33 4.53 Total from investment activities 2.59 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 $ 25.39 $ 22.80 $ 20.79 $ 22.20 $ 18.07 $ 16.32 ---------------------------------------------------------- Ratios/Supplemental Data Total return (diamond) 11.36% 14.66% (3.46)% 28.81% 21.05% 33.85% Ratio of total expenses to average net assets 0.95%! 0.96% 1.01% 1.02% 1.07% 1.11% Ratio of net investment income (loss) to average net assets 0.57%! 0.47% 0.46% 0.33% 0.56% 0.74% Portfolio turnover rate 39.6%! 42.3% 25.9% 22.9% 31.1% 57.8% Net assets, end of period (in millions) $ 2,046 $ 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. ! Annualized The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund Unaudited Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- Small-Cap Stock Advisor Class shares 3/31/00 Through 6/30/00 NET ASSET VALUE Beginning of period $24.93 Investment activities Net investment income (loss) 0.01* Net realized and unrealized gain (loss) 0.46 Total from investment activities 0.47 NET ASSET VALUE End of period $25.40 ------ Ratios/Supplemental Data Total return(diamond) 1.89% Ratio of total expenses to average net assets 0.81%! Ratio of net investment income (loss) to average net assets 1.20%! Portfolio turnover rate 39.6%! Net assets, end of period (in thousands) $695 (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. ! Annualized The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Unaudited June 30, 2000 Portfolio of Investments Shares/Par Value -------------------------------------------------------------------------------- In thousands Common Stocks 92.1% FINANCIAL 9.3% Bank and Trust 5.8% Charter One Financial 238,140 $ 5,477 Chittenden 900,000 21,994 Citizens Banking 595,000 9,669 Downey Financial 970,000 28,130 First Bell Bancorp 100,000 1,513 First Mariner Bancorp 47,500 270 First Security 168,750 2,294 Frankfort First Bancorp ! 75,000 923 Glacier Bancorp ! 520,190 6,811 Marshall & Ilsley 30,000 1,245 Southwest Bancorporation * 962,300 20,028 Summit Bancorp 214,800 5,289 WestAmerica 543,100 14,206 117,849 Insurance 3.0% Brown and Brown 447,700 23,280 Harleysville Group 218,100 3,626 London Pacific Group ADR 660,000 8,580 PartnerRe Holdings 483,200 17,123 Selective Insurance 155,000 2,921 W. R. Berkley 298,100 5,580 61,110 Financial Services 0.5% Delta Financial * 300,000 488 Financial Federal * 350,000 6,081 ITLA Capital * 279,900 3,936 10,505 Total Financial 189,464 UTILITIES 2.3% Electric Utilities 1.3% Cleco 760,000 $ 25,460 Unisource Energy 100,000 1,500 26,960 Water Utilities 0.2% United Water Resources 110,600 3,857 3,857 Telephone 0.8% Rural Cellular (Class A) * 112,800 8,640 Western Wireless * 155,000 8,443 17,083 Total Utilities 47,900 CONSUMER NONDURABLES 14.7% Food Processing 1.5% American Italian Pasta (Class A) * 334,100 6,912 International Multifoods ! 1,050,000 18,178 Makepeace * 164 1,558 Seneca Foods (Class A) * 174,900 2,044 Seneca Foods (Class B) * 74,700 892 29,584 Hospital Supplies/Hospital Management 4.0% Airgas * 714,000 4,061 Cephalon * 178,100 10,831 Lincare * 550,000 13,527 Mentor 881,700 23,944 Molecular Devices * 150,000 10,373 Quorum Health Group* 123,800 1,280 Renal Care Group * 574,250 14,051 Steris * 525,600 4,665 82,732 Pharmaceuticals 1.6% Aurora Biosciences * 161,000 10,943 Boron Lepore & Associates * 112,000 1,029 Imclone Systems * 30,000 2,294 Immunomedics * 30,000 729 Incyte Genomics * 60,000 $ 4,930 Noven Pharmaceuticals * 100,000 3,006 NPS Pharmaceuticals * 196,500 5,281 Triangle Pharmaceuticals * 550,000 5,053 33,265 Biotechnology 3.5% Abegenix * 42,400 5,081 Alkermes * 220,000 10,361 Anesta * 185,000 4,596 COR Therapeutics * 115,000 9,807 Cubist Pharmaceuticals * 70,000 3,450 Gilead Sciences * 30,000 2,135 Inhale Therapeutic Systems * 280,000 28,411 Neurocrine Biosciences * 106,300 3,764 Serologicals * 420,000 2,113 Viropharma * 75,000 1,176 70,894 Health Care Services 0.8% AmeriPath * 675,000 5,906 Orthodontic Centers of America * 300,000 6,788 Packard BioScience * 270,800 4,595 17,289 Miscellaneous Consumer Products 3.1% Cone Mills * 774,400 4,792 Culp 275,300 1,411 Dan River * ! 