Annual Report
December 31, 1997
Mid-Cap Equity Growth Fund
Dear Investor
Following stellar gains in 1995 and 1996, the stock market
turned in another unusually good performance in 1997, again led
by the type of large-capitalization, blue chip companies that
compose the Standard & Poor's 500 Stock Index. The S&P 500's
three-year gain of 125.61% was the best since the inception of
the index in 1936.
Mid-cap stocks lagged the major large-cap indices in the first
half of the year, staged a strong comeback in the third quarter,
and faded again in the last three months of 1997. Except for a
brief period from April to October, growth stocks lagged value
stocks by a considerable margin. Consequently, while the Mid-Cap
Equity Growth Fund outperformed an index of its peers for the
last six months and the year as a whole, it lagged the S&P
MidCap Index for both periods.
Performance Comparison
Periods Ended 12/31/97 6 Months 12 Months
________________________________________________________
Mid-Cap Equity
Growth Fund 11.82% 18.39%
S&P MidCap Index 17.04 32.25
Russell Midcap Growth Index 10.86 22.54
Lipper Mid Cap Fund Index 8.66 17.57
With this report, we are instituting two changes in your fund's
benchmarks. For our peer group comparison, we are using the
Lipper Mid Cap Fund Index instead of the Average of all mid-cap
funds. The Index, which is composed of the 30 largest mid-cap
funds, includes your fund and is generally more representative
of our average market cap. (For the 6- and 12-month periods, the
Average returned 10.55% and 19.63%, respectively.) We have also
added the Russell Midcap Growth Index to reflect the growth
portion of the mid-cap universe, where the fund's program is
focused.
Year-End Distributions
Your Board of Directors declared a short-term capital gain of
$0.02 per share and a long-term capital gain of $0.01 per share.
Both were paid on December 30 to shareholders of record on
December 26.
Market Environment
The year was characterized by a nearly ideal environment for the
domestic stock market. The U.S. economy expanded for the seventh
consecutive year at a rate that was fast enough to accommodate
good corporate earnings growth but slow enough to allay any
fears of resurgent inflation. Reflecting the taming of
inflation, long-term bond yields fell sharply, ending 1997 below
6%. Meanwhile, in Washington, both Republicans and Democrats
appear to have converged in the middle of the political spectrum
on most economic issues, facil-itated in part, perhaps, by
surging tax receipts and the possibility of a balanced budget as
soon as the current fiscal year. This convergence resulted in a
tangible benefit for many investors-a reduction in the long-term
capital gains rate. With the political and economic backdrop so
positive, it is not surprising that consumer confidence remains
close to record levels.
The major investment concern emanated from Asia, as the
extraordinary economic growth of the Asian tiger economies was
imperiled. What began in July as a currency crisis in Thailand
was followed within weeks by devaluations in Indonesia,
Malaysia, and the Philippines, and by the de facto default of
South Korea in the fall. In Japan, which has still not recovered
from the implosion of its own real estate and stock market
bubble, banks and brokerages failed. Asian markets plunged, and
their currencies fell dramatically against the U.S. dollar,
precipitating a major crisis. Except for a volatile period last
October, the U.S. stock market thus far has been relatively
unaffected by these events.
The U.S. stock market advanced 33.36%, as measured by the
large-cap Standard & Poor's 500 Stock Index. This was somewhat
surprising to us since the strengthening dollar is a drag on the
earnings of many large multinational companies. Furthermore, the
stocks of small and mid-size companies usually outdistance
larger stocks late in economic expansions, but not this time.
Perhaps the reason is that larger companies have benefited from
restructuring and cost cutting, whereas small and mid-size
companies are still growing rapidly and have had little fat to
cut. In any case, mid-cap stocks generally lagged large-caps in
1997. Within the mid-cap group, there was a pronounced
difference between growth stocks and value stocks, as
exemplified by the Russell indices shown in the table:
6 Months 12 Months
________________________________________________________
Russell Midcap Index 14.54% 29.01%
Russell Midcap Growth Index 10.86 22.54
Russell Midcap Value Index 17.34 34.37
The largest difference in performance between the two mid-cap
segments was the performance of the financial stocks,
particularly the slower-growing mid-cap banks, which experienced
a consolidation frenzy during the year.
