-----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, TlopEyhQcDSm87NcOPsAlB3DPB2Ku03iQOGj8waka+8LW6B9+MvD3UT1WpKQGlgf nusYOJoHu4k/86IDF+nTcw== 0000075170-99-000001.txt : 19990209 0000075170-99-000001.hdr.sgml : 19990209 ACCESSION NUMBER: 0000075170-99-000001 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990208 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: 99524008 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, 1998 T. Rowe Price Report Highlights - -------------------------------------------------------------------------------- Small-Cap Stock Fund o Despite significant volatility, large-cap stocks finished with a record fourth straight year of outstanding gains, while small-caps underperformed again. o Fund returns were comparable to the Russell 2000 Index but modestly behind the growth-oriented Lipper Small Cap Fund Index. o New purchases included technology stocks Saville Systems, a telecommunications software firm, and PSINet, one of the only reasonably valued Internet plays. o Small-cap stocks are cheap on both an absolute basis and, especially, relative to large-cap stocks, which remain expensive by traditional measures. We believe investors will eventually return to fundamentals and value. Fellow Shareholders Wow! For investors, 1998 was one of the most volatile and fascinating years in recent memory. In a year defined by the rolling international financial crisis-depression in parts of Asia, default in Russia, disappointing corporate earnings, and aggressive Federal Reserve intervention-few would have expected another 20%-plus performance from the S&P 500 Stock Index. Performance Comparison - -------------------------------------------------------------------------------- Periods Ended 12/31/98 6 Months 12 Months - -------------------------------------------------------------------------------- Small-Cap Stock Fund -7.66% -3.46% Russell 2000 Index -7.12 -2.55 Lipper Small Cap Fund Index -6.86 -0.85 S&P 500 9.22 28.57 Early in the year, few would have surmised that small-caps, with more attractive valuations and stronger earnings growth, would lag large-caps in such dramatic fashion. Your fund's performance fully reflects this dichotomy, virtually unprecedented in magnitude, which is further illustrated in the Comparative Index Returns table on page 3. Our loss of 7.66% for the six months ended December 31, 1998, resulted in an overall loss of 3.46% for the year. Last fall, when pessimism reigned supreme and stock prices (and portfolio managers) suffered greatly, almost no one foresaw the huge rally from the market's October 8 lows. The S&P's performance in a year featuring the worst corporate profit results since 1991 is startling. Remember the high-profile earnings shortfalls from blue chip favorites 3M, Coke, and Gillette? Still, most investors (outside of the Internet crowd) preferred liquidity and perceived safety and restricted their buying to the biggest of the big-caps. The market's double-digit return, as measured by the major indices, was driven by a handful of mega-cap stocks. Indeed, 53% of the S&P's return can be traced to the 15 largest stocks in the index. The Nasdaq's stellar return can also be largely attributed to large-cap technology stocks, i.e., those in the Nasdaq 100 Index such as Intel and Microsoft. In fact, the median Nasdaq stock declined 20% in 1998! While the S&P 500 rose 28.57%, the index would have risen a mere 13% if it were unweighted instead of capitalization-weighted. The 2.55% decline of the unmanaged Russell 2000 Index reflects the fact that decliners outnumbered advancers 2,364 to 1,261 in the over-the-counter market. The index's modest decline for the year masks the vicious small-cap bear market of the spring and summer. Here again the numbers tell the story, as shown in the peak-to-trough table below. The nearly 40% decline in small-caps was their worst since the early '70s bear market. Clearly, small-caps had a full-fledged bear market in 1998 and then recovered partially in the year's closing months. As is typical, we held up better than the Russell 2000 during the decline and lagged somewhat during the recovery, leaving us marginally behind the index for the year. Preparing For The Year 2000 - -------------------------------------------------------------------------------- The Year 2000 draws closer every day, and it holds special meaning beyond the arrival of a new millennium. The issue for investors is that many computer programs throughout the world use two digits instead of four to identify the year and may assume the next century starts with 1900. If these programs are not modified, they will not be able to correctly handle the century change when the year changes from "99" to "00" on January 1, 2000, and they will no longer be able to perform necessary functions. The Year 2000 issue affects all companies and organizations. T. Rowe Price has been taking steps to assure that its computer systems and processes are capable of functioning in the Year 2000. Detailed plans for remediation efforts have been developed and are currently being executed. OUR PLAN OF ACTION We began to address these issues several years ago by requiring that all new systems process and store four-digit years. All critical systems have been reprogrammed (including business applications required to service our customers and processing infrastructure necessary to ensure the integrity of customer data and investments), and they are currently being tested. Because we exchange data electronically with customers and vendors, we are working with them to assess the adequacy of their own compliance efforts. Our goal is to ensure the continuation of the same level of service to all our mutual fund shareholders and clients after December 31, 1999. We are asking all vendors and companies we do business with for a Year 2000 compliance status, with the expectation that some organizations will not be able to modify their interface files prior to December 31, 1999. In addition, we are scheduling tests for critical vendors and companies that claim Year 2000 compliance to ensure that time-related data and calculations function properly as we move into the next century. SMOOTH TRANSITION PLANNED We believe our programs and initiatives will provide a smooth transition into the next millennium. We are assessing all systems providing products or services to our retail mutual fund shareholders, retirement plan sponsors, and participants, and we have modified them where necessary for the Year 2000. The Securities Industry Association (SIA) is coordinating Year 2000 testing to assure that securities markets, clearing corporations, depositories, and third party service providers can send, receive, and process files and transactions accurately. In late July 1998, the SIA completed a beta test of Year 2000 readiness. The test was considered successful in terms of transactions completed and will serve as the basis for the SIA's industry-wide approach. During October 1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA and is ready for the industry-wide test that is scheduled for March and April 1999. For a more detailed discussion of our Year 2000 effort, as well as continuing updates on our progress, please check our Web site (www.troweprice.com). Comparative Index Returns - -------------------------------------------------------------------------------- Periods Ended 12/31/98 6 Months 12 Months - -------------------------------------------------------------------------------- S&P 500 9.22% 28.57% Nasdaq Composite 15.72 39.63 Nasdaq 100 35.54 82.68 Russell 2000 -7.12 -2.55 Peak to Trough and Back Again - -------------------------------------------------------------------------------- 1998 Peak-to-Trough Trough-to-12/31/98 - -------------------------------------------------------------------------------- Small-Cap Stock Fund -33.20% 29.90% Russell 2000 Index -36.46 36.27 S&P 500 -19.19 9.05 The late-year rally was very much concentrated in the growth sector of the small-cap market. Small-cap value, typically the least volatile sector, was the hardest hit in 1998, as shown in the Small-Cap Performance Comparison table on page 4. Therefore, our portfolio's small-cap value core, usually its anchor to windward in a stormy market, pulled down our returns in 1998. Given our blend of growth and value, our returns were in between each segment's returns and marginally behind the Russell 2000 index. YEAR-END DISTRIBUTIONS Your fund's Board of Directors declared a year-end dividend of $0.10 per share, a short-term capital gain distribution of $0.07 per share, and a long-term capital gain distribution of $0.43 per share. These distributions were paid on December 17 to shareholders of record on December 15. You should already have received a check or statement reflecting the distributions as well as our Form 1099-DIV reporting them for 1998 tax purposes. INVESTMENT REVIEW Our top performers in the past six months were Aliant Communications, U.S. Foodservice, and Shorewood Packaging. Aliant Communications rose 49% on the strength of a mid-December takeover bid from ALLTEL. As Aliant was our top holding in the fourth quarter, its gains added a whopping $9.7 million to the fund's return in the second half. U.S. Foodservice, again one of our top holdings entering the fourth quarter, rose 40% as investors recognized the company's impeccable execution of its large merger with Rykoff Sexton. Indeed, U.S. Foodservice