1,010,000 4,797 Polymer Group 353,700 3,272 Quicksilver * 263,000 4,093 Reebok * 289,500 4,614 Sola * 1,009,200 4,920 Stride Rite 900,000 5,512 Unifi * 582,700 7,211 US Can * ! 1,035,000 17,983 WestPoint Stevens 350,000 3,894 62,499 Cosmetics 0.2% Chattem * 342,400 4,697 4,697 Total Consumer Nondurables 300,960 CONSUMER SERVICES 8.6% Restaurants 1.5% Applebee's 137,000 $ 4,157 Buca * ! 795,000 12,422 PJ America * ! 290,600 2,869 Ruby Tuesday 629,400 7,907 Uno Restaurant 400,000 4,275 31,630 General Merchandisers 2.3% Bon-Ton Stores * ! 740,700 1,690 Casey's General Stores 1,656,100 17,234 Columbia Sportswear * 400,000 10,725 Neiman Marcus Group * 600,000 18,112 47,761 Specialty Merchandisers 1.4% CompuCom Systems * 1,261,200 2,109 O'Charley's * ! 785,700 10,681 PurchasePro.com * 169,800 6,967 Urban Outfitters * 440,000 3,891 Wild Oats Markets * 350,000 4,375 28,023 Entertainment and Leisure 0.9% Houghton Mifflin 62,400 2,913 Papa John's * 400,000 9,813 Sonic * 207,000 6,087 18,813 Media and Communications 2.5% American Tower Systems (Class A) * 60,000 2,501 Classic Communications * 293,000 2,646 Emmis Broadcasting (Class A) * 435,800 18,045 Pegasus Communications * 178,800 8,756 Sinclair Broadcast Group (Class A) * 1,086,400 11,916 Young Broadcasting (Class A) * 259,400 6,639 50,503 Total Consumer Services 176,730 CONSUMER CYCLICALS 10.1% Automobiles and Related 3.4% A.O. Smith (Class B) 1,055,000 $ 22,089 Adrian Steel ! 13,000 4,810 Keystone Automotive * 259,100 1,806 Littelfuse * 680,000 33,617 Strattec Security * 199,600 6,587 68,909 Building and Real Estate 4.9% Apartment Investment & Management, REIT 149,400 6,462 Arden Realty, REIT 610,000 14,335 EastGroup Properties, REIT 758,500 15,976 First Washington Realty Trust, REIT 325,000 7,170 Glenborough Realty Trust, REIT 500,000 8,719 JP Realty, REIT 565,300 10,069 Parkway Properties, REIT ! 702,700 21,432 Reckson Associates Realty (Class B), REIT 228,150 5,804 Woodhead Industries ! 600,000 10,950 100,917 Miscellaneous Consumer Durables 1.8% CompX (Class A) ! 485,000 9,852 Harman International 290,000 17,690 Intranet Solutions * 255,200 9,801 37,343 Total Consumer Cyclicals 207,169 TECHNOLOGY 13.3% Electronic Components 6.5% American Superconductor * 167,400 8,072 Analogic 419,600 16,640 Benchmark Electronics * 429,200 15,693 Burr Brown * 412,500 35,759 Exar * 150,000 13,092 Manufacturers Services Limited * 236,800 4,869 Methode Electronics (Class A) 644,400 24,910 QuickLogic * 177,000 3,977 SIPEX * 350,000 9,701 132,713 Electronic Systems 1.4% Applied Micro Circuits * 60,000 $ 5,925 Armor Holdings * 1,000,000 13,000 Lifeline Systems * ! 350,000 4,900 Lo-Jack * 631,100 4,398 28,223 Telecommunications 1.7% Aether Systems * 12,400 2,542 Airgate PCS * 80,300 4,223 Airnet Commerce * 23,000 602 Avant * 274,500 5,130 Ditech Communications * 120,000 11,370 Vyyo* 97,400 2,633 West TeleServices * 299,800 7,598 34,098 Aerospace and Defense 0.8% DONCASTERS ADR * 100,000 1,088 Harsco 442,600 11,286 Woodward Governor 160,000 4,465 16,839 Information Processing 1.3% Cybersource * 85,700 1,186 F. Y. I. * 541,000 18,191 Source Information Management * 415,200 6,319 25,696 Specialized Computer 0.2% Virata * 80,100 4,786 4,786 Office Automation 1.4% Technitrol 300,000 29,062 29,062 Total Technology 271,417 CAPITAL EQUIPMENT 1.3% Electrical Equipment 0.8% hi/fn * 205,000 9,103 LSI Industries 455,900 6,924 16,027 Machinery 0.5% Kennametal 300,000 $ 6,431 NN 350,000 3,544 9,975 Total Capital Equipment 26,002 BUSINESS SERVICES AND TRANSPORTATION 21.5% Computer Service and