-----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, HWT84h66IDSsCm0kQlEMEiBv9h0fTovkikm51HjPChwpRXSBh6YO+sLHzG0DZ8Nh Rba/Ryh7Bao5X5qNWeMslQ== 0000075170-96-000008.txt : 19960809 0000075170-96-000008.hdr.sgml : 19960809 ACCESSION NUMBER: 0000075170-96-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960808 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE OTC FUND INC CENTRAL INDEX KEY: 0000075170 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 231622210 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00696 FILM NUMBER: 96605921 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: 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 Semiannual Report OTC Fund June 30, 1996 T. Rowe Price Report Highlights o Small-cap stocks have regained a slight edge over their larger counterparts so far in 1996. Despite rising interest rates, the stock market advanced to new highs. o The OTC Fund outperformed its benchmarks in the six months ended June 30 and significantly outpaced them over the 12-month period. o The fund benefited from its holdings in energy and media stocks, as energy prices rose and consumer spending picked up. o We saw value in insurance and technology stocks and added shares of selected companies. We trimmed some energy holdings after their strong runup. o While there are signs of speculative excess, small-cap valuations have not reached extreme levels, and we expect these companies to outperform in coming months. Fellow Shareholders Small-cap stocks regained a slight edge over their larger counterparts in the first half of 1996. The unmanaged Russell 2000 index of small-company shares rose 10.39% versus 10.10% for the large-company Standard & Poor's 500 index. The stock market overcame rising interest rates to advance to new highs. Performance Comparison Periods Ended 6/30/96 6 Months 12 Months OTC Fund 13.85% 32.93% Nasdaq Composite* 12.63 26.95 Russell 2000 10.39 23.92 S&P 500 10.10 26.00 *Principal only The Russell 2000 was paced by strong returns in energy stocks, which rose 26.92% in the half, and consumer discretionary issues (particularly retail, entertainment, and media), which gained 22.80%. These areas were propelled by a rise in energy prices and a surprising pickup in consumer spending. Laggards included utilities and producer durable goods, up 3.2% and 4.4% respectively over the last six months. Fortunately, your OTC Fund was overweighted in energy services and media stocks and underweighted in utilities. As a result, the fund outperformed the Russell 2000 and the S&P 500 and also held an edge over the technology-laden Nasdaq Composite for the first half of 1996. The fund outpaced all of these benchmarks by a wide margin for the 12-month period ended June 30. After rallying sharply from February through early June, small-cap stocks subsequently retreated, along with most areas of the stock market. In June, the Russell 2000 Index fell 4.2%, and technology stocks, which were particularly hard hit, dropped nearly 14%. Insulated by its less volatile core of value stocks and an underweighting in technology, the OTC Fund declined a more moderate 1.75% in June as the first half came to a close. It remains to be seen whether the recent pullback represents the long-awaited market correction or just a temporary pause in the upward march of stock prices. However, we are optimistic that this latest round of volatility is a normal pause in the continuing small-cap bull market. More on this in the Outlook section. Investment Review The fund enjoyed outstanding performance from four holdings in particular. Sinclair Broadcast Group, Shiva, SITEL, and Richfood Holdings each gained more than $2 million in market value during the first half. Sinclair, the best performer, was spotlighted in our December annual report. The stock rebounded nicely from its 1995 low and, helped by an attractive broadcasting acquisition, recaptured investor favor. Shiva, a remote access networking provider, performed well as investors rewarded its accelerating revenues and earnings with a higher price/earnings multiple. SITEL, a fast-growing telecommunications outsourcing company, continued to exceed investors' expectations and was rewarded accordingly. Our faithful readers will no doubt recall our favorite wholesale grocery distributor - Richfood Holdings. The company's acquisition of food distributor Super Rite, which we wrote about a year ago, captured the attention of investors, leading to a 47% gain in Richfood's stock price over the last 12 months. While the company's fundamentals remain solid, the stock's large gain warranted a modest reduction in our position. Nevertheless, Richfood remained our largest holding, representing 2.8% of net assets, as shown in the table following this letter. Of course, we