shares ignored the midyear bear market, and the overall position added almost $8 million to the portfolio's value. Shorewood Packaging soared 29% during the second half of the year on news of a favorable acquisition and an excellent earnings report. Revenue growth in all segments, great cash flow, an excellent contribution from the recently acquired Queens Group, and cheap valuation proved the right combination to ignite investor interest. Shorewood added almost $5 million to the fund in the half. Small-Cap Performance Comparison - -------------------------------------------------------------------------------- Periods Ended 12/31/98 6 Months 12 Months - -------------------------------------------------------------------------------- Russell 2000 -7.12% -2.55% Russell 2000 Growth -4.01 1.23 Russell 2000 Value -10.43 -6.45 Two of our top three losers illustrate the market's reaction to poor earnings reports. Sola International and Renaissance Worldwide posted poor quarterly results and cost the portfolio between $5.5 and $6 million in value. Sola, a U.S.-based worldwide manufacturer and marketer of eyeglass lenses, suffered from soft sales in North America and in emerging markets. The stock declined from the low 30s to the upper teens, costing the fund about $6 million. We purchased staffing solutions firm Renaissance Worldwide late last spring when the shares fell due to the firm's inability to smoothly integrate several recent acquisitions. We attempted to catch the falling spear, but unfortunately it went right through our hand. While the firm's underlying business remained strong, we underestimated the challenge of bringing three separate but related businesses together. The idea of integrating information technology staffing, consulting, and solutions implementation sounded powerful. Yet Renaissance has fallen far short of delivering on its promises. The stock cost us about $5.5 million in the quarter. Our final big loser, A.O. Smith, declined from the mid-30s to the mid-20s on no fundamental news. The firm has proceeded to use its cash hoard and strong balance sheet to acquire attractive electric equipment businesses. A.O. Smith purchased GE's compressor business last year in a deal that likely added a few cents to its earnings per share. While a slowing economy and weaker energy prices may cause a modest 5% to 7% reduction in the company's 1999 earnings estimates, the firm is executing well and it's a mystery why this very cheap stock got cheaper. A.O. Smith is priced at about 12 times next year's earnings and remains at a material discount to other electric equipment firms on a price/cash flow basis. The 30% decline cost the fund $6.2 million during the second half. SECTOR DIVERSIFICATION - -------------------------------------------------------------------------------- (pie chart) Capital Equipment Business Services Process Industries, Consumer Services and Transportation Basic Materials Technology and Cyclicals 28 7 7 18 Energy, Utilities, Consumer Financial Miscellaneous Nondurables Reserves 10 5 16 9 Based on net assets as of 12/31/98. PORTFOLIO HIGHLIGHTS Our largest purchase in the past six months was Saville Systems, which should benefit from the continued rapid growth of billing software and information technology services to the global telecommunications industry. This growth is being spurred by deregulation and privatization, which are pushing carriers to compete more effectively through new services and advanced pricing plans. Saville offers its customers an industry-leading product that allows multiple services to appear on one consolidated bill and offers investors robust growth opportunities, high profit margins, and an excellent balance sheet-all at a cheap valuation. In fact, during last fall's panic sell-off, we purchased some shares as low as $8, or at just seven times earnings. By year-end, the stock had rebounded to $19, still only 15 times earnings, or half Saville's 30% growth rate. Another major purchase in the second half was Central Louisiana Electric, which we picked up as a defensive holding during the correction. CNL is well positioned competitively and sports a 5% dividend yield. We put about $7 million into the stock before the market's cascade turned up better values-like Saville. The final new idea we'd like to highlight is PSINet, our sole recent foray into the white-hot Internet space. PSINet is a turnkey Internet and intranet access provider for businesses worldwide. This Northern Virginia company appears to be one of the great values among Internet stocks. PSINet owns its own fiber network and sells space to consumer providers like Earthlink and Mindspring, which trade at 11 times and 16 times