Semiannual Report
Mid-Cap
Value Fund
June 30, 1998
T. Rowe Price
Report Highlights
Mid-Cap Value Fund
o Mid-cap stocks performed well but lagged the broad market; the best returns
were recorded by growth stocks.
o The Mid-Cap Value Fund's solid return for the six-month period trailed its
benchmarks because of its value orientation.
o Although our REIT and utility holdings held back performance in this half
year, we like their low valuations and defensive characteristics.
o We are hopeful that good fundamentals and attractive valuations will draw
investors away from blue chip stocks and toward our investment universe.
Fellow Shareholders
For the first six months of 1998, the performance of mid-size stocks slowed from
1997's torrid pace but remained strong on an absolute basis. Returns varied
widely among various mid-cap sectors, and growth companies significantly
outperformed stocks with value characteristics. Once again, the mid-cap universe
could not keep up with the remarkably popular large-cap stocks.
Performance Comparison
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Periods Ended 6/30/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Mid-Cap Value Fund 6.08% 21.21%
S&P MidCap Index 8.64 27.15
Lipper Mid Cap Funds Average 10.66 22.22
During this period, your fund posted steady gains but failed to keep pace with
its major comparative benchmarks. Good stock selection and a focus on reasonable
valuations contributed to its 6.08% six-month advance, but slight exposure to
the top-performing sectors within the index, health care and technology, put the
fund behind the S&P MidCap Index's 8.64% total return. After outperforming the
Lipper Mid Cap Funds Average sharply in the last six months of 1997 (14.26% for
the fund versus 10.55% for the average), your fund trailed this growth-focused
benchmark in 1998's first half.
INVESTMENT REVIEW
For the first half of 1998, the strongest sectors within the S&P 400 MidCap
Index were technology (gaining 24%), consumer cyclicals (17%), and health care
(18%). Technology alone accounted for more than a third of the index's total
return so far this year. Your fund was underweighted in these segments because
technology and health care are the traditional bastions of emerging growth
investing and we have not identified many attractive values within these
segments. While we had an adequate representation within consumer cyclicals, our
emphasis on REITs (real estate investment trusts) proved to be misplaced so far
this year. With attractive valuations, positive fundamentals, and strong
defensive characteristics because of high dividend yields, we still believe
REITs will have their day in the sun in this expensive stock market.
We hold the same view on utilities, which, at 13% of assets, were a major area
of investment for your portfolio. Electric utilities have significantly
underperformed the market for several years as investors feared coming
deregulation. By many measures-price/earnings, price/book value, price/sales,
and dividend yield-utility stocks reached historically low valuations relative
to the broad market. We believe that the actual deregulation legislation crafted
by the states thus far has been less burdensome than anticipated, with longer
transition periods and the sharing of restructuring costs between the companies
and their customers. This favorable outcome has not been reflected in the prices
of utility stocks. Considering the earnings volatility in the overall market and
continued fallout from Asian economies, utility stocks could benefit from their
steady earnings growth, stable cash flows, low historical valuations, and
relatively high yields. But they have not gathered much momentum yet, with the
sector returning only 2.70% in the first half of 1998.
Sector Diversification pie chart
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Capital
Equip-
Busi- ment,
Consumer Energy, ness Process
Services Utilities, Con- Services Industries,
and and sumer and and
Consumer Miscell- Finan- Non- Transp- Tech- Res- Basic
Cyclicals aneous cial durables ortation nology erves Materials
23% 17% 16% 15% 2% 3% 9% 15%
Based on net assets as of 6/30/98.
The other poor performing stock sectors for the six months were energy (down
18%), basic materials (falling 2%) and capital goods (flat). In general, the
more defensive sectors of the mid-cap market (REITs, utilities, energy, and
basic materials) that represent our natural universe remained very much out of
favor.
The fund's gains were evenly spread among the various segments of the portfolio.
We had eight stocks that made as much as $1 million or more in gains, and only
one that cost us as much as $1 million in losses. Three of our top performers
were Neiman-Marcus, United States Surgical, and Union Texas Petrol-eum.