are not infallible. We lost over $1 million in three stocks over the last six months. First, pipeline repair outfit Insituform Technologies, another old favorite, experienced both slowing revenues and difficulty integrating its acquisition of Insituform Mid-America. Second, software maker Adobe Systems performed poorly due to slower-than-expected sales of its new Pagemaker product and difficulty in assimilating its recent acquisition of Frame, another software firm. Finally, Holophane, a manufacturer of industrial and commercial lighting equipment, experienced a slowdown in volume and weaker earnings, resulting in a 28% decline in its stock price. Nevertheless, we consider these short-term problems and remain positive on the longer-term outlook for these companies. Portfolio Highlights Our largest purchases during the first half are shown in the table following this letter. You will notice that two insurance companies, Selective Insurance and Harleysville Group, head the list. Why is the sector particularly attractive at the moment? Given investor fears of rising inflation and rising interest rates, the group has underperformed so far in 1996. Historically, when we have purchased well-positioned insurance stocks (with returns on equity between 10% and 15%) at modest premiums to book value, they have subsequently outperformed. Take our old friend, Selective Insurance, a major holding since 1993. (Our largest purchases often take place in stocks we already own.) Since taking over as chief executive three years ago, Bill Entringer has streamlined operations, cut expenses, and positioned the company to grow profitably. As a result, earnings more than doubled from 1993 to 1995, leading to nice appreciation in the stock. However, the company is prone to winter storm losses because it writes auto insurance in New Jersey. When old man winter dropped a record amount of snow and ice on the Mid-Atlantic region this year, Selective's earnings fell more than 30% for the first half. Typically, investors overreacted, driving the stock down to the low-$30 range, making it a great value at 1.1 times book value and 9 times earnings. Our second-largest purchase was Harleysville Group, another Mid-Atlantic insurer. In our view, the stock is a true bargain, recently selling at 1.1 times book value and 9 times trailing earnings with a 2.9% dividend yield. By comparison, the S&P 500 was twice as expensive, selling at 18.5 times trailing earnings. Furthermore, Harleysville made a merger that should lead to more than 25% growth in revenues. After technology stocks took a beating in recent weeks, we began to see some bargains. We initiated a position in Leasing Solutions, which leases information processing and networking equipment mostly to Fortune 100-sized corporations. The company's earnings are growing at better than 18%, and we bought it at around 12 times earnings, or two-thirds of its projected growth rate. Chart 1 - Sector Diversification On the sell side, we trimmed several large positions that appeared fully valued. Orthodontic Centers of America was up more than 40% at one point and selling at over 40 times projected earnings. While the company has performed well since its 1994 initial public offering, the valuation seemed a bit rich. We also pared our holdings in Richfood, as mentioned. Last, the energy group became ripe for profit-taking after its recent runup. Consequently, we trimmed Atwood Oceanics and Weatherford Enterra. We made only minimal changes to sector diversification during the last six months, although we increased our exposure to consumer services and cyclicals from 13% to 18% of net assets, reflecting opportunistic purchases in the sector. Outlook As we noted, small-cap stocks retreated from their earlier highs in recent weeks, including after the close of the reporting period. It remains to be seen whether this is a temporary stumble, another mid-cycle correction, or the end of the five-year-old bull market for small-cap stocks. However, the evidence at hand seems to point to a temporary correction, leaving us optimistic for the balance of 1996 and 1997. While there are signs of speculative excess - such as an ebullient IPO market, strong first half returns, and a flood of new money into small-company mutual funds - small-cap stocks have not reached extreme valuations, the classic signal of a market top. Certainly, small-cap P/E ratios have expanded since 1990, but they still remain below the peak levels of past performance cycles. On the positive side, the economy continues to grow, interest rates (despite their recent increase) have not risen to disturbing levels, and earnings fundamentals may well favor smaller, nimbler companies late in this economic cycle. Respectfully submitted, Gregory A. McCrickard