revenues, respectively. Given its position as the world's largest independent provider of Internet access, we found the shares a great bargain at a mere two times cash balances and a paltry-by Internet standards-four times revenues. Our largest sale during the past six months was U.S. Foodservice, which we highlighted earlier. We had owned the company since its IPO and hated to sell it. Unfortunately, U.S. Foodservice is no longer a small-cap, nor is it as good a value as it was; it sells at a 25% premium to its growth rate versus a 12% discount at the beginning of the year. Therefore, we have begun to reduce our holdings. We also eliminated Concord Communications and VERITAS Software last fall. While both were terrific companies, we found the stocks pricey at 111 and 75 times earnings, respectively. Concord supplies network performance measurement software, and VERITAS offers enterprise storage management software. VERITAS faced a difficult product transition in the near future; fortunately, we sold our shares before their large decline last fall. OUTLOOK Last year marked the fifth straight year of small-cap underperformance versus the S&P 500. Given small-caps' strong earnings outlook and attractive valuations entering 1998, we remain surprised that the S&P 500 beat the Russell 2000 by over 30 percentage points. Small-cap valuations reached historic lows relative to large caps last October, and the sector remains a compelling value. The market is enthralled with large-caps and highly speculative Internet plays. Late in 1998 and so far in 1999, any company with ".com" in its name has surged to ridiculous levels, even if the company has no earnings, little or no revenue, and a highly questionable business model. We may have the makings of a modern day "tulip mania" as day-traders seem to be playing the greater fool game in cyberspace. Large-cap stocks--particularly the blue chips--remain at historically high valuations based on price/earnings and price/book value ratios. We often hear investors dismiss traditional valuation parameters and urge a focus solely on global franchise values. That's easy to say but difficult to quantify. Large-caps are expensive on both an absolute and a relative basis. Small-caps are inexpensive by both measures. Indeed, it is these extraordinarily low valuations that might sow the seeds of better performance in 1999. Since our last report, merger activity has been announced in eight of our holdings. This level of activity has picked up dramatically, as four holdings have received bids since December 1. We see this activity across all sectors. Small-caps are cheap: Large-cap corporate managers recognize this, and we could see a huge wave of consolidation in 1999. It is winter now, and as the old dictum goes, "straw hats" (read: small-caps) are on sale. Just as summer will inevitably return, so investors will once again focus on fundamentals and value. We remain confident that our strategy of buying good companies with strong management at reasonable prices will continue to add significant value for our shareholders. Thank you for your continued support. Respectfully submitted, Greg A. McCrickard President and Chairman of the Investment Advisory Committee January 19, 1999 T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Portfolio Highlights - -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 12/31/98 - -------------------------------------------------------------------------------- Aliant Communications 2.6% New England Business Service 1.9 A.O. Smith 1.8 Shorewood Packaging 1.8 Coach USA 1.5 - -------------------------------------------------------------------------------- Mentor 1.4 PartnerRe Holdings 1.4 Matthews International 1.3 U.S. Foodservice 1.3 Richfood Holdings 1.2 - -------------------------------------------------------------------------------- Parkway Properties 1.2 Tetra Tech 1.2 Analogic 1.1 Comfort Systems USA 1.0 Strayer Education 1.0 - -------------------------------------------------------------------------------- SteriGenics International 1.0 Downey Financial 1.0 CompX International 0.9 Holophane 0.9 Saville Systems 0.9 - -------------------------------------------------------------------------------- Citizens Banking 0.9 Casey's General Stores 0.9 EastGroup Properties 0.8 Glacier Bancorp 0.8 Summit Bancorp 0.8 - -------------------------------------------------------------------------------- Total 30.6% T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Portfolio Highlights - -------------------------------------------------------------------------------- MAJOR PORTFOLIO CHANGES Listed in descending order of size 6 Months Ended 12/31/98 Ten Largest Purchases Ten Largest Sales - -------------------------------------------------------------------------------- Saville Systems* U.S. Foodservice Cleco* Concord Communications** Coach USA Outback Steakhouse United Natural Foods* VERITAS Software** A.O. Smith Centennial Cellular** Richfood Holdings Ingles Markets** Applied Micro Circuits* York Group** Financial Federal* Excel Switching** Unifi* Pediatrix Medical Group Mentor Wesley Jessen VisionCare** * 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 a broad-based average or index. The index return does not reflect expenses, which have been deducted from the fund's return. SMALL-CAP STOCK FUND - -------------------------------------------------------------------------------- As of 12/31/98 Lipper Small Small-Cap Cap Fund Russell 2000 Stock Fund 12/88 10,000 10,000 10,000 12/89 12,106 11,626 11,913 12/90 10,438 9,362 9,474 12/91 15,504 13,672 13,132 12/92 17,238 16,189 14,958 12/93 20,155 19,246 17,710 12/94 20,058 18,895 17,725 12/95 26,400 24,271 23,724 12/96 30,193 28,274 28,71 12/97 34,727 34,597 36,993 12/98 34,430 33,716 35,715 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 12/31/98 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- Small-Cap Stock Fund -3.46% 14.61% 15.06% 13.58% 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 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 NET ASSET VALUE Beginning of period $ 22.20 $ 18.07 $ 16.32 $ 13.80 $ 15.39 Investment activities Net investment income 0.08 0.05 0.09 0.12 0.04 Net realized and unrealized gain (loss) (0.89) 5.13 3.33 4.53 (0.04) Total from investment activities (0.81) 5.18 3.42 4.65 0.00 Distributions Net investment income (0.10) (0.04) (0.09) (0.12) (0.03) Net realized gain (0.50) (1.01) (1.58) (2.01) (1.56) Total distributions (0.60) (1.05) (1.67) (2.13) (1.59) NET ASSET VALUE End of period $ 20.79 $ 22.20 $ 18.07 $ 16.32 $ 13.80 ---------------------------------------------------- Ratios/Supplemental Data Total return* (3.46)% 28.81% 21.05% 33.85% 0.08% Ratio of expenses to average net assets 1.01% 1.02% 1.07% 1.11% 1.11% Ratio of net investment income to average net assets 0.46% 0.33% 0.56% 0.74% 0.24% Portfolio turnover rate 25.9% 22.9% 31.1% 57.8% 41.9% Net assets, end of period (in millions) $ 1,153 $ 816 $ 416 $ 279 $ 197 * 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, 1998 Statement of Net Assets Shares/Par Value - -------------------------------------------------------------------------------- In thousands Common Stocks and Warrants 90.5% FINANCIAL 9.9% Bank and Trust 5.5% Charter One Financial 226,800 $ 6,287 Citizens Banking 300,000 10,088 Downey Financial 440,000 11,193 First Bell Bancorp 100,000 1,556 First Mariner Bancorp* 125,000 1,656 First Security 168,750 3,939 Frankfort First Bancorp 75,000 1,148 Glacier Bancorp! 429,000 9,519 Marshall & Ilsley 30,000 1,737 Mercantile Bancorporation 92,250 4,255 Summit Bancorp 214,800 9,384 WestAmerica 90,000 3,310 64,072 Insurance 3.7% Harleysville Group 325,000 8,338 PartnerRe Holdings 360,000 16,470 Poe & Brown 230,000 8,035 Selective Insurance 155,000 3,168 W. R. Berkley 185,000 6,244 42,255 Financial Services 0.7% Delta Financial* 300,000 1,781 Financial Federal* 200,000 4,950 ITLA Capital* 70,000 1,057 7,788 Total Financial 114,115 UTILITIES 4.0% Electric Utilities 0.6% Cleco 200,000 6,862 6,862 Telephone 3.4% Aliant Communications 725,000 29,567 Commnet Cellular* 119,550 1,472 Rural Cellular (Class A)* 331,700 $ 3,441 Western Wireless* 200,000 4,394 38,874 Total Utilities 45,736 CONSUMER NONDURABLES 16.0% Food Processing 1.6% American Italian Pasta* 102,200 2,696 Imperial Holly 619,900 5,037 Makepeace* 164 2,259 P F Chang's China Bistro* 20,900 469 Seneca Foods (Class A)* 91,700 1,123 Seneca Foods (Class B)* 74,700 952 United Natural Foods* 255,000 6,104 18,640 Hospital Supplies/Hospital Management 3.6% American Oncology Resources* 600,000 8,775 Mentor 704,900 16,499 Pediatrix Medical Group* 60,000 3,596 Quorum Health Group* 360,000 4,646 Renal Care Group* 281,250 8,157 41,673 Pharmaceuticals 2.4% Alkermes* 250,000 5,531 Aviron* 58,300 1,512 COR Therapeutics* 102,476 1,367 Coulter Pharmaceutical* 65,000 1,936 Gilead Sciences* 70,000 2,872 Millennium Pharmaceuticals* 260,938 6,736 Neurocrine Biosciences* 100,000 669 PathoGenesis* 30,000 1,723 PharmaPrint* 400,000 5,263 27,609 Biotechnology 0.3% Cell Genesys* 250,000 1,508 Zonagen* 100,000 1,893 3,401 Health Care Services 3.6% AmeriPath* 675,000 $ 6,086 Concentra Managed Care* 571,600 6,055 Inhale Therapeutic Systems* 185,000 6,099 Monarch Dental* 314,300 1,277 Northfield Laboratories* 220,000 2,764 Orthodontic Centers of America* 250,000 4,859 ProMedCo* 400,000 2,413 SteriGenics International*! 