Portfolio Review
Driven by falling interest rates, financial services was the
best-performing sector in the market. Not surprisingly, two
financial stocks were also the fund's top contributors for 1997:
Franklin Resources, a leading mutual fund manager and
distributor, benefited from strong stock and bond markets; and
ACE Limited, a leading multi-specialty property and casualty
insurer, reported sharply rising earnings from recently acquired
lines of business. Several consumer companies were also top
contributors: General Nutrition, the leading retailer of
vitamins and health supplements in the U.S., had strong sales
and earnings gains; and Royal Caribbean Cruises experienced
extremely strong bookings on its ships. The top contributor for
the second half of 1997 was Cox Communications, a cable company
that is leading its industry in the implementation of new
services, particularly high-speed Internet access and local
telephone service.
The year's worst detractor to performance was Mercury Finance,
a leader in used automobile lending. Along with other investors,
we were victimized by suspected management fraud and
manipulation of financial statements and are seeking redress
through legal action. The fund was also hurt by its position in
Boston Chicken, a restaurant operator whose stock fell when an
unanticipated slowdown precipitated a reevaluation by investors
of what was, in hindsight, an overly aggressive expansion plan
and a problematic financial structure. The worst-performing
industry in 1997 was precious metals, as gold fell from a 1997
high of $370 per ounce to a low of $283 near year-end. Our
holdings in two growing gold companies, TVX Gold and Cambior,
also fell. Finally, the worst performer in the second half was
United States Surgical. Unanticipated weakness in the company's
base noninvasive surgery supply business undercut exciting
growth in new product lines.
Sector Diversification
6/30/97 12/31/97
________________________________________________________
Financial 10% 9%
Health Care 10 12
Consumer 18 20
Technology 7 11
Business Services 28 29
Energy 7 5
Industrial 10 7
Basic Materials 2 2
Reserves 8 5
Your fund remains well diversified across sectors. We have made
only modest changes in the last six months, as shown in the
table.
Investment Strategy and Outlook
As we begin 1998, the critical investment issue is whether the
Asian economic crisis will affect the U.S. stock market. We have
already seen tremendous damage inflicted on Asian financial
markets and are likely to see the economies of many of these
countries begin to contract. There will be derivative effects on
western nations that are difficult to predict at this stage.
However, it is apparent that the overinvestment in productive
capacity in many Asian nations will take time to absorb, and
part of the solution will inevitably involve greater exports of
cheaper goods into the United States and fewer imports of
suddenly expensive American goods into Asia. This may well slow
the U.S. economy and further dampen our inflation rate. If
domestic labor markets continue to tighten, the result could be
a squeeze on corporate profits as wages rise but companies are
unable to pass through price increases. In 1998, we may well
find out how globally integrated the world's economies have
become.
One thing we do surmise is that we have entered a period of
change. This usually entails higher risks. Stock market
volatility, which increased significantly in 1997, is often a
signal of change, although it is rarely obvious at the time what
those changes are.
We should note, however, that we manage your fund not by making
major macroeconomic judgments but by picking stocks we believe
will produce good returns over a reasonable time horizon. We
will continue to invest based on the precept that fundamental
research will deliver superior long-term results. We devote our
time to carefully researching and evaluating company
fundamentals. While we typically examine a multitude of factors
before we invest, and virtually never invest before a
face-to-face meeting with a company's management, several of the
criteria we focus on include the growth in the company's
industry sector; the growth rate we foresee for the company over
the next several years; the strength of a company's business
model (competitive advantages such as brand names, low-cost
production, and patent positions); management we respect; strong
financial characteristics such as good cash flow and healthy
balance sheets; and, finally, reasonable valuations.
Nevertheless, at the margin, we make adjustments over time to
respond to changing conditions. A year ago, we noted that there
had been a bifurcation in the mid-cap growth stock universe into
two groups: the momentum stocks, featuring fast-growing
companies with accelerating fundamentals trading at extremely
high valuations; and the plodders, growing more slowly and less
assuredly, but trading at dramatically lower valuations. In the
last year, many (though not all!) of the formerly high-flying
momentum stocks have returned to more reasonable valuations, and
we are more focused on some of these faster growers than we were
a year ago. Conversely, we are emphasizing the plodders a little
less, not only because the valuation differential with the
faster growers has narrowed, but also because we believe that in
a more difficult pricing environment, the faster-growing
companies are generally less dependent on pricing for their
growth.
While the stock market as a whole continues to trade near the
upper end of its traditional valuation range, low interest rates
provide some support as long as earnings growth continues.
Relative to the overall market, we believe mid-cap growth stocks
look quite attractive. The aggregate underlying growth rate of
our portfolio companies is well in excess of the market as a
whole, yet the price/earnings ratio is only modestly higher than
the market, and well below many of the blue chip leaders. In
addition, many of our mid-cap companies have little direct
foreign exposure, a factor that could be an advantage for the
first time in several years. Finally, the drop in the long-term
U.S. capital gains tax rate should favor small- and mid-cap
growth companies, most of which pay little or no dividends in
order to reinvest in their own growth. We believe the mid-cap
growth sector, and your fund in particular, are well-positioned
to achieve attractive returns over the long run.
