-----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, SudKkTRhXVHboUwett0EAmojeXxpcVESydhd/Y4YKdg/DvH/RaiPjI0bb9jfk44y Q4X7xOp9/sk+BUjyYNdS4A== 0000075170-99-000005.txt : 19990806 0000075170-99-000005.hdr.sgml : 19990806 ACCESSION NUMBER: 0000075170-99-000005 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990805 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: 99678169 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 Semiannual Report Small-Cap Stock Fund June 30, 1999 T. Rowe Price Report Highlights - -------------------------------------------------------------------------------- Small-Cap Stock Fund o Small-cap stocks roared past large-caps in the second quarter, but still lagged the S&P 500 for the six-month period. o Fund returns lagged the Russell 2000 Index and the growth-oriented Lipper Small Cap Fund Index due to our general avoidance of Internet stocks. o New purchases included bank holding company UST, metals-coating firm Material Sciences, and software company Progress Software. o Heavy merger-and-acquisition activity shows that corporate buyers have discovered the extraordinary value in small-caps. We believe investors will too. Fellow Shareholders Small-cap stocks rebounded dramatically in the second quarter, outpacing large-caps by the best margin in recent years, but it wasn't enough to push their first half performance above that of the Standard & Poor's 500 Stock Index. Growing confidence that the global financial crisis had ended encouraged investors to begin venturing beyond the multinational growth, technology, and telecom stocks they had favored overwhelmingly during the previous four years. Despite a sharp correction in Internet stocks in the spring, the group returned to favor by the end of the period. Performance Comparison - -------------------------------------------------------------------------------- Periods Ended 6/30/99 6 Months 12 Months - -------------------------------------------------------------------------------- Small-Cap Stock Fund 4.52% -3.48% Russell 2000 Index 9.28 1.50 Lipper Small Cap Fund Index 9.43 1.92 S&P 500 12.38 22.76 Your fund's returns of 4.52% and -3.48%, respectively, for the 6- and 12-month periods ended June 30 lagged the unmanaged Russell 2000 Index of smaller companies and the Lipper Small Cap Fund Index, as shown in the table. Our general avoidance of the high-flying Internet sector hurt performance in both periods. Year-to-date, the 52 Internet stocks in the Russell 2000 contributed almost four percentage points to the index's performance, which accounts for most of the benchmark's margin over the fund. (During the past year, many of these stocks outgrew the small-cap index and were replaced at the end of June when the index was reconstituted.) In addition, our exposure to small-cap value stocks held back returns relative to the Lipper index, which is dominated by emerging-growth funds. Our commitment to a blend of growth and value stocks has served us well in the past but was a liability over the past year as small-cap value stocks were among the worst-performing sectors-though they joined the rally in the second quarter. At the peak of the frenzy last spring, the Internet stocks in the Russell 2000 accounted for nearly 10% of the index's capitalization and significantly influenced performance on a daily basis. Without the Internet stocks, the Russell 2000 would have gained 5.52% in the first half. We have difficulty throwing valuations and caution to the wind and investing in what we believe are money-losing business models. The exuberance of the crowd left us a bit behind in the first half, yet we remain confident valuation will win out in the end. SECTOR DIVERSIFICATION - -------------------------------------------------------------------------------- Business Services and Transportation 24 Capital Equipment, Process Industries, and Basic Materials 8 Technology 9 Consumer Services, Cyclicals, and Education 14 Financial 8 Energy and Utilities 5 Consumer Nondurables 13 Reserves 5 Other 14 * Reflects a receivable for fund shares to an institutional client on the last day of the second quarter and does not represent a defensive posture. Based on net assets as of 6/30/99. Overall, the stock market again posted surprisingly strong returns in the first half of 1999, and the large-cap averages are on track to extend their record of four consecutive years of double-digit gains set last year. Both the S&P 500 and the Nasdaq Composite Index finished the period at record levels. With the memories of financial crises and fears of global recession receding, investors warmed to assets that were perceived as more risky or less liquid-small-cap stocks included. In addition, corporate profits are expected to rise this year after stalling in 1998. Merger-and-acquisition activity in the small-cap arena accelerated in the first half and is likely to continue, given the disparity in valuations between potential acquirers (large companies) and potential targets in our small-company universe. A pending change