President and Chairman of the Investment Advisory Committee July 17, 1996 T. Rowe Price OTC Fund Portfolio Highlights TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 6/30/96 Richfood Holdings 2.8% Selective Insurance 2.4 Harleysville Group 1.9 Analogic 1.6 Analysts International 1.5 JP Foodservice 1.4 Shiva 1.4 Sinclair Broadcast Group 1.4 Electro Rent 1.3 Unitog 1.2 Glacier Bancorp 1.2 Collective Bancorp 1.1 United Insurance 1.1 PartnerRe Holdings 1.0 W. R. Berkley 1.0 SITEL 1.0 AMTROL 1.0 FelCor Suites Hotels 1.0 Woodward Governor 1.0 Culp 1.0 Insituform Technologies 0.9 Home Beneficial 0.9 Renal Care Group 0.9 Petrolite 0.9 Poe & Brown 0.9 _____________________________________________________________________________ Total 31.8% T. Rowe Price OTC Fund Portfolio Highlights MAJOR PORTFOLIO CHANGES Listed in descending order of size 6 Months Ended 6/30/96 Ten Largest Purchases Selective Insurance Harleysville Group Copart * Scholastic * Heartland Wireless * Renal Care Group * Leasing Solutions * TBC * Rutherford-Moran Oil * Cadmus Communications Ten Largest Sales Orthodontic Centers of America Atwood Oceanics Greenstone Resource ** Cityscape Financial ** WestPoint Stevens Bell Bancorp ** Richfood Holdings Inter-Tel Weatherford Enterra PanAmSat * Position added ** Position eliminated T. Rowe Price OTC 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 a broad-based average or index. The index return does not reflect expenses, which have been deducted from the fund's return. Chart 2 - OTC Fund 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 6/30/96 1 Year 3 Years 5 Years 10 Years OTC Fund 32.93% 19.41% 18.85% 10.07% Performance prior to 9/2/92 reflects investment managers other than T. Rowe Price. 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 OTC Fund Unaudited Financial Highlights For a share outstanding throughout each period 6 Months Year Ended Ended 6/30/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 NET ASSET VALUE Beginning of period $ 16.32 $ 13.80 $ 15.39 $ 14.37 $ 16.86 $ 12.72 Investment activities Net invest- ment income 0.04 0.12 0.04 - 0.02 0.07 Net realized and unrealized gain (loss) 2.22 4.53 (0.04) 2.60 2.20 4.84 Total from investment activities 2.26 4.65 - 2.60 2.22 4.91 Distributions Net invest- ment income - (0.12) (0.03) - (0.07) (0.09) Net realized gain - (2.01) (1.56) (1.58) (4.64) (0.68) Total dis- tributions - (2.13) (1.59) (1.58) (4.71) (0.77) NET ASSET VALUE End of period $ 18.58 $ 16.32 $ 13.80 $ 15.39 $ 14.37 $ 16.86 Ratios/Supplemental Data Total return 13.85% 33.85% 0.08% 18.40% 13.91% 38.60% Ratio of expenses to average net assets 1.08%! 1.11% 1.11% 1.20% 1.32% 1.34% Ratio of net investment income to average net assets 0.53%! 0.74% 0.24% (0.01)% 0.03% 0.48% Portfolio turnover rate 35.3%! 57.8% 41.9% 40.8% 30.7% 31.2% Average commission rate paid $0.1613 - - - - - Net assets, end of period (in thousands) $343,313 $278,613 $ 196,726 $ 204,609 $ 186,838 $266,584 ! Annualized. The accompanying notes are an integral part of these financial statements. T.Rowe Price OTC Fund Unaudited June 30, 1996 Statement of Net Assets Shares/Par Value In thousands Common Stocks 90.5% FINANCIAL 15.4% Bank and Trust 5.2% Albank Financial 36,000 $ 952 Collective Bancorp 160,000 3,810 First Bell Bancorp 100,000 1,375 First Security 75,000 1,809 Frankfort First 112,000 1,337 Glacier Bancorp ! 193,600 4,162 Marshall & Ilsley 30,000 834 Mercantile Bancorporation 61,500 2,737 ValliCorp Holdings 52,500 886 _____________________________________________________________________________ 17,902 Insurance 9.9% Foremost 35,000 1,986 Harleysville Group 225,000 6,525 Home Beneficial (Class B) 125,000 3,219 PartnerRe Holdings ADR 120,000 3,593 Poe & Brown 125,000 3,070 Selective Insurance 250,000 8,187 United Insurance * 160,000 3,630 W. R. Berkley 85,000 3,581 _____________________________________________________________________________ 33,791 Financial Services 0.3% Imperial Thrift * 70,000 1,024 _____________________________________________________________________________ 1,024 _____________________________________________________________________________ Total Financial 52,717 UTILITIES 0.4% Electric Utilities 0.4% Public Service of New Mexico 75,000 1,538 _____________________________________________________________________________ Total Utilities 1,538 CONSUMER NONDURABLES 16.8% Food Processing 1.3% Lone Star Steakhouse & Saloon * 20,000 $ 754 Makepeace 164 1,452 Seneca Foods (Class A) * 65,200 1,100 Seneca Foods (Class B) * 65,200 1,092 _____________________________________________________________________________ 4,398 Hospital Supplies/Hospital Management 4.2% Allied Healthcare Products 137,500 1,220 OccuSystems * 80,000 2,975 Patterson Dental * 40,000 1,440 Quorum Health Group * 110,000 2,901 