Respectfully submitted,
Brian W. H. Berghuis
President and Chairman of the Investment Advisory Committee
January 19, 1998
Portfolio Highlights
Twenty-Five Largest Holdings
Percent of
Net Assets
12/31/97
________________________________________________________
Warnaco Group 2.2%
JP Foodservice 2.0
Biogen 1.9
Suiza Foods 1.9
Affiliated Computer Services 1.8
Danaher 1.7
Royal Caribbean Cruises 1.7
TriMas 1.7
Culligan Water Technologies 1.6
Outdoor Systems 1.6
SunGard Data Systems 1.6
Circuit City Stores 1.6
PartnerRe Holdings 1.5
Cox Communications 1.5
ACE Limited 1.5
Interim Services 1.5
DST Systems 1.5
Cendant 1.4
FINOVA Group 1.4
Network Associates 1.4
360 Communications 1.4
Galileo International 1.4
Franklin Resources 1.4
Teleflex 1.3
Quorum Health Group 1.3
________________________________________________________
Total 39.8%
Contributions to the Change in Net Asset Value Per Share
6 Months Ended December 31, 1997
Ten Best Contributors
________________________________________________________
Cox Communications 8(cents)
Royal Caribbean Cruises 8
Outdoor Systems 8
ACE Limited 8
Cendant 7
Comcast 6
Gilead Sciences 5
SunGard Data Systems 5
BDM International ** 5
PLATINUM technology 5
________________________________________________________
Total 65(cents)
Ten Worst Contributors
________________________________________________________
United States Surgical - 5(cents)
Cambior 5
Vencor * 5
TVX Gold 5
OEA 3
St. Jude Medical 3
Fairfax Financial 3
Great Lakes Chemical 3
Xilinx 2
Quest Diagnostics ** 2
________________________________________________________
Total - 36(cents)
12 Months Ended December 31, 1997
Ten Best Contributors
________________________________________________________
ACE Limited 13(cents)
Franklin Resources 12
General Nutrition 11
Royal Caribbean Cruises * 11
Outdoor Systems * 10
Costco Companies 9
Gartner Group * 9
Cox Communications 9
Kohl's 8
Cooper Cameron 8
________________________________________________________
Total 100(cents)
* Position added
** Position eliminated
Ten Worst Contributors
________________________________________________________
Mercury Finance ** - 15(cents)
Boston Chicken ** 11
TVX Gold 8
Cambior 7
Corporate Express 6
American Pad & Paper ** 6
OEA 6
Ikon Office Solutions 5
United States Surgical * 5
Scholastic ** 5
________________________________________________________
Total - 74(cents)
T. Rowe Price Mid-Cap Equity Growth Fund
December 31, 1997
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.
Mid-Cap Equity Growth Fund
December 31, 1997
Mid-Cap
Equity Growth S&P MidCap Lipper Mid Cap
Fund Index Fund Index
7/31/96 $ 10,000 $ 10,000 $ 10,000
12/96 11,610 11,707 12,298
12/97 13,745 15,482 13,363
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.
Mid-Cap Equity Growth Fund
Periods Ended 12/31/97
Since Inception
1 Year Inception Date
_______________________________________________________
18.39% 37.45% 7/31/96
Investment return and principal value represent past performance
and will vary. Shares may be worth more or less at redemption
than at original purchase.
Total returns do not include charges imposed by your insurance
company's separate account. If these were included, performance
would have been lower.
Financial Highlights
T. Rowe Price Mid-Cap Equity Growth Fund
For
a share outstanding
throughout each period
_______________________
Year 7/31/96
Ended Through
12/31/97 12/31/96
NET ASSET VALUE
Beginning of
period $ 11.59 $ 10.00
Investment activities
Net investment income (0.01)* 0.02*
Net realized and
unrealized gain (loss) 2.14 1.59
Total from
investment activities 2.13 1.61
Distributions
Net investment income - (0.02)
Net realized gain (0.03) -
Total Distributions (0.03) (0.02)
NET ASSET VALUE
End of period $ 13.69 $ 11.59
___________________
Ratios/Supplemental Data
Total return 18.39%* 16.10%*
Ratio of expenses to
average net assets 0.85%* 0.85%*!
Ratio of net investment
income to average
net assets (0.12)%* 0.43%*!