Neiman-Marcus shares rallied along with the entire retail sector on reports of
strong consumer spending and confidence. The company generated 6% comparable
store sales gains and better-than-expected earnings in the first two quarters of
1998. Furthermore, the embedded value we saw in Neiman-Marcus shares came to
light when Saks Fifth Avenue announced it was engaged in merger and buyout
discussions. Saks is Neiman's only major competitor in the high-end retail goods
market. Saks was trading at 107% of sales, yet Neiman-Marcus was trading at only
73% of sales despite its superior operating and financial results. United States
Surgical spiked up after it agreed to be acquired by Tyco International at a 40%
premium to its average trading price in the weeks prior to the bid. Similarly,
Union Texas Petroleum surged on a rich buyout offer from ARCO. Both takeovers
were announced during May.
Fortunately, only one stock, PennCorp Financial, caused us a material loss in
the first half of 1998. The company's shares declined after it took accounting
charges designed to strengthen its insurance reserves, and higher-than-expected
claims depressed earnings in the fourth quarter of 1997 and the first quarter of
1998.
PORTFOLIO HIGHLIGHTS
In each report we like to highlight recent major purchases to give you a better
feel for our current investment thinking. We have already sung the praises of
utility stocks in general, and within the utility sector we believe that
companies focusing on transmission and distribution (T&D) are more attractive
than companies focusing on generation. T&D companies have lower operational risk
and are generally able to sell what generation assets they have for a premium.
Consistent with this thesis, the largest purchases in our fund within the last
six months were New England Electric System (NEES) and GPU (General Public
Utilities), two companies that focus on T&D.
NEES has already sold a portion of its generation assets at a high premium to
book value. The company has a reasonable risk profile since Massachusetts has
already passed deregulation legislation, creating a stable regulatory
environment. NEES trades at an average utility valuation, but we believe it
should trade at a premium to the group. Cash from the sale of the generation
assets will provide the shareholder-oriented management with the flexibility to
grow earnings by buying back stock or acquiring another utility. The cash on the
balance sheet also makes NEES an attractive acquisition candidate.
GPU is a well-managed company whose stock is trading at a significant discount
to its group due to (justified) concerns about restructuring legislation pending
in Pennsylvania and New Jersey. We believe GPU is pursuing a solid strategy in
this period of industry change.
We expect GPU to divest its generation assets to focus on T&D and to use the
asset sale proceeds to repurchase shares and pay down debt. Over the next year,
legislative issues should be resolved, the sale of generation assets should be
completed, and one of its nuclear plants may be sold. These events, combined
with a discount price/earnings (P/E) ratio and a higher-than-average dividend
yield, make the shares attractive at this time.
Another significant first half purchase was Inland Steel Industries. Inland
Steel runs two related but fundamentally separate businesses. The "bad" business
is in traditional steel manufacturing, which suffers from low returns and other
problems associated with commodity products. The other business is 87%-owned
Ryerson Tull, which is in metals distribution. Given its high returns, strong
market position, and exciting consolidation opportunities, this can be
characterized as the "good" business.
During the period, Inland announced its intention to sell its steel
manufacturing assets to concentrate on Ryerson Tull. The sale would eliminate
debt and still leave $900 million in excess cash; in addition, we noticed that
Inland shares were trading at less than 10 times 1998 earnings per Ryerson Tull
share. We believe this is a low price to pay and represents a significant
discount to comparable steel distribution and processing companies. We bought
Inland shares with the intent of becoming a shareholder in Ryerson Tull, and
expect that as a "pure play" Ryerson Tull will command a higher P/E multiple in
the market.
Our largest non-merger-related sale in the first half of 1998 was Gulfstream
Aerospace. Gulfstream shares surged 50% during the period on
stronger-than-expected results. Given this performance and the company's
cyclical operating characteristics, we no longer viewed the shares as
undervalued. When the company's major shareholder, Ted Forstman, undertook to
sell half of his position in a secondary offering, we decided to sell our
position, effectively exiting the investment along with company insiders.
Merger and acquisition activity resulted in three of our 10 largest sales. Union
Texas Petroleum, Tracor, and TriMas were all eliminated through completed tender
offers. We also sold shares of Meritor Automotive after making a strong return
in a short period. Meritor is an automotive parts manufacturer that was spun off
by Rockwell International late in 1997. Spin-offs can be great opportunities to
pick up shares in misunderstood situations, and Meritor was exactly such an
opportunity. The shares fell from $28 to $21 in a brief period with no
diminution in fundamentals. We bought shares at that time, and the stock
rebounded to $27 in short order. Auto parts companies are cyclical and must be
sold when results are strongest, so we decided to trim the position at that
price.