475,000 11,875 41,428 Miscellaneous Consumer Products 4.5% Coinmach Laundry* 200,300 2,591 Cone Mills* 574,400 3,231 CSS Industries* 88,200 2,674 Culp 100,000 788 Dan River* 600,000 7,050 Equity Corp. International* 295,000 7,836 Quicksilver* 80,000 2,400 Sola* 510,000 8,797 Unifi 325,000 6,358 US Can* 300,000 5,362 WestPoint Stevens* 150,000 4,730 51,817 Total Consumer Nondurables 184,568 CONSUMER SERVICES 7.8% Restaurants 1.3% Logan's Roadhouse* 300,000 7,022 Outback Steakhouse* 158,588 6,314 PJ America* 71,900 1,298 14,634 General Merchandisers 2.0% Bon-Ton Stores*! 740,700 5,648 Casey's General Stores 764,900 9,968 Columbia Sportswear* 287,700 4,837 Saks* 100,000 3,156 23,609 Specialty Merchandisers 1.8% CompuCom Systems* 850,000 $ 3,002 Goody's Family Clothing* 145,500 1,459 Performance Food Group* 262,500 7,334 St. John Knits 210,000 5,460 Urban Outfitters* 192,300 3,347 20,602 Entertainment and Leisure 0.1% Seattle Filmworks* 239,400 1,122 1,122 Media and Communications 2.6% American Tower Systems (Class A)* 60,000 1,774 Emmis Broadcasting (Class A)* 160,000 6,940 Jacor Communications* 30,000 1,940 Pegasus Communications* 89,400 2,238 Sinclair Broadcast Group (Class A)* 280,000 5,539 Vanguard Cellular (Class A)* 85,000 2,191 Young Broadcasting (Class A)* 220,000 9,192 29,814 Total Consumer Services 89,781 CONSUMER CYCLICALS 9.9% Automobiles and Related 3.0% A.O. Smith (Class B) 865,000 21,246 Adrian Steel! 13,000 6,175 Keystone Automotive* 140,000 2,949 Littelfuse* 225,000 4,275 34,645 Building and Real Estate 5.8% Apartment Investment & Management, REIT 149,400 5,556 Arden Realty, REIT 325,000 7,536 EastGroup Properties, REIT 530,000 9,772 First Washington Realty Trust, REIT 325,000 7,698 Glenborough Realty Trust, REIT 125,000 2,547 JP Realty, REIT 200,000 3,925 Parkway Properties, REIT 435,000 13,594 Starwood Hotels & Resorts, REIT 35,000 794 Tower Realty Trust, REIT 405,000 $ 8,151 Western Water* 40,000 203 Woodhead Industries! 600,000 7,612 67,388 Miscellaneous Consumer Durables 1.1% CompX* 410,000 10,814 Craftmatic Contour, Warrants, 12/31/02* 20,970 0 Harman International 50,000 1,906 12,720 Total Consumer Cyclicals 114,753 TECHNOLOGY 7.3% Electronic Components 4.4% American Superconductor* 50,000 513 Analogic 350,000 13,169 Burr Brown* 275,000 6,428 Exar* 100,000 1,612 Maxim Integrated Products* 120,000 5,239 Methode Electronics (Class A) 427,400 6,718 Optek Technology* 350,000 6,497 Planar Systems* 350,000 2,406 PMC-Sierra* 75,000 4,727 Trident International*! 370,000 3,411 50,720 Electronic Systems 2.0% Applied Micro Circuits* 235,000 7,990 Electromagnetic Sciences* 380,600 5,352 Lifeline Systems* 200,000 5,050 Lo-Jack* 375,000 4,477 22,869 Telecommunications 0.6% Avant* 250,000 3,984 Premisys Communications* 150,000 1,364 West TeleServices* 109,500 1,116 6,464 Aerospace and Defense 0.3% Woodward Governor 160,000 3,480 3,480 Total Technology 83,533 EDUCATION 0.6% Education 0.6% ITT Educational Service* 200,000 $ 6,800 Total Education 6,800 CAPITAL EQUIPMENT 2.6% Electrical Equipment 0.9% Holophane* 400,000 10,275 10,275 Capital Equipment 0.6% Omniquip International 450,000 6,778 6,778 Machinery 1.1% JLG Industries 490,000 7,656 Laser Alignment* 16,450 99 NN Ball & Roller 350,000 2,122 Toolex Alpha* 270,400 3,143 13,020 Total Capital Equipment 30,073 BUSINESS SERVICES AND TRANSPORTATION 27.9% Computer Service and Software 5.1% Analysts International 230,000 4,442 BISYS Group* 100,000 5,156 Concur Technologies* 52,800 1,596 Electronic Arts* 50,000 2,803 Great Plains Software* 140,000 6,764 HCIA* 330,000 1,423 Peerless Systems* 400,000 3,375 Phoenix Technologies* 150,000 1,298 PSINet* 150,000 3,150 Saville Systems ADR* 532,300 10,097 Summit Design* 300,000 2,766 SunGard Data Systems* 38,400 1,524 Synopsys* 30,000 1,626 Vantive* 75,000 602 Viasoft* 550,000 $ 3,884 Visio* 245,000 8,889 59,395 Distribution Services 4.5% MSC* 321,800 7,281 Primesource 189,000 1,240 Richfood Holdings 676,300 14,033 SED International Holdings* 350,000 1,531 SunSource 215,000 4,045 U.S. Foodservice* 298,800 14,641 Watsco (Class A) 523,250 8,765 51,536 Environmental 0.6% CUNO* 285,000 4,524 IT Group* 100,000 1,112 Waterlink* 467,000 1,693 7,329 Transportation Services 4.7% C.H. Robinson Worldwide 215,400 5,580 Coach USA* 495,000 17,170 Comfort Systems USA* 675,000 12,066 Eagle USA Air Freight* 355,000 8,698 Expeditors International of Washington 120,000 5,055 Frozen Food Express 150,000 1,181 Heartland Express* 80,827 1,399 Hub Group (Class A)* 26,900 528 International Shipholding 141,562 2,221 53,898 Miscellaneous Business Services 12.9% Alternative Resources* 300,000 3,234 Billing Information Concepts* 454,400 5,013 CORT Business Services* 258,300 6,264 Electro Rent* 480,000 7,710 Insituform Technologies (Class A)* 500,000 7,234 