in merger accounting rules is also likely to continue driving deals. Information on Year-End Distributions - -------------------------------------------------------------------------------- To help you with tax planning, we try to give you a good idea of the per-share income and capital gain amounts our funds may distribute near year-end. In late October, we will provide estimates of these amounts, which will be paid on December 16, 1999, to shareholders of record on December 14. These preliminary numbers will be included in The Price Report mailing to shareholders in late October and will also be available on our Web site-www.troweprice.com. We hope that these preliminary numbers will be useful to you in approximating the income and capital gains taxes you may pay on distributions to taxable accounts. If your fund distributed any capital gains earlier in 1999, you can find the amounts on your statements and should include them in your tax planning calculations. Please keep in mind that the numbers are not final and are likely to be revised before the December 14 declaration and record date. As the fall progresses, you may want to check our Web site for revisions. If you would like information on tax matters relating to mutual funds, please visit our Web site to download our Insights report, Tax Information for Mutual Fund Investors, or call 1-800-225-5132 to request a copy. Though rising interest rates provided some turbulence for stocks in the first half-particularly among high multiple large-cap growth stocks-the rising rates reflected growing optimism about the world economy, powered by the unflagging pace of U.S. growth. Stocks got a bit of good news as the first half ended, when the Federal Reserve increased the key federal funds rate by the expected one-quarter point but unexpectedly shifted its policy bias back to neutral. This latter move suggested that the June 30 rate hike might not be the first in a series of tightening moves after all. INVESTMENT REVIEW The leading sectors for the Russell 2000 Index for the first half included: technology, up 17.95%; utilities, up 19.95%; and energy, up 34.08%. Unfortunately, we were underweighted in the energy and utility segments as neither sector appears attractive under our criteria for identifying strong franchise values. The utility sector remains volatile due to fundamental changes occurring in the electric industry, and the energy sector will remain very volatile based on swings in the commodity markets. The worst sectors included: consumer staples, down 9.72%; and health care, down about 1%. Here we were aided by an underweighting in health care. Major contributors for the first half included Applied Micro Circuits, Holophane, Eagle USA Air Freight, and a host of companies involved in mergers and acquisitions. Applied Micro Circuits, which designs, develops, and manufactures high performance, high bandwidth integrated circuits for the communications infrastructure industry (making it a semiconductor telecom equipment play), rose more than 144% on the back of very strong fundamentals. We found this high-quality company a true bargain in last fall's technology sell-off and first purchased the shares at $13, or 16 times projected earnings for a firm we judged to be growing 30% annually. The world has now fully discovered the stock, and it rallied from $33.96 in December to $83 on June 30. Airfreight forwarder Eagle USA acts essentially as a travel agent for time-sensitive goods, such as computer components and auto parts. The company is greatly benefiting from the trend toward just-in-time inventory management, which describes how manufacturers today increasingly want production inputs delivered as needed rather than tying up valuable capital in inventory. This shift creates a heavy reliance on a forwarder like Eagle, which helps explain the company's extraordinary profitability and better-than-30% growth over the past few years. When Eagle USA missed Wall Street earnings estimates by only a penny last September and the stock traded off 65%, we aggressively began purchasing shares at less than $13, or 10 times earnings. The company has since met or beaten expectations every quarter, carrying the stock into the low $40s and adding over $6.5 million to the fund in the first half. Holophane, which specializes in outdoor lighting for businesses and municipalities, agreed to be acquired by National Service Industries for $38.50 per share in cash in the second quarter. The shares gained about 35% the day the deal was announced, and rose 48% for the first half. Holophane added 10 cents to the fund's net asset value during the period. Merger-and-acquisition activity was dramatic in the past six months, with more than 10 deals involving portfolio holdings announced during the period. Corporate America and management-led leveraged buyout firms took advantage of the extraordinary valuations in small-caps to buy excellent companies at what we believe to be bargain prices. Besides Holophane, our list of major contributors includes Optek, which