OUTLOOK
While our first half underperformance versus the unmanaged indices was
disappointing, it was not entirely unexpected. The stock market's best
performers rotate between growth and value characteristics with some regularity,
and the past six months strongly favored growth categories. Given the costliness
of the overall stock market, we anticipate that our value-based approach will
outperform in the event of market turmoil and a decline in overall valuation
levels.
Furthermore, we think that investors will ultimately move away from the highly
priced blue chip shares and rotate toward mid- and small-cap stocks that offer
outstanding fundamentals and cheaper valuations. We see no catalyst at the
moment to end investors' love affair with the big household names, but the
change may come when we least expect it. The catalyst could be further economic
weakness in Asia, which would particularly hurt the large-cap multinational
companies. If this shift is further marked by an equity market correction to
more reasonable valuations, then we believe our value philosophy and lower
volatility will serve shareholders well.
Respectfully submitted,
Greg A. McCrickard
President and Chairman of the Investment Advisory Committee
July 20, 1998
T. Rowe Price Mid-Cap Value Fund
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Portfolio Highlights
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/98
- ------------------------------------------------------------
Neiman-Marcus 2.0%
A.O. Smith 1.9
Security Capital Industrial Trust 1.9
BJ's Wholesale Club 1.9
Meredith 1.8
- ------------------------------------------------------------
Warnaco Group 1.8
Valassis Communications 1.8
PartnerRe Holdings 1.8
Aliant Communications 1.7
Premark International 1.7
- ------------------------------------------------------------
McCormick 1.7
Analogic 1.6
United States Surgical 1.6
Tomkins 1.6
Unifi 1.5
- ------------------------------------------------------------
International Multifoods 1.5
Willis-Corroon 1.4
Hubbell 1.4
Olin 1.4
Teco Energy 1.4
- ------------------------------------------------------------
Galileo International 1.4
Stanley Works 1.4
Pinnacle West Capital 1.3
Century Telephone Enterprises 1.3
NIPSCO 1.2
- ------------------------------------------------------------
Total 40.0%
T. Rowe Price Mid-Cap Value Fund
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Portfolio Highlights
- ------------------------------------------------------------
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended 6/30/98
Ten Largest Purchases
- ---------------------------------------
New England Electric System *
GPU *
Amerada Hess *
Inland Steel Industries *
TCF Financial *
Reckson Associates Realty *
Erie Indemnity *
Murphy Oil
Louisiana Pacific *
Domtar *
Ten Largest Sales
- ---------------------------------------
Union Texas Petroleum ***
Gulfstream Aerospace **
Tracor ***
Nordstrom **
Meritor Automotive
TriMas ***
Burlington Industries
Sterling Software **
New York Times **
AmerUs Life **
* Position added
** Position eliminated
*** Acquired by another company
T. Rowe Price Mid-Cap Value Fund
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Performance Comparison
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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.
Mid-Cap Value SEC chart
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S&P MidCap Lipper Mid Cap Mid-Cap
Index Funds Average Value Fund
6/30/96 10,000 10,000 10,000
6/97 12,333 11,448 12,938
6/96 15,681 13,949 15,682
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.
Since Inception
Periods Ended 6/30/98 1 Year Inception Date
- --------------------------------------------------------------------------------
Mid-Cap Value Fund 21.21% 25.15% 6/28/96
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 Mid-Cap Value Fund
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Unaudited
Financial Highlights
For a share outstanding throughout each period
- ----------------------------------------------------------------------------
Months Year 6/28/96
Ended Ended Through
6/30/98 12/31/97 12/31/96
NET ASSET VALUE
Beginning of period $ 14.47 $ 11.56 $ 10.00
Investment activities
Net investment income 0.08 0.08* 0.10*
Net realized and
unrealized gain (loss) 0.80 3.05 1.53
Total from
investment activities 0.88 3.13 1.63
Distributions
Net investment income -- (0.08) (0.07)
Net realized gain -- (0.14) --
Total Distributions -- (0.22) (0.07)
NET ASSET VALUE
End of period $ 15.35 $ 14.47 $ 11.56
---------------------------------------
Ratios/Supplemental Data
Total return(C) 6.08% 27.1%* 16.3%*
Ratio of expenses to
average net assets 1.08%! 1.25%* 1.25%*!