Iron Mountain* 159,950 5,738 Maximus* 25,000 925 McGrath RentCorp 300,000 6,525 Metamor Worldwide* 202,500 5,025 MPW Industrial Services Group* 119,900 $ 1,394 New England Business Service 557,000 21,793 Paging Network* 87,800 409 Paxar* 240,000 2,145 Renaissance Worldwide* 587,600 3,636 Romac International* 403,868 8,961 Shorewood Packaging* 1,000,000 20,500 Strayer Education 340,000 11,953 Superior Services* 97,000 1,946 Tetra Tech* 499,000 13,457 The Peterson Companies (Class A)* 177,400 6,009 The Vincam Group* 142,400 2,496 Unitog 210,000 6,051 148,418 Airlines 0.1% Midwest Express Holdings* 45,000 1,184 1,184 Total Business Services and Transportation 321,760 ENERGY 0.6% Energy Services 0.5% Carbo Ceramics 20,000 343 Cooper Cameron* 50,000 1,225 Smith International* 100,000 2,519 Weatherford International* 94,050 1,822 5,909 Exploration and Production 0.1% Rutherford-Moran Oil* 194,500 565 565 Total Energy 6,474 PROCESS INDUSTRIES 1.2% Specialty Chemicals 0.4% A. Schulman 110,000 2,485 Furon* 54,600 932 Hauser* 360,000 1,586 5,003 Paper and Paper Products 0.3% Jefferson Smurfit* 200,000 $ 3,156 3,156 Building and Construction 0.5% Layne Christensen* 360,000 2,700 Simpson Manufacturing* 84,500 3,164 5,864 Total Process Industries 14,023 BASIC MATERIALS 2.7% Metals 2.1% AngloGold ADR 81,130 1,587 Cambior 900,000 4,444 Gibraltar Steel* 110,000 2,502 Matthews International (Class A) 500,000 15,500 24,033 Mining 0.3% Coal Creek ! 9,295 967 Homestake Mining 185,000 1,700 TVX Gold* 650,000 1,178 3,845 Miscellaneous Materials 0.3% Synthetic Industries* 200,000 3,425 3,425 Total Basic Materials 31,303 Total Miscellaneous Common Stocks 0.0% 580 Total Common Stocks and Warrants (Cost $904,796) 1,043,499 Preferred Stocks 0.2% Prime Retail, Cum., 10.50%, (Series A) 30,000 759 Seneca Foods* 83,200 1,019 Total Preferred Stocks (Cost $1,568) 1,778 Convertible Preferred Stocks 0.0% Prime Retail, 8.50%, (Series B) 25,000 416 Total Convertible Preferred Stocks (Cost $471) 416 Convertible Bonds 0.3% Offshore Logistics, Sub. Notes, (144a) 6.00%, 12/15/03 $2,000,000 $ 1,736 Vantive, 4.75%, 9/1/02 3,000,000 2,072 Total Convertible Bonds (Cost $4,094) 3,808 Short-Term Investments 9.1% Money Market Funds 9.1% Reserve Investment Fund, 5.42%# 104,166,423 104,166 Total Short-Term Investments (Cost $104,166) 104,166 Total Investments in Securities 100.1% of Net Assets (Cost $1,015,097) $1,153,667 Other Assets Less Liabilities (1,073) NET ASSETS $1,152,594 ---------- Net Assets Consist of: Accumulated net investment income - a net of distributions $ (182) Accumulated net realized gain/loss - net of distributions 7,146 Net unrealized gain (loss) 138,570 Paid-in-capital applicable to 55,438,449 shares of $0.50 par value capital stock outstanding; 200,000,000 shares authorized 1,007,060 NET ASSETS $1,152,594 ---------- NET ASSET VALUE PER SHARE $ 20.79 ---------- # Seven-day yield ! Affiliated company * Non-income producing ADR American Depository Receipt REIT Real Estate Investment Trust 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 .15% of net assets. 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 12/31/98 Investment Income Income Dividend $ 8,638 Interest 6,230 Total income 14,868 Expenses Investment management 7,791 Shareholder servicing 1,881 Registration 243 Custody and accounting 146 Prospectus and shareholder reports 131 Legal and audit 14 Directors 9 Miscellaneous 12 Total expenses 10,227 Net investment income 4,641 Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities 26,975 Change in net unrealized gain or loss on securities (67,486) Net realized and unrealized gain (loss) (40,511) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $(35,870) -------- 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 12/31/98 12/31/97 Increase (Decrease) in Net Assets Operations Net investment income $ 4,641 $ 1,901 Net realized gain (loss) 26,975 32,376 Change in net unrealized gain or loss (67,486) 111,242 Increase (decrease) in net assets from operations (35,870) 145,519 Distributions to shareholders Net investment income (5,359) (1,388) Net realized gain (26,791) (35,062) Decrease in net assets from distributions (32,150) (36,450) Capital share transactions* Shares sold 789,814 491,109 Distributions reinvested 28,541 34,624 Shares redeemed (414,115) (234,032) Increase (decrease) in net assets from capital share transactions 404,240 291,701 Net Assets Increase (decrease) during period 336,220 400,770 Beginning of period 816,374 415,604 End of period $ 1,152,594 $ 816,374 --------------------------------- *Share information Shares sold 36,695 23,580 Distributions reinvested 1,472 1,598 Shares redeemed (19,500) (11,410) Increase (decrease) in shares outstanding 18,667 13,768 The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- December 31, 1998 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. NOTE 2 - INVESTMENT TRANSACTIONS Purchases and sales of portfolio securities, other than short-term securities, aggregated $589,277,000 and $234,485,000, respectively, for the year ended December 31, 1998. 