Portfolio turnover rate 41.0% 31.3%!
Average commission rate paid $ 0.0487 $ 0.0402
Net assets, end of period $ 57,974 $ 14,367
* Excludes expenses in excess of a 0.85% voluntary expense
limitation in effect through 12/31/97.
! Annualized.
The accompanying notes are an integral part of these financial
statements.
Statement of Net Assets
T. Rowe Price Mid-Cap Equity Growth Fund
December 31, 1997
Shares/Par Value
In thousands
Common Stocks 95.3%
FINANCIAL 8.7%
Insurance 3.9%
ACE Limited 8,900 $ 859
Fairfax Financial (CAD) * 2,300 515
PartnerRe Holdings 18,900 876
2,250
Financial Services 4.8%
Capital One Financial 11,800 640
FINOVA Group 16,500 820
Franklin Resources 9,100 791
INMC Mortgage Holdings 23,000 539
2,790
Total Financial 5,040
HEALTH CARE 12.5%
Pharmaceuticals 1.6%
Agouron Pharmaceuticals * 10,200 298
ALZA (Class A) * 19,800 630
928
Biotechnology 3.0%
Biogen * 30,500 1,111
Gilead Sciences * 16,900 649
1,760
Medical Instruments and
Devices 3.0%
St. Jude Medical * 16,500 503
Sybron International * 13,200 620
United States Surgical 20,600 604
1,727
Health Care Services 4.9%
Cardinal Health 7,100 533
Covance * 37,000 735
Omnicare 21,400 664
Quorum Health Group * 28,050 736
Vencor * 7,300 179
2,847
Total Health Care 7,262
CONSUMER 20.0%
Soft Goods Retailers 2.2%
Gymboree * 25,500 700
Kohl's * 8,200 558
1,258
Hard Goods Retailers 6.7%
BJ's Wholesale Club * 20,600 $ 646
Circuit City Stores 25,400 903
Costco Companies * 16,500 736
Fred Myer * 17,300 629
General Nutrition * 18,100 614
Shopko Stores * 17,400 379
3,907
Consumer Non-Durables 3.8%
Culligan Water
Technologies * 18,700 940
Warnaco Group (Class A) 40,300 1,264
2,204
Restaurants 0.9%
Outback Steakhouse * 18,100 524
524
Food and Beverages 1.9%
Suiza Foods * 18,100 1,078
1,078
Entertainment 1.7%
Royal Caribbean Cruises 18,400 981
981
Consumer Services 2.8%
Cendant * 24,106 829
La Quinta Inns 25,500 493
Stewart Enterprises
(Class A) 6,500 303
1,625
Total Consumer 11,577
TECHNOLOGY 10.6%
Computer Software 4.5%
BMC Software * 7,100 465
Intuit * 7,700 318
Network Associates * 15,400 813
PLATINUM technology * 5,500 156
Security Dynamics
Technologies * 9,100 326
Synopsys * 14,800 528
2,606
Semiconductors and
Components 3.7%
Analog Devices * 16,500 457
Maxim Integrated Products * 15,800 546
Microchip Technology * 11,500 346
PMC-Sierra * 9,500 296
Xilinx * 14,000 $ 490
2,135
Networking and Telecom
Equipment 0.5%
Anixter International * 18,900 312
312
E-Commerce 1.9%
Checkfree * 15,600 424
Sterling Commerce * 17,300 665
1,089
Total Technology 6,142
BUSINESS SERVICES 29.1%
Telecom Services 6.6%
360 Communications * 39,800 804
Cincinnati Bell 13,200 409
Comcast (Class A Special) 23,000 725
Cox Communications
(Class A) * 21,700 869
Omnipoint * 18,100 422
Paging Network * 41,000 442
Vanguard Cellular
(Class A) * 14,000 179
3,850
Computer Services 7.2%
Affiliated Computer Services
(Class A) * 40,300 1,060
DST Systems * 19,800 845
Galileo International 28,700 793
National Data 15,600 564
SunGard Data Systems * 29,200 905
4,167
Distribution 6.1%
Corporate Express * 42,800 553
Fastenal 5,800 223
Henry Schein * 4,900 172
Ikon Office Solutions 10,700 301
JP Foodservice * 31,100 1,149
MSC * 14,000 593
Richfood Holdings 19,800 559
3,550
Media and Advertising 3.6%
ADVO * 7,400 144
Catalina Marketing * 12,800 592
Jacor Communications * 7,600 404
Outdoor Systems * 24,400 $ 937
2,077
Real Estate Services 1.1%
Security Capital Group
(Class B) * 19,800 643
643
Environmental 1.0%
USA Waste Services * 14,800 581
581
Miscellaneous Business
Services 3.5%
AccuStaff * 19,800 456
Gartner Group (Class A) * 18,900 705
Interim Services * 32,900 851
2,012
Total Business Services 16,880
ENERGY 5.2%
Exploration and Production 0.8%
United Meridian * 17,000 478
478
Energy Services 4.4%
Camco International 10,800 688
Cooper Cameron * 10,700 653
Smith International * 9,900 607
Weatherford Enterra * 13,300 582
2,530
Total Energy 3,008