agreed to be acquired by the Dyson Kissler Group at $25.50-a nice premium to its mid-teens trading price; Coach USA, which agreed to be acquired by the U.K.'s Stagecoach Holdings Plc for $42-a 47% premium; and SteriGenics, which agreed to be acquired by IBA, a Belgian firm, for $27-a 54% premium. Fortunately, this spurt of deals-eight alone in the month of June-brought us a strong finish to the quarter. Major decliners in the first half included: MSC Industrial, Romac, and New England Business Services. MSC declined 54% largely due to fundamental weakness and a preannounced shortfall in the May quarter. Weak revenue growth, increased investment spending, and customer service issues have stung MSC. We believe nothing fundamental is broken at the company. Though MSC Industrial is currently a victim of sluggish conditions in its end markets, we view it as a high-quality firm with solid management and a very reasonable current valuation. The shares' decline cost the fund $2.2 million. Romac fell 54% in the first half, costing the fund more than $5 million. Romac is a security we inherited last year when the company acquired our long-term holding Source Services. Romac folded Source Services' permanent placement employment service into its own information technology consulting operation. The theory was that Romac could improve Source's operating margins and drive internal earnings growth to 30%. However, by the first half it became apparent that the firm was having difficulty integrating the acquisition and, in addition, its own IT business was probably suffering due to the year 2000-related slowdown in IT spending. We are carefully evaluating this position. New England Business Services shares declined 21% in the first half after the firm experienced some difficulty integrating its new Rapid Forms division. The firm had a slight revenue shortfall in the March quarter, and consequently, the stock suffered an overreaction from the market. We very much believe in CEO Bob Murray's strategy and continue to invest money in the company. The stock cost the fund about $4 million. PORTFOLIO HIGHLIGHTS A major new addition was UST, a Massachusetts bank holding company with $4 billion in assets offering a unique franchise in New England. The company has a growing asset management business and a highly profitable leasing operation. The shares appeared to represent a great bargain at two times book value and 13.6 times this year's earnings estimates. Indeed, we were pleasantly surprised in June when UST agreed to be purchased by Citizen's Financial Group for $32 per share, or a 33% premium to our average purchase price. The deal values US Trust at 2.6 times book value and 17 times 2000 earnings-a nice premium. We'd also like to highlight Material Sciences, a leading company in the field of coil coating-the process of applying finishes to wide rolls of metal before the metal is cut into parts. The company also uses its metals processing knowledge to develop proprietary products that combine different metal and polymer materials. Material Sciences is a solid turnaround situation. The company aggressively added to capacity and made a large acquisition just before the steel market was upended by low-priced imports. As a consequence, its operating margins were cut in half. The company is now back on track, and recent results have been encouraging. As Material Sciences continues to fill up its excess capacity, it should return to its historical margin level of 9% of sales on earnings before interest and taxes. This translates to earnings per share of about $1.60 for 2000. We initiated positions at $11 per share, less than seven times earnings. Moreover, with $2 per share in depreciation and amortization, our purchase price translates into just three times cash flow! With this strong cash flow underpinning, the downside appears quite limited, while the upside is significant if the company can return to its previous levels of profitability. Our major sales included two stocks involved in merger-and-acquisition activity: Optek (as mentioned above) was purchased by Dyson Kissner; and Cintas came to the fund by way of its purchase of Unitog. We found Cintas expensive and sold the shares. Finally, we exited Outback Steakhouse, which at 21.2 times 2000 estimates appears to more than reflect the company's outstanding track record and current favorable sales and food cost trends. Outback still needs a strong second leg of growth (that is, a new restaurant concept), and future food cost volatility is always a risk. Consequently, we sold the position. OUTLOOK Small-cap stocks recently posted their best quarter of performance relative to large-caps in recent years. This impressive relative strength may be a harbinger of better performance in the coming months. Valuations remain compelling and near 40-year lows. The small-cap advance in the second quarter was broad-based and included all sectors and both growth and value stocks. Finally, merger-and-acquisition activity, as we've discussed, is quite