Ratio of net investment
income to average
net assets 1.04%! 1.18%* 2.10%*!
Portfolio turnover rate 16.9% 16.0% 3.9%!
Net assets, end of period
(in thousands) $ 260,474 $ 217,991 $ 49,189
(C) 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.
* Excludes expenses in excess of a 1.25% voluntary expense limitation in
effect through 12/31/97.
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Mid-Cap Value Fund
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Unaudited June 30, 1998
Statement of Net Assets
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 89.8%
FINANCIAL 15.8%
Bank and Trust 5.3%
Bank United 55,000 $ 2,636
First Security 99,750 2,135
Mercantile Bancorporation 21,750 1,096
Mercantile Bankshares 75,000 2,609
Northern Trust 36,000 2,744
TCF Financial 85,000 2,507
13,727
Insurance 7.9%
ACE Limited 16,500 644
Erie Indemnity 70,000 2,012
FBL Financial Group 48,000 1,230
Harleysville Group 60,000 1,253
PartnerRe Holdings 90,000 4,590
PennCorp Financial Group 95,000 1,947
Selective Insurance 10,000 224
UICI * 70,000 1,908
UNUM 10,400 577
W. R. Berkley 58,000 2,325
Willis-Corroon ADR 300,000 3,769
20,479
Financial Services 2.6%
Delta Financial * 120,000 2,205
INMC Mortgage Holdings 110,000 2,503
Leucadia National 65,000 2,149
6,857
Total Financial 41,063
UTILITIES 13.0%
Telephone Services 3.9%
Aliant Communications 165,000 4,522
Century Telephone Enterprises 72,000 3,303
Cincinnati Bell 80,000 2,290
10,115
Electric Utilities 9.1%
DQE 34,000 $ 1,224
FirstEnergy 60,000 1,845
GPU 75,000 2,836
Illinova 100,000 3,000
New England Electric System 70,000 3,027
NIPSCO 110,000 3,080
Pinnacle West Capital 74,000 3,330
Teco Energy 135,000 3,620
United Water Resources 100,000 1,800
23,762
Total Utilities 33,877
CONSUMER NONDURABLES 14.7%
Food Processing 3.2%
International Multifoods 140,000 3,850
McCormick 125,000 4,465
8,315
Hospital Supplies/Hospital Management 1.6%
United States Surgical 90,000 4,106
4,106
Pharmaceuticals 0.1%
Perrigo * 40,000 401
401
Miscellaneous Consumer Products 9.8%
Burlington Industries * 90,000 1,266
First Brands 90,000 2,306
Hasbro 70,000 2,752
Premark International 140,000 4,515
Reebok * 75,000 2,076
Stanley Works 85,000 3,533
Tomkins (GBP) 750,000 4,073
Unifi 115,000 3,939
WestPoint Stevens * 31,000 1,025
25,485
Total Consumer Nondurables 38,307
CONSUMER SERVICES 10.6%
General Merchandisers 5.7%
BJ's Wholesale Club * 120,000 $ 4,875
Neiman-Marcus * 120,000 5,212
Warnaco Group (Class A) 110,000 4,668
14,755
Specialty Merchandisers 0.2%
CVS 15,208 592
592
Media and Communications 4.7%
Chris-Craft * 51,500 2,816
Meredith 100,000 4,694
Valassis Communications * 120,000 4,628
12,138
Total Consumer Services 27,485
CONSUMER CYCLICALS 11.7%
Automobiles and Related 2.9%
A.O. Smith (Class B) 95,000 4,910
Littelfuse * 35,000 890
Meritor Automotive 20,000 480
SPX * 20,000 1,288
7,568
Building & Real Estate 7.9%
Arden Realty, REIT 62,500 1,617
CCA Prison Reality Trust, REIT 15,000 459
Federal Realty Investment Trust, REIT 30,000 722
Kilroy Realty, REIT 10,000 250
Owens Corning 60,000 2,449
Patriot American Hospitality, REIT 9,299 223
Reckson Associates Realty, REIT 100,000 2,362
Reckson Service Industries 32,000 109
Rouse 85,000 2,672
Security Capital Atlantic, REIT 30,000 669
Security Capital Industrial Trust, REIT 180,000 4,500
SECURITY CAPITAL PACIFIC TRUST, REIT 65,000 1,463