Renal Care Group * 100,000 3,219 St. Jude Medical * 52,500 1,752 Tecnol Medical Products * 41,000 782 _____________________________________________________________________________ 14,289 Pharmaceuticals 1.2% Biogen * 40,000 2,187 Perrigo * 175,000 1,980 _____________________________________________________________________________ 4,167 Biotechnology 0.3% Cell Genesys * 150,000 1,125 _____________________________________________________________________________ 1,125 Health Care Services 4.0% Apria Healthcare * 50,000 1,569 EmCare Holdings * 60,000 1,770 Inphynet Medical Management * 135,000 2,565 NeoPath * 50,000 1,256 Northfield Laboratories * 100,000 1,456 Orthodontic Centers of America * 80,000 2,100 Raytel Medical * 225,000 2,953 _____________________________________________________________________________ 13,669 Miscellaneous Consumer Products 5.8% Boston Acoustics 120,000 2,700 Crown City Plating *! 34,500 349 Culp 250,000 3,438 DiMon 55,000 1,018 Richfood Holdings 296,800 $ 9,627 TSC * 65,000 1,503 WestPoint Stevens * 57,300 1,375 _____________________________________________________________________________ 20,010 _____________________________________________________________________________ Total Consumer Nondurables 57,658 CONSUMER SERVICES 14.0% General Merchandisers 1.1% Carson Pirie Scott * 75,000 2,006 Caseys General Stores 90,000 1,778 _____________________________________________________________________________ 3,784 Specialty Merchandisers 2.7% CSS Industries * 88,000 2,068 Egghead * 50,000 550 GT Bicycles * 175,000 2,865 Norton McNaughton * 20,000 140 Pacific Sunwear * 100,000 2,375 Performance Food Group * 53,000 1,358 _____________________________________________________________________________ 9,356 Entertainment and Leisure 1.8% FelCor Suites Hotels 115,000 3,508 Heartland Wireless * 100,000 2,400 Noble Roman's * 50,000 156 _____________________________________________________________________________ 6,064 Media and Communications 8.4% American Radio Systems (Class A) * 54,000 2,336 Cadmus Communications 125,000 1,914 Centennial Cellular (Class A) * 71,300 1,194 Chancellor * 50,000 1,572 Comnet Cellular * 72,398 2,186 Cowles Media 50,978 1,249 Jacor Communications * 55,000 1,708 Mobile Telecommunication Technologies * 15,000 218 Scholastic * 40,000 2,490 Shiva * 60,000 4,800 Sinclair Broadcast Group (Class A) * 110,000 4,744 Vanguard Cellular * 75,000 1,645 Wireless One * 150,000 $ 2,644 _____________________________________________________________________________ 28,700 _____________________________________________________________________________ Total Consumer Services 47,904 CONSUMER CYCLICALS 3.8% Automobiles and Related 1.5% Adrian Steel 7,756 1,260 Littelfuse * 45,000 1,699 TBC * 255,000 2,215 _____________________________________________________________________________ 5,174 Building and Real Estate 1.3% Prime Retail, REIT ! 150,000 1,715 Starwood Lodging, REIT 50,000 1,819 Storage Trust Realty, REIT 50,000 1,025 _____________________________________________________________________________ 4,559 Miscellaneous Consumer Durables 1.0% Craftmatic Contour, warrants, 12/31/02 * 20,970 0 Ellett Brothers 200,000 1,237 Juno Lighting 55,000 932 Vallen * 20,000 358 York Group 38,100 648 _____________________________________________________________________________ 3,175 _____________________________________________________________________________ Total Consumer Cyclicals 12,908 TECHNOLOGY 6.9% Electronic Components 2.4% American Superconductor * 25,000 353 Analogic 200,000 5,325 Linear Technology 35,000 1,048 Maxim Integrated Products * 60,000 1,639 _____________________________________________________________________________ 8,365 Electronic Systems 1.1% ITI Technologies * 70,000 2,306 Lifeline Systems * 100,000 1,325 _____________________________________________________________________________ 3,631 Information Processing 0.1% DH Technology * 20,000 465 _____________________________________________________________________________ 465 Telecommunications Equipment 2.3% Cellular Communications of Puerto Rico * 55,000 $ 1,784 Inter-Tel * 20,000 525 PanAmSat * 60,000 1,733 SITEL * 85,000 3,549 TriQuint Semiconductor * 15,000 309 _____________________________________________________________________________ 7,900 Aerospace and Defense 1.0% Woodward Governor 37,900 3,458 _____________________________________________________________________________ 3,458 _____________________________________________________________________________ Total Technology 23,819 CAPITAL EQUIPMENT 3.9% Electrical Equipment 1.5% Advanced Lighting * 135,000 2,329 Holophane * 190,000 2,992 _____________________________________________________________________________ 5,321 Machinery 2.4% AMTROL 161,000 3,522 Greenfield Industries 17,800 592 