significant. Corporate America sees great value in our universe, and we believe investors will, too. We believe our blend of growth and value investing will reassert its historic edge over the Russell 2000 Index and that investors will, once again, outperform the S&P 500 by investing in small-cap shares. Keep the faith. Thanks for your continued support. Respectfully submitted, Greg A. McCrickard President and Chairman of the Investment Advisory Committee July 16, 1999 T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Portfolio Highlights - -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 6/30/99 - -------------------------------------------------------------------------------- Aliant Communications 2.0% Coach USA 1.8 A.O. Smith 1.7 New England Business Service 1.3 Shorewood Packaging 1.2 - -------------------------------------------------------------------------------- Matthews International 1.2 Holophane 1.2 Parkway Properties 1.1 Richfood Holdings 1.1 Methode Electronics 1.0 - -------------------------------------------------------------------------------- PartnerRe Holdings 1.0 Casey's General Stores 1.0 Comfort Systems USA 0.9 SteriGenics International 0.9 Mentor 0.9 - -------------------------------------------------------------------------------- Insituform Technologies 0.9 U.S. Foodservice 0.9 Analogic 0.9 JLG Industries 0.9 Technitrol 0.9 - -------------------------------------------------------------------------------- Applied Micro Circuits 0.8 US Can 0.8 Brown and Brown 0.8 Eagle USA Air Freight 0.8 Glacier Bancorp 0.8 - -------------------------------------------------------------------------------- Total 26.8% 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 6/30/99 Ten Largest Purchases - -------------------------------------------------------------------------------- Technitrol Aviation Sales * UST * Material Sciences * Wind River Systems * International Multifoods * Steris * Serologicals * Richfood Holdings Furon Ten Largest Sales - -------------------------------------------------------------------------------- Optek Technology ** Outback Steakhouse ** Cintas ** Logans Roadhouse ** Trident International ** The Peterson Companies ** Concentra Managed Care ** Applied Micro Circuits Millennium Pharmaceuticals Eagle USA Air Freight * 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. An index return does not reflect expenses, which have been deducted from the fund's return. SMALL-CAP STOCK FUND --------------------------------------------------------------------------- As of 6/30/99 Lipper Small Cap Russell 2000 Small-Cap Fund Index Index Stock Fund 6/89 10.000 10.000 10.000 6/90 10.935 10.296 10.126 6/91 11.122 10.433 9.813 6/92 12.517 11.949 11.094 6/93 15.667 15.057 13.669 6/94 16.019 15.711 14.655 6/95 20.180 18.871 17.508 6/96 26.245 23.379 23.273 6/97 27.898 27.195 27.567 6/98 32.227 31.685 33.326 6/99 32.846 32.160 32.166 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 6/30/99 1 Year 3 Years 5 Years 10 Years --------------------------------------------------------------------------- Small-Cap Stock Fund 3.48% 11.39% 17.03% 12.39% Investment return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase. Performance prior to 8/31/92 reflects investment managers other than T. Rowe Price. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Unaudited Financial Highlights For a share outstanding throughout each period - -------------------------------------------------------------------------------- 6 Months Year Ended Ended 6/30/99 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 NET ASSET VALUE Beginning of period $ 20.79 $ 22.20 $ 18.07 $ 16.32 $ 13.80 $ 15.39 Investment activities Net investment income 0.03 0.08 0.05 0.09 0.12 0.04 Net realized and unrealized gain (loss) 0.91 (0.89) 5.13 3.33 4.53 (0.04) Total from investment activities 0.94 (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 $ 21.73 $ 20.79 $ 22.20 $ 18.07 $ 16.32 $ 13.80 ---------------------------------------------------------- Ratios/Supplemental Data Total return(diamond) 4.52% (3.46)% 28.81% 21.05% 33.85% 0.08% Ratio of total expenses to average net assets 0.99%! 1.01% 1.02% 1.07% 1.11% 1.11% Ratio of net investment income to average net assets 0.32%! 0.46% 0.33% 0.56% 0.74% 0.24% Portfolio turnover rate 28.1%! 25.9% 22.9% 31.1% 57.8% 41.9% Net assets, end of period (in millions) $ 1,482 $ 1,153 $ 816 $ 416 $ 279 $ 197 (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, 1999 Portfolio of Investments Shares/Par Value - -------------------------------------------------------------------------------- In thousands Common Stocks 80.8% FINANCIAL 8.3% Bank and Trust 5.0% Charter One Financial 226,800 $ 6,301 Citizens Banking 320,000 9,610 Downey Financial 500,000 10,969 First Bell Bancorp 100,000 1,794 First Mariner Bancorp 47,500 531 First Security 168,750 4,593 Frankfort First Bancorp 75,000 1,118 Glacier Bancorp 471,900 11,119 Marshall & Ilsley 30,000 1,930 Mercantile Bancorporation 92,250 5,270 Summit Bancorp 214,800 8,981 UST 300,000 9,066 WestAmerica 90,000 