Software 8.2% 724 Solutions * 12,000 524 Actuate * 93,800 5,004 Analysts International 580,000 5,365 Bisys Group * 155,000 9,581 Cambridge Technology Partners * 300,000 2,620 Concord Communications * 180,000 7,374 Digital Impact * 175,800 2,461 Electronic Arts * 50,000 3,648 Great Plains Software * 123,500 2,420 iGATE Capital * 400,000 5,513 Interact Commerce * 215,600 2,540 Jack Henry & Associates 50,000 2,509 Keynote Systems * 400,000 27,913 Loislaw * 100,000 838 Net.Genesis * 250,000 4,523 NetIQ * 200,000 11,925 Netsolve * 54,000 1,409 Peerless Systems * 398,000 746 Progress Software * 1,232,500 22,570 PSINet * 382,000 9,586 Quest Software * 58,000 3,219 Sonicwall * 17,400 1,532 SPSS * 260,000 7,556 SunGard Data Systems * 38,400 1,190 Synopsys * 11,200 387 USInternetworking * 250,000 5,102 Verity * 83,500 3,173 Websense * 58,000 1,454 WebTrends * 267,600 $ 10,311 Zebra Technologies (Class A) * 105,700 4,664 167,657 Distribution Services 3.0% MSC (Class A) * 421,800 8,831 Performance Food Group * 150,000 4,791 Primesource 191,500 979 SCP Pool * ! 882,500 20,629 SunSource * 215,000 1,088 United Stationers * 500,000 16,203 Watsco (Class A) 748,500 9,356 61,877 Environmental 0.6% CUNO * 378,300 8,760 IT Group * 495,000 2,413 Waterlink * 467,000 1,167 12,340 Transportation Services 2.4% C.H. Robinson Worldwide 299,900 14,836 Comfort Systems USA * 775,000 3,100 EGL * 330,300 10,136 Expeditors International of Washington 301,300 14,246 Frozen Food Express 3,400 10 Heartland Express * 80,827 1,333 Hub Group (Class A) * 98,000 1,467 International Shipholding 141,562 1,239 Seacor Smit * 59,200 2,290 48,657 Miscellaneous Business Services 6.8% AnswerThink * 256,800 4,237 Consolidated Graphics * 176,900 1,658 Electro Rent * 592,000 7,030 G&K Services 275,400 6,894 Herman Miller 150,000 3,877 Insituform Technologies (Class A) * 700,300 19,149 Iron Mountain * 492,150 16,733 Ivex Packaging * 849,900 9,455 kforce.com * 403,868 2,789 Maximus * 712,000 $ 15,753 McGrath RentCorp 304,000 5,073 MPW Industrial Services Group * ! 575,000 4,420 New England Business Service ! 871,000 14,154 Strayer Education 391,400 9,357 Tetra Tech * 704,750 16,143 Visual Networks * 103,300 2,941 139,663 Airlines 0.5% Midwest Express Holdings * 464,500 9,987 9,987 Total Business Services and Transportation 440,181 ENERGY 5.7% Energy Services 1.1% Cooper Cameron * 93,100 6,145 Grant Prideco * 137,850 3,446 Smith International * 100,000 7,281 Weatherford International * 137,850 5,488 22,360 Exploration and Production 4.6% Barrett Resources * 604,000 18,384 Chieftain International * 600,000 11,438 Cross Timbers Oil 500,000 11,063 Forest Oil * 672,500 10,718 Key Energy * 1,100,000 10,588 National Oilwell * 331,300 10,891 Noble Affiliates 550,000 20,487 93,569 Total Energy 115,929 PROCESS INDUSTRIES 2.9% Specialty Chemicals 0.2% A. Schulman 202,900 2,441 Hauser * 90,000 152 MacDermid 100,000 2,350 4,943 Paper and Paper Products 0.4% Buckeye Technologies * 300,000 $ 6,581 Smurfit-Stone Container * 200,000 2,569 9,150 Building and Construction 0.9% Layne Christensen * 360,000 1,665 Simpson Manufacturing * 137,300 6,565 Trex * 62,100 3,105 U.S. Aggregates 385,300 6,983 18,318 Diversified Chemicals 1.4% Arch Chemicals 854,300 18,688 Cabot Microelectronics * 195,000 8,958 27,646 Total Process Industries 60,057 BASIC MATERIALS 2.2% Metals 1.8% Gibraltar Steel 198,800 2,839 Material Sciences * 725,300 7,253 Matthews International (Class A) ! 908,000 26,446 36,538 Mining 0.4% Battle Mountain Gold * 2,285,700 5,000 Coal Creek ! 9,295 706 Lihir Gold * 8,355,900 3,298 9,004 Total Basic Materials 45,542 EDUCATION 0.2% Education 0.2% ITT Educational Service * 200,000 3,513 Total Education 3,513 Total Common Stocks (Cost $1,578,430) 1,884,864 Convertible Bonds 0.1% Vantive, 4.75%, 9/1/02 $3,000,000 $ 2,520 Total Convertible Bonds (Cost $2,405) 2,520 Short-Term Investments 8.9% Money Market Funds 8.9% Reserve Investment Fund, 6.68% # ! 