Laser Alignment 16,450 236 Sudbury * 276,000 2,484 Toolex Alpha * 55,000 1,341 _____________________________________________________________________________ 8,175 _____________________________________________________________________________ Total Capital Equipment 13,496 BUSINESS SERVICES AND TRANSPORTATION 17.9% Computer Service and Software 4.5% Adobe Systems 30,000 1,071 Analysts International 125,000 5,172 Electronic Arts * 50,000 1,331 Expert Software * 45,000 351 PLATINUM technology * 50,000 753 Premenos Technology * 30,000 540 Secure Computing * 35,000 779 SunGard Data Systems * 30,000 1,202 Synopsys * 50,000 $ 1,994 Verity * 46,100 1,308 Visio * 30,000 1,087 _____________________________________________________________________________ 15,588 Distribution Services 1.9% JP Foodservice * 200,000 4,925 Primesource 225,000 1,603 _____________________________________________________________________________ 6,528 Environmental 1.1% Continental Waste Industries * 100,000 2,237 EMCON * 90,000 366 TRC * 200,000 1,175 _____________________________________________________________________________ 3,778 Transportation Services 2.1% Expeditors International of Washington 60,000 1,845 Heartland Express * 53,885 1,462 International Shipholding 101,562 1,790 M.S. Carriers * 70,000 1,452 Midwest Express Holdings * 20,000 643 _____________________________________________________________________________ 7,192 Miscellaneous Business Services 8.1% Copart * 135,000 2,227 COREStaff * 35,000 1,558 Electro Rent * 180,000 4,365 Insituform Technologies (Class A) * 414,200 3,236 International Imaging Materials * 60,000 1,410 Leasing Solutions * 160,000 2,480 McGrath RentCorp 120,000 2,685 Nobel Education Dynamics 140,000 1,978 Shorewood Packaging * 186,000 2,848 Unitog 150,000 4,162 Walsh International * 80,000 735 _____________________________________________________________________________ 27,684 Railroads 0.2% North Carolina Railroad * 27,400 668 _____________________________________________________________________________ 668 _____________________________________________________________________________ Total Business Services and Transportation 61,438 ENERGY 4.2% Energy Services 2.7% Atwood Oceanics * 7,500 $ 333 Carbo Ceramics * 45,000 1,007 Cooper Cameron * 50,000 2,188 Geophysique (FRF) * 5,500 327 Maverick Tube * 40,000 478 Oceaneering International * 134,500 2,034 Petroleum Helicopters 61,500 984 Petroleum Helicopters (non-voting) 33,500 517 Smith International * 50,000 1,506 _____________________________________________________________________________ 9,374 Exploration and Production 1.5% Rutherford-Moran Oil * 86,000 2,096 Weatherford Enterra * 100,000 3,000 _____________________________________________________________________________ 5,096 _____________________________________________________________________________ Total Energy 14,470 PROCESS INDUSTRIES 3.2% Specialty Chemicals 2.6% A. Schulman 55,000 1,341 Furon 27,300 676 Hauser Chemical Research * 360,000 2,475 Petrolite 100,000 3,175 Sybron Chemical * 100,000 1,412 _____________________________________________________________________________ 9,079 Paper and Paper Products 0.6% Jefferson Smurfit * 175,000 1,925 _____________________________________________________________________________ 1,925 _____________________________________________________________________________ Total Process Industries 11,004 BASIC MATERIALS 2.8% Metals 1.8% Free State Consolidated Gold Mines ADR 100,000 931 Gibraltar Steel * 110,000 2,200 Matthews International 103,800 2,816 _____________________________________________________________________________ 5,947 Mining 1.0% Coal Creek ! 9,295 $ 1,013 Golden Shamrock Mines (AUD) * 200,000 179 Pittston Minerals 50,000 656 Rochester & Pittsburgh 15,728 504 TVX Gold * 164,000 1,189 _____________________________________________________________________________ 3,541 _____________________________________________________________________________ Total Basic Materials 9,488 Miscellaneous Common Stocks 1.2% 4,337 _____________________________________________________________________________ Total Common Stocks (Cost $223,080) 310,777 _____________________________________________________________________________ Preferred Stocks 0.2% Prime Retail, REIT, Cum., 10.50%, Series A ! 30,000 728 _____________________________________________________________________________ Total Preferred Stocks (Cost $570) 728 Convertible Preferred Stocks 0.5% ICO, $25.00 51,000 1,122 Prime Retail, REIT, 8.50%, Series B ! 