3,282 74,564 Insurance 2.6% Brown and Brown 303,000 11,514 Harleysville Group 220,400 4,511 London Pacific Group 9,400 216 PartnerRe Holdings 390,000 14,576 Selective Insurance 155,000 2,950 W. R. Berkley 185,000 4,631 38,398 Financial Services 0.7% Delta Financial * 300,000 1,912 Financial Federal * 350,000 7,700 ITLA Capital * 70,000 1,085 10,697 Total Financial 123,659 UTILITIES 3.7% Electric Utilities 0.6% Cleco * 300,000 9,113 9,113 Telephone 3.1% Aliant Communications 650,000 $ 30,063 Commnet Cellular * 119,550 3,164 Rural Cellular (Class A) * 331,700 6,634 Western Wireless 200,000 5,406 45,267 Total Utilities 54,380 CONSUMER NONDURABLES 13.1% Food Processing 2.0% American Italian Pasta * 122,200 3,712 Imperial Sugar 619,900 4,301 International Multifoods 251,300 5,670 Makepeace * 164 1,935 Seneca Foods (Class A) * 174,900 2,361 Seneca Foods (Class B) * 74,700 1,023 United Natural Foods * 425,000 10,545 29,547 Hospital Supplies/Hospital Management 2.2% Mentor 709,000 13,294 Pediatrix Medical Group * 20,000 425 Quorum Health Group * 360,000 4,534 Renal Care Group * 356,250 9,207 Steris * 300,000 5,812 33,272 Pharmaceuticals 0.6% Boron Lepore & Associates * 112,000 945 Incyte Pharmaceuticals * 104,000 2,746 Triangle Pharmaceuticals * 258,900 4,644 8,335 Biotechnology 2.3% Abegenix * 100,000 1,981 Alkermes * 210,400 4,839 Anesta * 50,000 1,017 COR Therapeutics * 102,476 1,505 Coulter Pharmaceutical * 115,000 2,591 Gilead Sciences * 50,000 2,609 Inhale Therapeutic Systems * 335,000 $ 8,009 Millennium Pharmaceuticals * 100,000 3,597 Neurocrine Biosciences * 100,000 525 Northfield Laboratories * 220,000 2,688 PharmaPrint * 299,800 1,490 Serologicals * 330,000 2,702 Zonagen * 74,700 696 34,249 Health Care Services 2.3% AmeriPath * 675,000 5,801 Monarch Dental * 269,000 862 Orthodontic Centers of America * 300,000 4,237 ProMedCo * 400,000 1,537 SteriGenics International * ! 513,300 13,554 US Oncology 630,000 7,580 33,571 Miscellaneous Consumer Products 3.7% Coinmach Laundry * 200,300 2,529 Cone Mills * 574,400 3,446 Culp 150,500 1,580 Dan River * 1,010,000 7,449 Reebok * 200,000 3,725 Sola * 510,000 9,913 Stride Rite 270,000 2,784 Unifi 375,000 7,969 US Can * 529,100 11,773 WestPoint Stevens 150,000 4,472 55,640 Total Consumer Nondurables 194,614 CONSUMER SERVICES 5.8% Restaurants 0.2% Buca * 49,100 813 PJ America * 96,900 2,056 2,869 General Merchandisers 1.9% Bon-Ton Stores * ! 740,700 4,838 Casey's General Stores 970,000 $ 14,520 Columbia Sportswear * 348,200 5,321 Saks * 100,000 2,887 27,566 Specialty Merchandisers 1.8% CompuCom Systems * 850,000 3,493 Goody's Family Clothing * 450,000 5,133 O'Charley's * 192,700 3,089 Performance Food Group * 157,200 4,298 St. John Knits 210,000 6,143 Urban Outfitters * 192,300 4,796 26,952 Media and Communications 1.9% American Tower Systems (Class A) * 60,000 1,440 Clear Channel Communications * 34,719 2,393 Emmis Broadcasting (Class A) * 140,000 6,891 Pegasus Communications * 89,400 3,523 Sinclair Broadcast Group (Class A) * 280,000 4,567 Young Broadcasting (Class A) * 220,000 9,357 28,171 Total Consumer Services 85,558 CONSUMER CYCLICALS 8.5% Automobiles and Related 2.7% A.O. Smith (Class B) 900,300 25,208 Adrian Steel ! 13,000 5,850 Keystone Automotive * 165,000 2,857 Littelfuse * 275,000 5,216 Strattec Security * 41,600 1,422 40,553 Building and Real Estate 4.8% Apartment Investment & Management, REIT 149,400 6,387 Arden Realty, REIT 325,000 8,003 EastGroup Properties, REIT 530,000 10,633 First Washington Realty Trust, REIT 325,000 7,597 Glenborough Realty Trust, REIT 155,000 2,712 JP Realty, REIT 250,000 5,141 Parkway Properties, REIT 495,000 $ 16,397 Reckson Associates Realty (Class B), REIT 228,150 5,447 Starwood Hotels & Resorts, REIT 35,000 1,070 Woodhead Industries ! 600,000 7,387 70,774 Miscellaneous Consumer Durables 1.0% CompX * ! 485,000 8,670 Harman International 115,000 5,060 Juno Lighting * 8,325 204 13,934 Total Consumer Cyclicals 125,261 TECHNOLOGY 8.7% Electronic Components 4.7% American Superconductor * 50,000 748 Analogic 416,600 12,954 ATMI * 400 12 Benchmark Electronics * 150,000 5,390 Burr Brown * 275,000 10,158 Exar * 100,000 2,506 Maxim Integrated Products * 120,000 7,980 Methode Electronics (Class A) 650,000 14,869 Planar Systems * 350,000 2,691 PMC-Sierra * 150,000 8,845 SIPEX * 150,000 3,066 69,219 Electronic Systems 1.7% Applied Micro Circuits * 150,000 12,460 EMS Technologies * 316,600 4,541 Lifeline Systems * 200,000 3,875 Lo-Jack * 475,000 4,008 24,884 Telecommunications 1.1% Avant * 343,500 4,326 Ditech Communications * 185,000 3,711 Premisys Communications * 125,000 906 Voicestream Wireless * 200,000 5,694 West TeleServices * 109,500 $ 1,027 15,664 Aerospace and Defense 0.4% DONCASTERS ADR * 100,000 1,750 Woodward Governor 160,000 4,195 5,945 Office Automation 0.8% Technitrol 391,200 12,616 12,616 Total Technology 128,328 EDUCATION 0.6% ITT Educational Service * 340,000 8,861 Total Education 8,861 CAPITAL EQUIPMENT 2.7% Electrical Equipment 1.3% Holophane * 450,000 17,156 LSI Industries 110,900 2,689 