Security Capital U.S. Realty * 100,000 1,330
Starwood Hotels & Resorts, REIT 15,000 $ 725
Texas Industries 20,000 1,060
20,610
Miscellaneous Consumer Durables 0.9%
Masco 39,000 2,360
2,360
Total Consumer Cyclicals 30,538
TECHNOLOGY 2.7%
Electronic Components 1.7%
Analogic 95,000 4,251
Molex 8,358 210
4,461
Aerospace & Defense 1.0%
L 3 Communications * 80,000 2,615
2,615
Total Technology 7,076
CAPITAL EQUIPMENT 4.0%
Electrical Equipment 1.4%
Hubbell (Class A) 10,000 436
Hubbell (Class B) 80,000 3,330
3,766
Machinery 2.6%
American Standard * 55,000 2,458
Coltec Industries * 19,000 378
Danaher 28,000 1,027
FMC * 10,000 682
Teleflex 55,000 2,090
6,635
Total Capital Equipment 10,401
BUSINESS SERVICES AND
TRANSPORTATION 2.1%
Computer Service and Software 1.4%
Galileo International 80,000 3,605
3,605
Distribution Services 0.7%
Richfood Holdings 90,000 $ 1,862
1,862
Total Business Services and Transportation 5,467
ENERGY 4.3%
Energy Services 1.5%
Cooper Cameron * 6,000 306
EVI Weatherford * 8,000 297
McDermott International 20,000 689
Western Atlas 15,000 1,273
Witco 50,000 1,462
4,027
Exploration and Production 0.7%
Devon Energy 11,550 404
Rutherford-Moran Oil * 40,000 802
Union Pacific Resources 35,000 615
1,821
Integrated Petroleum - Domestic 2.1%
Amerada Hess 50,500 2,743
Murphy Oil 52,500 2,661
5,404
Total Energy 11,252
PROCESS INDUSTRIES 6.3%
Diversified Chemicals 1.5%
Olin 90,000 3,752
3,752
Specialty Chemicals 1.0%
Georgia Gulf 30,000 684
Great Lakes Chemical 45,000 1,775
Octel * 11,250 224
2,683
Paper and Paper Products 2.3%
Consolidated Papers 22,000 599
Sonoco Products 99,000 2,995
Wausau-Mosinee Paper 90,000 2,059
Willamette Industries 11,000 352
6,005
Forest Products 1.5%
Domtar 225,000 $ 1,519
Louisiana Pacific 90,000 1,642
Rayonier 15,000 690
3,851
Total Process Industries 16,291
BASIC MATERIALS 4.6%
Metals 3.6%
Cambior 150,000 881
Inco 175,000 2,384
Inland Steel Industries 100,000 2,819
Nucor 54,000 2,484
Reynolds Metals 15,000 839
9,407
Mining 1.0%
Lonrho (GBP) 62,500 293
Lonrho Africa (GBP) 62,500 77
Newmont Mining 70,000 1,654
TVX Gold * 200,000 612
2,636
Total Basic Materials 12,043
Total Common Stocks (Cost $207,757) 233,800
Convertible Preferred Stocks 0.1%
Security Capital Industrial Trust,
7.00%, (Series B) 12,000 376
Total Convertible Preferred Stocks (Cost $281) 376
Convertible Bonds 0.7%
Liberty Property Trust,
Sub. Deb., 8.20%, 7/1/01 $200,000 257
Security Capital U. S. Realty,
(144a), 2.00%, 5/22/03 2,000,000 1,639
Total Convertible Bonds (Cost $1,814) 1,896
Short-Term Investments 9.3%
Money Market Funds 9.3%
Reserve Investment Fund, 5.69% # 24,221,520 $ 24,222
Total Short-Term Investments (Cost $24,222) 24,222
Total Investments in Securities
99.9% of Net Assets (Cost $234,074) $ 260,294
Other Assets Less Liabilities 180
NET ASSETS $ 260,474
----------
Net Assets Consist of:
Accumulated net investment income
- - net of distributions $ 1,348
Accumulated net realized gain/loss
- - net of distributions 12,157
Net unrealized gain (loss) 26,220
Paid-in-capital applicable to
16,973,122 shares of $0.0001 par
value capital stock outstanding;
1,000,000,000 shares authorized 220,749
NET ASSETS $ 260,474
----------
NET ASSET VALUE PER SHARE $ 15.35
----------
# Seven-day yield
* 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
0.63% of net assets.