25,000 462 _____________________________________________________________________________ Total Convertible Preferred Stocks (Cost $1,504) 1,584 Convertible Bonds 0.3% Arch Communications (144a), 6.75%, 12/1/03 $1,000,000 1,207 _____________________________________________________________________________ Total Convertible Bonds (Cost $1,150) 1,207 Short-Term Investments 8.2% Commercial Paper 7.6% American Home Products 4(2), 5.35%, 7/30/96 2,000,000 1,991 Bex America Finance, 5.32%, 7/9/96 3,000,000 2,997 BHF Finance (Delaware), 5.35%, 7/10/96 4,000,000 3,995 BNP Canada, 5.40%, 7/25/96 2,000,000 1,993 Ciba-Geigy, 5.35%, 7/8/96 3,000,000 2,997 International Lease Finance, 5.33%, 7/24/96 2,000,000 1,993 Investments in Commercial Paper through a joint account 5.49-5.68%, 7/1/96 1,299,277 1,299 Southern 4(2), 5.40%, 7/1/96 $3,000,000 $ 3,000 Tasmanian Public Finance, 5.10%, 7/15/96 2,000,000 1,996 Western Australian Treasury, 5.38%, 8/1/96 3,845,000 3,827 _____________________________________________________________________________ 26,088 Medium-Term Notes 0.6% Morgan Stanley Group, VR, 5.613%, 1/31/97 2,000,000 2,000 _____________________________________________________________________________ 2,000 _____________________________________________________________________________ Total Short-Term Investments (Cost $28,088) 28,088 _____________________________________________________________________________ Total Investments in Securities 99.7% of Net Assets (Cost $254,392) $ 342,384 Other Assets Less Liabilities 929 _____________________________________________________________________________ NET ASSETS $ 343,313 _____________________________________________________________________________ Net Assets Consist of: Accumulated net investment income - net of distributions $ 839 Accumulated net realized gain/loss - net of distributions 26,933 Net unrealized gain (loss) 87,992 Paid-in-capital applicable to 18,474,103 shares of $0.50 par value capital stock outstanding; 200,000,000 shares authorized 227,549 _____________________________________________________________________________ NET ASSETS $ 343,313 _____________________________________________________________________________ NET ASSET VALUE PER SHARE $ 18.58 _____________________________________________________________________________ ! Affiliated company * Non-income producing REIT Real Estate Investment Trust VR Variable rate 4(2) Commercial paper sold within terms of a private placement memorandum, exempt from registration under section 4.2 of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." 144a Security was purchased pursuant to Rule 144a under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers - total of such securities at period-end amounts to 0.35% of net assets. AUD Australian dollar FRF French franc The accompanying notes are an integral part of these financial statements. T. Rowe Price OTC Fund Unaudited Statement of Operations In thousands 6 Months Ended 6/30/96 Investment Income Income Dividend $ 1,625 Interest 783 _____________________________________________________________________________ Total income 2,408 _____________________________________________________________________________ Expenses Investment management 1,172 Shareholder servicing 310 Custody and accounting 72 Prospectus and shareholder reports 22 Registration 21 Legal and audit 9 Directors 6 Miscellaneous 7 _____________________________________________________________________________ Total expenses 1,619 _____________________________________________________________________________ Net investment income 789 _____________________________________________________________________________ Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities 21,116 Change in net unrealized gain or loss on securities 16,773 _____________________________________________________________________________ Net realized and unrealized gain (loss) 37,889 _____________________________________________________________________________ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 38,678 _____________________________________________________________________________ The accompanying notes are an integral part of these financial statements. T. Rowe Price OTC Fund Unaudited Statement of Changes in Net Assets In thousands 6 Months Year Ended Ended 6/30/96 12/31/95 Increase (Decrease) in Net Assets Operations Net investment income $ 789 $ 1,774 Net realized gain (loss) 21,116 30,377 Change in net unrealized gain or loss 16,773 37,772 _____________________________________________________________________________ Increase (decrease) in net assets from operations 38,678 69,923 _____________________________________________________________________________ Distributions to shareholders Net investment income - (1,809) Net realized gain - (30,304) _____________________________________________________________________________ Decrease in net assets from distributions - (32,113) _____________________________________________________________________________ Capital share transactions* Shares sold 