19,845 Capital Equipment 0.3% Omniquip International 450,000 3,572 3,572 Machinery 1.1% JLG Industries 625,000 12,735 NN Ball & Roller 350,000 2,034 Toolex Alpha * 149,800 2,008 16,777 Total Capital Equipment 40,194 BUSINESS SERVICES AND TRANSPORTATION 23.2% Computer Service and Software 5.0% Analysts International 230,000 3,299 BISYS Group * 90,000 5,268 Concur Technologies * 42,800 1,209 Electronic Arts * 50,000 $ 2,706 Great Plains Software * 140,000 6,554 HCIA * 330,000 2,887 Peerless Systems * 400,000 4,175 Phoenix Technologies * 150,000 2,672 Progress Software * 141,700 4,030 PSINet * 110,000 4,806 SalesLoggix * 106,000 1,583 Saville Systems ADR * 532,300 7,735 Summit Design * 300,000 905 SunGard Data Systems 38,400 1,325 Synopsys * 30,000 1,655 Vantive * 75,000 853 Viasoft * 550,000 1,942 Visio * 285,000 10,839 WebTrends * 60,000 2,766 Wind River Systems * 273,000 4,376 Zebra Technologies (Class A) * 58,900 2,258 73,843 Distribution Services 3.9% Aviation Sales * 200,000 7,900 Jack Henry & Associates 100,000 3,912 MSC * 321,800 3,298 Primesource 191,500 1,221 Richfood Holdings 913,300 16,097 SunSource 215,000 2,782 U.S. Foodservice * 306,300 13,056 Watsco (Class A) 505,699 8,281 Wilmar Industries * 138,500 1,818 58,365 Environmental 0.7% CUNO * 285,000 5,486 IT Group * 200,000 3,213 Waterlink * 467,000 1,343 10,042 Transportation Services 4.9% C.H. Robinson Worldwide 271,300 9,936 Coach USA * 636,000 26,672 Comfort Systems USA 775,000 $ 13,950 Eagle USA Air Freight * 265,000 11,221 Expeditors International of Washington 240,000 6,548 Frozen Food Express 150,000 1,148 Heartland Express * 80,827 1,319 Hub Group (Class A) * 26,900 605 International Shipholding 141,562 2,035 73,434 Miscellaneous Business Services 8.6% Billing Information Concepts * 454,400 5,069 CORT Business Services * 330,400 7,909 Electro Rent * 480,000 5,220 Insituform Technologies (Class A) * 609,300 13,119 Iron Mountain * 215,950 6,182 Ivex Packaging * 150,000 3,300 Maximus * 125,000 3,594 McGrath Rent 300,000 5,887 Metamor Worldwide * 202,500 4,860 MPW Industrial Services Group * 496,800 5,030 New England Business Service 614,900 18,985 Paxar * 48,400 436 Renaissance Worldwide * 587,600 4,664 Romac International * 403,868 3,572 Shorewood Packaging * 1,000,000 18,437 Strayer Education 340,000 10,423 Tetra Tech * 623,750 10,370 127,057 Airlines 0.1% Midwest Express Holdings * 45,000 1,530 1,530 Total Business Services and Transportation 344,271 ENERGY 0.9% Energy Services 0.6% Cooper Cameron * 50,000 1,853 Smith International 100,000 4,344 Weatherford International 94,050 3,444 9,641 Exploration and Production 0.3% Key Energy * 376,600 $ 1,342 National Oilwell * 200,000 2,800 4,142 Total Energy 13,783 PROCESS INDUSTRIES 1.8% Specialty Chemicals 0.5% A. Schulman 110,000 1,880 Furon 304,600 5,787 Hauser * 90,000 501 8,168 Paper and Paper Products 0.3% Smurfit-Stone Container * 200,000 4,106 4,106 Building and Construction 1.0% Layne Christensen * 360,000 2,340 Simpson Manufacturing * 94,500 4,489 Trex * 324,800 8,242 15,071 Total Process Industries 27,345 BASIC MATERIALS 3.3% Metals 2.3% AngloGold ADR 81,130 1,744 Cambior 900,000 2,925 Gibraltar Steel * 110,000 2,709 Material Sciences * 599,800 8,997 Matthews International (Class A) 605,000 17,999 34,374 Mining 0.5% Battle Mountain Gold 1,612,000 3,929 Coal Creek ! 9,295 883 Lihir Gold (AUD) * 1,930,000 1,455 TVX Gold ADR 585,000 585 6,852 Miscellaneous Materials 0.5% Synthetic Industries * 261,900 $ 7,791 7,791 Total Basic Materials 49,017 Total Miscellaneous Common Stocks 0.2% 2,594 Total Common Stocks (Cost $1,017,840) 1,197,865 Convertible Bonds 0.1% Vantive, 4.75%, 9/1/02 $3,000,000 2,266 Total Convertible Bonds (Cost $2,191) 2,266 Short-Term Investments 5.5% Money Market Funds 5.5% Reserve Investment Fund, 5.05% # 80,855,626 80,856 Total Short-Term Investments (Cost $80,856) 80,856 Total Investments in Securities 86.4% of Net Assets (Cost $1,100,887) $1,280,987 Other Assets Less Liabilities 201,497 NET ASSETS $1,482,484 ---------- # Seven-day yield ! Affiliated company * Non-income producing ADR American Depository Receipt REIT Real Estate Investment Trust AUD Australian dollar The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Unaudited June 30, 1999 Statement of Assets and Liabilities - -------------------------------------------------------------------------------- In thousands Assets Investments in securities, at value Affiliated companies (cost $45,836) $ 41,182 Other companies (cost $1,055,051) 1,239,805 Total investments in securities 1,280,987 Receivable for fund shares sold 206,418 Other assets 8,676 Total assets 1,496,081 Liabilities Total liabilities 13,597 NET ASSETS $ 1,482,484 ------------ Net Assets Consist of: Accumulated net investment income - net of distributions $ 1,639 Accumulated net realized gain/loss - net of distributions 23,236 Net unrealized gain (loss) 180,100 Paid-in-capital applicable to 68,232,491 shares of $0.50 par value capital stock outstanding; 200,000,000 shares authorized 1,277,509 NET ASSETS $ 1,482,484 ------------ NET ASSET VALUE PER SHARE $ 21.73 ------------ 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 6/30/99 Investment Income Income Dividend $ 4,706 Interest 2,690 Total income 7,396 Expenses Investment management 4,318 Shareholder servicing 1,034 Prospectus and shareholder reports 111 Custody and accounting 80 Registration 20 Legal and audit 7 Directors 5 Miscellaneous 6 Total expenses 5,581 Expenses paid indirectly (6) Net expenses 5,575 Net investment income 1,821 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 16,088 Foreign currency transactions 2 Net realized gain (loss) 16,090 Change in net unrealized gain or loss on securities 41,530 Net realized and unrealized gain (loss) 57,620 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 59,441 --------- 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 6/30/99 12/31/98 Increase (Decrease) in Net Assets Operations Net investment income $ 1,821 $ 4,641 Net realized gain (loss) 16,090 26,975 Change in net unrealized gain or loss 41,530 (67,486) Increase (decrease) in net assets from operations 59,441 (35,870) Distributions to shareholders Net investment income -- (5,359) Net realized gain -- (26,791) Decrease in net assets from distributions -- (32,150) Capital share transactions* Shares sold 562,312 789,814 Distributions reinvested -- 28,541 Shares redeemed (291,863) (414,115) Increase (decrease) in net assets from capital share transactions 270,449 404,240 Net Assets Increase (decrease) during period 329,890 336,220 Beginning of period 1,152,594 816,374 End of period $1,482,484 $1,152,594 ----------------------- *Share information Shares sold 27,475 36,695 Distributions reinvested -- 1,472 Shares redeemed (14,681) (19,500) Increase (decrease) in shares outstanding 12,794 18,667 The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund - -------------------------------------------------------------------------------- Unaudited June 30, 1999 Notes to Financial Statements - -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Small-Cap Stock Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company and commenced operations on June 1, 1956. Prior to May 1, 1997, the name of the fund was T. Rowe Price OTC Fund, Inc. The accompanying financial statements are prepared in accordance with generally accepted accounting principles for the investment company industry; these principles may require the use of estimates by fund management. Valuation Equity securities listed or regularly traded on a securities exchange are valued at the last quoted sales price on the day the valuations are made. A security which is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day and securities regularly traded in the over-the-counter market are valued at the mean of the latest bid and asked prices. Other equity securities are valued at a price within the limits of the latest bid and asked prices deemed by the Board of Directors, or by persons delegated by the Board, best to reflect fair value. Debt securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independent pricing service. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. 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 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 Asset 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. 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, used to reduce the fund's custody charges. NOTE 2 - INVESTMENT TRANSACTIONS Purchases and sales of portfolio securities, other than short-term securities, aggregated $241,951,000 and $148,285,000, respectively, for the six months ended June 30, 1999. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. At June 30, 1999, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $1,100,887,000. Net unrealized gain aggregated $180,100,000 at period-end, of which $299,779,000 related to appreciated investments and $119,679,000 to depreciated investments. NOTE 4 - RELATED PARTY TRANSACTIONS The investment management agreement between the fund and the manager provides for an annual investment management fee, of which $780,000 was payable at June 30, 1999. The fee is computed daily and paid monthly, and consists of an individual fund fee equal to 0.45% of average daily net assets and a group fee. The group fee is based on the combined assets of certain mutual funds sponsored by the manager or Price Associates (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 June 30, 1999, 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. 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 $833,000 for the six months ended June 30, 1999, of which $196,000 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, 1999, totaled $2,503,000 and are reflected as interest income in the accompanying Statement of Operations. 