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, 1998, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $1,015,097,000. Net unrealized gain aggregated $138,570,000 at period end, of which $255,257,000 related to appreciated investments and $116,687,000 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 $714,000 was payable at December 31, 1998. 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 0.30% for assets in excess of $80 billion. At December 31, 1998, 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 $1,571,000 for the year ended December 31, 1998, of which $160,000 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, 1998, totaled $6,020,000 and are reflected as interest income in the accompanying Statement of Operations. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- 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 net assets 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, 1998, 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 generally accepted accounting principles. 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 generally accepted auditing standards 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, 1998, by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Baltimore, Maryland January 21, 1999 T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Tax Information (Unaudited) for the Tax Year Ended 12/31/98 - -------------------------------------------------------------------------------- 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 $3,751,000 from short-term capital gains, o $23,040,000 from long-term capital gains, subject to the 20% rate gains category. For corporate shareholders, $4,426,000 of the fund's distributed income and short-term capital gains qualified for the dividends-received deduction. - -------------------------------------------------------------------------------- T. Rowe Price Shareholder Services - -------------------------------------------------------------------------------- Investment Services And Information KNOWLEDGEABLE SERVICE REPRESENTATIVES By Phone 1-800-225-5132 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. In Person Available in T. Rowe Price Investor Centers. ACCOUNT SERVICES Checking Available on most fixed income funds ($500 minimum). Automatic Investing From your bank account or paycheck. Automatic Withdrawal Scheduled, automatic redemptions. Distribution Options Reinvest all, some, or none of your distributions. Automated 24-Hour Services Including Tele*Access(registered trademark) and the T. Rowe Price Web site on the Internet. Address: www.troweprice.com BROKERAGE SERVICES* Individual Investments Stocks, bonds, options, precious metals, and other securities at a savings over full-service commission rates. INVESTMENT INFORMATION Combined Statement Overview of all your accounts with T. Rowe Price. Shareholder Reports Fund managers' reviews of their strategies and results. T. Rowe Price Report Quarterly investment newsletter discussing markets and financial strategies. Performance Update Quarterly review of all T. Rowe Price fund results. Insights Educational reports on investment strategies and financial markets. Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A Guide to International Investing, Personal Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit. * T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC. For yield, price, last transaction, current balance, or to conduct transactions, 24 hours, 7 days a week, call Tele*Access(registered trademark): 1-800-638-2587 toll free For assistance with your existing fund account, call: Shareholder Service Center 1-800-225-5132 toll free 410-625-6500 Baltimore area To open a brokerage account or obtain information, call: 1-800-638-5660 toll free Internet address: www.troweprice.com 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 of the T. Rowe Price Small-Cap Stock Fund. Investor Centers: 101 East Lombard St. Baltimore, MD 21202 T. Rowe Price Financial Center 10090 Red Run Blvd. Owings Mills, MD 21117 Farragut Square 900 17th Street, N.W. Washington, D.C. 20006 ARCO Tower 31st Floor 515 South Flower St. Los Angeles, CA 90071 4200 West Cypress St. 10th Floor Tampa, FL 33607 Invest With Confidence(registered trademark) T. Rowe Price T. Rowe Price Investment Services, Inc., Distributor. F65-050 12/31/98 -----END PRIVACY-ENHANCED MESSAGE-----