181,960,707 181,961 Total Short-Term Investments (Cost $181,961) 181,961 Total Investments in Securities 101.1% of Net Assets (Cost $1,762,796) $2,069,345 Other Assets Less Liabilities (22,314) NET ASSETS $2,047,031 ---------- # 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 -------------------------------------------------------------------------------- Unaudited June 30, 2000 Statement of Assets and Liabilities -------------------------------------------------------------------------------- In thousands Assets Investments in securities, at value Affiliated companies (cost $390,807) $ 366,225 Other companies (cost $1,371,989) 1,703,120 Total investments in securities 2,069,345 Other assets 8,771 Total assets 2,078,116 Liabilities Total liabilities 31,085 NET ASSETS $ 2,047,031 ----------- Net Assets Consist of: Accumulated net investment income - net of distributions $ 5,622 Accumulated net realized gain/loss - net of distributions 182,539 Net unrealized gain (loss) 306,549 Paid-in-capital applicable to 80,634,159 shares of $0.50 par value capital stock outstanding; 200,000,000 shares authorized 1,552,321 NET ASSETS $ 2,047,031 ----------- NET ASSET VALUE PER SHARE Small-Cap Stock shares ($2,046,335,999/80,606,805 shares outstanding) $ 25.39 ----------- Small-Cap Stock Advisor Class shares ($694,811/27,354 shares outstanding) $ 25.40 ----------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Unaudited Statement of Operations -------------------------------------------------------------------------------- In thousands 6 Months Ended 6/30/00 Investment Income (Loss) Income Dividend (including $2,028 from affiliated companies) $ 8,542 Interest (including $5,280 from affiliated companies) 5,607 Total income 14,149 Expenses Investment management 7,179 Shareholder servicing Small-Cap Stock shares 1,453 Small-Cap Stock Advisor Class shares -- Custody and accounting 95 Prospectus and shareholder reports Small-Cap Stock shares 64 Small-Cap Stock Advisor Class shares -- Registration 42 Legal and audit 14 Directors 5 Miscellaneous 8 Total expenses 8,860 Expenses paid indirectly (23) Net expenses 8,837 Net investment income (loss) 5,312 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities (including $15,111 from affiliated companies) 108,508 Foreign currency transactions 2 Net realized gain (loss) 108,510 Change in net unrealized gain or loss on securities (including ($14,749) from affiliated companies) 90,794 Net realized and unrealized gain (loss) 199,304 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 204,616 ----------- The accompanying notes are an integral part of these financial statements T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Unaudited Statement of Changes in Net Assets -------------------------------------------------------------------------------- In thousands 6 Months Year Ended Ended 6/30/00 12/31/99 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 5,312 $ 6,337 Net realized gain (loss) 108,510 131,905 Change in net unrealized gain or loss 90,794 77,185 Increase (decrease) in net assets from operations 204,616 215,427 Distributions to shareholders Net investment income Small-Cap Stock shares -- (5,845) Net realized gain Small-Cap Stock shares -- (65,022) Decrease in net assets from distributions -- (70,867) Capital share transactions * Shares sold Small-Cap Stock shares 445,392 918,700 Small-Cap Stock Advisor Class shares 683 -- Increase in net assets from shares sold 446,075 918,700 Distributions reinvested Small-Cap Stock shares -- 66,463 Shares redeemed Small-Cap Stock shares (343,986) (541,991) Increase (decrease) in net assets from capital share transactions 102,089 443,172 Net Assets Increase (decrease) during period 306,705 587,732 Beginning of