GBP British sterling
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Mid-Cap Value Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
6/30/98
Investment Income
Income
Dividend $ 2,011
Interest 697
Total income 2,708
Expenses
Investment management 848
Shareholder servicing 351
Custody and accounting 48
Registration 39
Prospectus and shareholder reports 29
Legal and audit 6
Directors 3
Miscellaneous 57
Total expenses 1,381
Net investment income 1,327
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 11,456
Foreign currency transactions 2
Net realized gain (loss) 11,458
Change in net unrealized gain or loss on securities 1,901
Net realized and unrealized gain (loss) 13,359
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 14,686
---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Mid-Cap Value Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
6/30/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,327 $ 1,160
Net realized gain (loss) 11,458 2,769
Change in net unrealized gain or loss 1,901 19,275
Increase (decrease) in
net assets from operations 14,686 23,204
Distributions to shareholders
Net investment income -- (1,175)
Net realized gain -- (2,056)
Decrease in net assets
from distributions -- (3,231)
Capital share transactions*
Shares sold 53,438 169,513
Distributions reinvested -- 3,185
Shares redeemed (25,641) (23,869)
Increase (decrease) in
net assets from capital
share transactions 27,797 148,829
Net Assets
Increase (decrease) during period 42,483 168,802
Beginning of period 217,991 49,189
End of period $ 260,474 $ 217,991
---------------------------------
*Share information
Shares sold 3,596 12,445
Distributions reinvested -- 224
Shares redeemed (1,692) (1,855)
Increase (decrease)
in shares outstanding 1,904 10,814
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Mid-Cap Value Fund
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Unaudited June 30, 1998
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Mid-Cap Value 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 28, 1996.
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.
Currency Translation Assets and liabilities are translated into U.S. dollars at
the prevailing exchange rate at the end of the reporting period. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
Premiums and Discountso 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 $64,427,000 and $38,469,000, respectively, for the six months ended
June 30, 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 June 30, 1998, the aggregate cost of investments for federal income tax and
financial reporting purposes was $234,074,000, and net unrealized gain
aggregated $26,220,000, of which $34,380,000 related to appreciated investments
and $8,160,000 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 $143,000 was payable at June 30, 1998. The fee is computed daily and
paid monthly, and consists of an individual fund fee equal to 0.35% 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 June
30, 1998, 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.
Under the terms a previous investment management agreement, the manager was
required to bear any expenses through December 31, 1997, which would cause the
fund's ratio of expenses to average net assets to exceed 1.25%. There-after,
through December 31, 1999, the fund is required to reimburse the manager for
these expenses, provided that average net assets have grown or expenses have
declined sufficiently to allow reimbursement without causing the fund's ratio of
expenses to average net assets to exceed 1.25%. Pursuant to this previous
agreement, $7,000 of unaccrued 1996-1997 fees were repaid during the six months
ended June 30, 1998.
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. (TRPS) 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 $337,000 for the six months
ended June 30, 1998, of which $22,000 was payable at period-end.
Additionally, the fund is one of several T. Rowe Price-sponsored mutual funds
(underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum) may
invest. Spectrum does not invest in the underlying funds for the purpose of
exercising management or control. Expenses associated with the operation of
Spectrum are borne by each underlying fund to the extent of estimated savings to
it and in proportion to the average daily value of its shares owned by Spectrum,
pursuant to special servicing agreements between and among Spectrum, the
underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum
International, Rowe Price-Fleming International. Spectrum Growth Fund held
approximately 44.7% of the outstanding shares of the Mid-Cap Value Fund at June
30, 1998.
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, 1998, totaled
$677,000 and are reflected as interest income in the accompanying Statement of
Operations.
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 Discount 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 Mid-Cap Value 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
T. Rowe Price Investment Services, Inc., Distributor. F15-051 6/30/98