60,179 69,748 Distributions reinvested - 30,002 Shares redeemed (34,157) (55,673) _____________________________________________________________________________ Increase (decrease) in net assets from capital share transactions 26,022 44,077 _____________________________________________________________________________ Net Assets Increase (decrease) during period 64,700 81,887 Beginning of period 278,613 196,726 _____________________________________________________________________________ End of period $ 343,313 $ 278,613 _____________________________________________________________________________ *Share information Shares sold 3,369 4,412 Distributions reinvested - 1,857 Shares redeemed (1,970) (3,448) _____________________________________________________________________________ Increase (decrease) in shares outstanding 1,399 2,821 The accompanying notes are an integral part of these financial statements. T. Rowe Price OTC Fund Unaudited June 30, 1996 Notes to Financial Statements Note 1 - Significant Accounting Policies T. Rowe Price OTC 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. Valuation Equity securities listed or regularly traded on a securities exchange are valued at the last quoted sales price at the time 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 that are not traded on a particular day and securities that are 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. Short-term debt securities are valued at their cost which, when combined with accrued interest, approximates fair value. For purposes of determining the fund's net asset value per share, the U.S. dollar value of all assets and liabilities initially expressed in foreign currencies is determined by using the mean of the bid and offer prices of such currencies against U.S. dollars quoted by a major bank. Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Directors. Affiliated Companies Investments in companies 5% or more of whose outstanding voting securities are held by the fund are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940. 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. 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. Note 2 - Investment Transactions Commercial Paper Joint Account The fund, and other affiliated funds, may transfer uninvested cash into a commercial paper joint account, the daily aggregate balance of which is invested in high-grade commercial paper. All securities purchased by the joint account satisfy the fund's criteria as to quality, yield, and liquidity. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $71,639,000 and $48,865,000, respectively, for the six months ended June 30, 1996. 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, 1996, the aggregate cost of investments for federal income tax and financial reporting purposes was $254,392,000, and net unrealized gain aggregated $87,992,000, of which $97,790,000 related to appreciated investments and $9,798,000 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 $218,000 was payable at June 30, 1996. 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 0.305% for assets in excess of $50 billion. At June 30, 1996, and for the six months then ended, the effective annual group fee rate was 0.33% and 0.34%, respectively. 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 $293,000 for the six months ended June 30, 1996, of which $56,000 was payable at period-end. T. Rowe Price Shareholder Services To help shareholders monitor their current investments and make decisions that accurately reflect their financial goals, T. Rowe Price offers a wide variety of information and services - at no extra cost. Knowledgeable Service Representatives By Phone Shareholder service representatives are available Monday through Friday from 8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET. Call 1-800-225-5132 to speak directly with a representative who will be able to assist you with your accounts. In Person Visit one of our Investor Center locations to meet with a representative who will be able to assist you with your accounts. You can also drop off applications or obtain prospectuses and other literature. Automated 24-Hour Services Tele*Access(registered trademark) Call 1-800-638-2587 to obtain information such as account balance, date and amount of your last transaction, latest dividend payment, and fund prices and yields. Additionally, you can request prospectuses, statements, new account and tax forms; reorder checks; and initiate purchase, redemption, and exchange orders for identically registered accounts. T. Rowe Price OnLine Through a personal computer via dial-up modem, you can replicate all the services available on Tele*Access. Account Services Checking Write checks for $500 or more on any money market and most bond fund accounts (except the High Yield and Emerging Markets Bond Funds). Automatic Investing Build your account over time by investing directly from your bank account or paycheck with Automatic Asset Builder. Additionally, Automatic Exchange enables you to move investments systematically from one fund account to another, such as from a money fund to a stock fund. A low $50 minimum makes it easy to get started. Automatic Withdrawal If you need money from your fund account on a regular basis, you can establish scheduled, automatic redemptions. Dividend and Capital Gains Payment Options Reinvest all or some of your distributions, or take them in cash. We give you maximum flexibility and convenience. Discount Brokerage* Investments Available You can trade stocks, bonds, options, precious metals, and other securities at a savings over regular commission rates. To Open an Account Call a shareholder service representative at 1-800-225-5132. Investment Information Combined Statement A comprehensive overview of your T. Rowe Price accounts is provided. The summary page gives you earnings by tax category, provides total portfolio value, and lists your investments by type - stock, bond, and money market. Detail pages itemize account transactions by fund. Shareholder Reports Portfolio managers review the performance of the funds in plain language and discuss T. Rowe Price's economic outlook. The T. Rowe Price Report This is a quarterly newsletter with relevant articles on market trends, personal financial planning, and T. Rowe Price's economic perspective. Performance Update This quarterly report reviews recent market developments and provides comprehensive performance information for each T. Rowe Price fund. Insights This library of information includes reports on mutual fund tax issues, investment strategies, and financial markets. Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet, College Planning Kit, Personal Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit (also available on disk for PC use) help you determine and reach your investment goals. *T. Rowe Price Discount Brokerage is a division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC. T. Rowe Price Mutual Funds Stock Funds Domestic Balanced Blue Chip Growth Capital Appreciation Capital Opportunity Dividend Growth Equity Income Equity Index Growth & Income Growth Stock Health Sciences Mid-Cap Growth Mid-Cap Value New America Growth New Era New Horizons* OTC Science & Technology Small-Cap Value* Spectrum Growth Value International/Global Emerging Markets Stock European Stock Global Stock International Discovery International Stock Japan Latin America New Asia Bond Funds Domestic Taxable Corporate Income GNMA High Yield New Income Short-Term Bond Short-Term U.S. Government Spectrum Income Summit GNMA Summit Limited-Term Bond U.S. Treasury Intermediate U.S. Treasury Long-Term Domestic Tax-Free California Tax-Free Bond Florida Insured Intermediate Tax-Free Georgia Tax-Free Bond Maryland Short-Term Tax-Free Bond Maryland Tax-Free Bond New Jersey Tax-Free Bond New York Tax-Free Bond Summit Municipal Income Summit Municipal Intermediate Tax-Free High Yield Tax-Free Income Tax-Free Insured Intermediate Bond Tax-Free Short-Intermediate Virginia Short-Term Tax-Free Bond Virginia Tax-Free Bond International/Global Emerging Markets Bond Global Government Bond International Bond Short-Term Global Income Money Market Taxable Prime Reserve Summit Cash Reserves U.S. Treasury Money Tax-Free California Tax-Free Money New York Tax-Free Money Summit Municipal Money Market Tax-Exempt Money Blended Asset Personal Strategy Balanced Personal Strategy Growth Personal Strategy Income T. Rowe Price No-Load Variable Annuity Equity Income Portfolio International Stock Portfolio Limited-Term Bond Portfolio New America Growth Portfolio Personal Strategy Balanced Portfolio *Closed to new investors. For yield, price, last transaction, and current balance, 24 hours, 7 days a week, call: 1-800-638-2587 toll free For assistance with your existing fund account, call: Shareholder Service Center 1-800-225-5132 toll free 625-6500 Baltimore area T. Rowe Price 100 East Pratt Street Baltimore, Maryland 21202 This report is authorized for distribution only to shareholders and to others who have received a copy of the prospectus of the T. Rowe Price OTC Fund. Invest With Confidence(registered trademark) T. Rowe Price T. Rowe Price Investment Services, Inc., Distributor RPRTOTC 6/30/96 Chart 1 - Sector Diversification - Pie chart of sector diversification as of 6/30/96. Chart 2 - OTC Fund - A line chart showing the cumulative growth of $10,000 invested in the OTC Fund over the past 10 years compared with $10,000 invested in a broad-based index or average over the same period. -----END PRIVACY-ENHANCED MESSAGE-----