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. ** Based on a January 1999 survey for representative-assisted stock trades. Services vary by firm, and commissions may vary depending on size of order. T. Rowe Price Mutual Funds - -------------------------------------------------------------------------------- STOCK FUNDS Domestic Blue Chip Growth Capital Appreciation Capital Opportunity Diversified Small-Cap Growth Dividend Growth Equity Income Equity Index 500 Extended Equity Market Index Financial Services Growth & Income Growth Stock Health Sciences Media & Telecommunications Mid-Cap Growth Mid-Cap Value New America Growth New Era New Horizons* Real Estate Science & Technology Small-Cap Stock Small-Cap Value Spectrum Growth Total Equity Market Index Value International/Global Emerging Markets Stock European Stock Global Stock International Discovery International Growth & Income International Stock Japan Latin America New Asia Spectrum International 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 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 Intermediate Bond*** Tax-Free Short-Intermediate Virginia Short-Term Tax-Free Bond Virginia Tax-Free Bond International/Global Emerging Markets Bond Global Bond International Bond MONEY MARKET FUNDS! 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 FUNDS Balanced Personal Strategy Balanced Personal Strategy Growth Personal Strategy Income Tax-Efficient Balanced T. ROWE PRICE NO-LOAD VARIABLE ANNUITY Equity Income Portfolio International Stock Portfolio Limited-Term Bond Portfolio Mid-Cap Growth Portfolio New America Growth Portfolio Personal Strategy Balanced Portfolio Prime Reserve Portfolio * Closed to new investors. ** Formerly named Florida Insured Intermediate Tax-Free. *** Formerly named Tax-Free Insured Intermediate Bond. ! Investments in the funds are not insured or guaranteed by the FDIC or any other government agency. Although the funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the funds. Please call for a prospectus. Read it carefully before investing. The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by First Security Benefit Life Insurance Company of New York, White Plains, NY. T. Rowe Price refers to the underlying portfolios' investment managers and the distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security Benefit Group of Companies and the T. Rowe Price companies are not affiliated. The variable annuity may not be available in all states. The contract has limitations. Call a representative for costs and complete details of the coverage. T. Rowe Price Retirement Plans and Resources - -------------------------------------------------------------------------------- Retirement Plans and Resources We recognize that saving for retirement is the number one investment goal for most Americans. We can help you meet your retirement needs, whether you are starting an IRA or designing a retirement program for your employees. T. Rowe Price offers an assortment of retirement plans for individuals, the self-employed, small businesses, corporations, and nonprofit organizations. We provide recordkeeping, communications, and investment management services, as well as a variety of educational materials, self-help planning guides, and software tools to help you choose and implement a retirement plan appropriate for you. For information or to request literature, call us at 1-800-638-5660. IRAs AND QUALIFIED PLANS Traditional IRA Roth IRA Rollover IRA SEP-IRA SIMPLE IRA Profit Sharing Money Purchase Pension "Paired" Plans (Money Purchase Pension and Profit Sharing Plans) 401(k) 403(b) 457 Deferred Compensation RETIREMENT RESOURCES AT T. ROWE PRICE Planning and Informational Guides Minimum Required Distributions Guide Retirement Planning Kit Retirees Financial Guide Tax Considerations for Investors Investment Kits The IRA Investing Kit Roth IRA Conversion Kit Rollover IRA Kit The T. Rowe Price SIMPLE IRA Plan Kit The T. Rowe Price SEP-IRA Plan The Simplified Keogh Plan(registered trademark) From T. Rowe Price The T. Rowe Price 401(k) Century Plan(registered trademark) (for small businesses) Money Purchase Pension/Profit Sharing Plan Kit Investing for Retirement in Your 403(b) Account The T. Rowe Price No-Load Variable Annuity Information Kit Insights Reports The Challenge of Preparing for Retirement Financial Planning After Retirement The Roth IRA: A Review Software Packages T. Rowe Price Retirement Planning Analyzer(registered trademark) CD-ROM or diskette $19.95. To order, please call 1-800-541-5760. Also available on the Internet for $9.95. T. Rowe Price Variable Annuity Analyzer(registered trademark) CD-ROM or diskette, free. To order, please call 1-800-469-5304. Many of these resources are also available for viewing or ordering on the Internet at www.troweprice.com. 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 appropriate to the fund or funds covered in this report. 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 4200 West Cypress St. 10th Floor Tampa, FL 33607 4410 ArrowsWest Drive Colorado Springs, CO 80907 Warner Center 21800 Oxnard Street, Suite 270 Woodland Hills, CA 91367 Invest With Confidence(registered trademark) T. Rowe Price T. Rowe Price Investment Services, Inc., Distributor. F65-051 6/30/99 -----END PRIVACY-ENHANCED MESSAGE-----