period 1,740,326 1,152,594 End of period $2,047,031 $1,740,326 ---------- ---------- *Share information Shares sold Small-Cap Stock shares 18,596 44,046 Small-Cap Stock Advisor Class shares 27 -- Distributions reinvested Small-Cap Stock shares -- 3,120 Shares redeemed Small-Cap Stock shares (14,308) (26,285) Increase (decrease) in shares outstanding 4,315 20,881 The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Unaudited June 30, 2000 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. The fund seeks long-term capital growth by investing primarily in stocks and equity-related securities of small to medium-sized companies. The fund has two classes of shares-Small-Cap Stock, offered since June 1, 1956, and Small-Cap Stock Advisor Class, first offered on March 31, 2000. Small-Cap Stock Advisor Class sells its shares only through financial intermediaries, which it compensates for distribution and certain administrative services under a Board-approved Rule 12b-1 plan. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to both classes, and, in all other respects, the same rights and obligations as the other class. 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. Currency Translation Assets and liabilities are translated into U.S. dollars at the prevailing exchange rate at the end of the reporting period. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing exchange rate on the dates of such transactions. The effect of changes in foreign exchange rates on realized and unrealized security gains and losses is reflected as a component of such gains and losses. Premiums and Discounts Premiums and discounts on debt securities are amortized for both financial reporting and tax purposes. Class Accounting The Small-Cap Stock Advisor Class pays distribution and administrative expenses, in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% of the class's average net assets. Shareholder servicing, prospectus, and shareholder report expenses are charged directly to the class to which they relate. Expenses common to both classes, investment income, and realized and unrealized gains and losses are allocated to the classes based upon the relative daily net assets of each class. Income distributions are declared and paid by each class on an annual basis. Capital gain distributions are declared and paid by the fund on an annual basis. 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 $418,652,000 and $340,566,000, respectively, for the six months ended June 30, 2000. 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 June 30, 2000, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $1,762,796,000. Net unrealized gain aggregated $306,549,000 at period-end, of which $534,359,000 related to appreciated investments and $227,810,000 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 $1,250,000 was payable at June 30, 2000. 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 June 30, 2000, and for the six months 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. The manager has agreed to bear any expenses through December 31, 2001, which would cause Small-Cap Stock Advisor Class's ratio of total expenses to average net assets to exceed 1.20%. Thereafter, through December 31, 2003, Small-Cap Stock Advisor Class is required to reimburse the manager for these expenses, provided that its average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its ratio of total expenses to average net assets to exceed 1.20%. 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 $1,066,000 for the six months ended June 30, 2000, of which $195,000 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 six months ended June 30, 2000, totaled $5,280,000 and are reflected as interest income in the accompanying Statement of Operations. 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. F65-051 6/30/00