INDUSTRIAL 6.9%
Defense & Aerospace 1.0%
BE Aerospace * 22,200 594
594
Auto Related 0.3%
OEA 6,300 182
182
Specialty Chemicals 0.9%
Great Lakes Chemical 12,300 552
552
Machinery 4.7%
Danaher 15,600 985
Teleflex 20,000 755
TriMas 28,100 966
2,706
Total Industrial 4,034
BASIC MATERIALS 1.7%
Mining 1.7%
Battle Mountain Gold
(Class A) 84,000 $ 494
Cambior 32,900 193
TVX Gold * 88,900 300
Total Basic Materials 987
Miscellaneous Common Stocks 0.6% 338
Total Common Stocks (Cost $49,411) 55,268
Short-Term Investments 14.2%
Money Market Fund 14.2%
Government Reserve
Investment Fund
5.55% # 8,230,568 8,231
Total Short-Term Investments
(Cost $8,231) 8,231
Total Investments in Securities
109.5% of Net Assets (Cost $57,642) $ 63,499
Other Assets Less Liabilities (5,525)
NET ASSETS $ 57,974
_________
Net Assets Consist of:
Accumulated net realized gain/loss -
net of distributions 449
Net unrealized gain (loss) 5,857
Paid-in-capital applicable to 4,233,601
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares
authorized 51,668
NET ASSETS $ 57,974
_________
NET ASSET VALUE PER SHARE $ 13.69
_________
* Non-income producing
# Seven-day yield
CAD Canadian dollar
The accompanying notes are an integral part of these financial
statements.
Statement of Operations
T. Rowe Price Mid-Cap Equity Growth Fund
In thousands
Year
Ended
12/31/97
Investment Income
Income
Interest $ 135
Dividend 90
Total income 225
Expenses
Investment management 117
Custody and accounting 105
Legal and audit 12
Registration 10
Directors 7
Shareholder servicing 6
Prospectus and shareholder reports 3
Miscellaneous 3
Total expenses 263
Net investment income (38)
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 544
Foreign currency transactions (1)
Net realized gain (loss) 543
Change in net unrealized gain or
loss on securities 5,325
Net realized and unrealized gain (loss) 5,868
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 5,830
_________
The accompanying notes are an integral part of these financial
statements.
Statement of Changes in Net Assets
T. Rowe Price Mid-Cap Equity Growth Fund
In thousands
Year 7/31/96
Ended Through
12/31/97 12/31/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ (38) $ 10
Net realized gain (loss) 543 72
Change in net unrealized
gain or loss 5,325 532
Increase (decrease) in net
assets from operations 5,830 614
Distributions to shareholders
Net investment income - (24)
Net realized gain (114) -
Decrease in net assets
from distributions (114) (24)
Capital share transactions*
Shares sold 38,240 13,650
Distributions reinvested 100 16
Shares redeemed (449) -
Increase (decrease) in net
assets from capital
share transactions 37,891 13,666
Net equalization - 11
Net Assets
Increase (decrease) during period 43,607 14,267
Beginning of period 14,367 100
End of period $ 57,974 $ 14,367
_____________________
*Share information
Shares sold 3,023 1,228
Distributions reinvested 8 2
Shares redeemed (37) -
Increase (decrease) in
shares outstanding 2,994 1,230
The accompanying notes are an integral part of these financial
statements.
Notes to Financial Statements
T. Rowe Price Mid-Cap Equity Growth Fund
December 31, 1997
Note 1 - Significant Accounting Policies
T. Rowe Price Institutional Equity Funds, Inc. (the corporation)
is registered under the Investment Company Act of 1940. The
Mid-Cap Equity Growth Fund (the fund), a diversified, open-end
management investment company, is the sole portfolio established
by the corporation and commenced operations on July 31, 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.
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 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.
Effective January 1, 1997, the fund discontinued its practice of
equalization. The results of operations and net assets were not
affected by this change.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than
short-term securities, aggregated $48,532,000 and $12,061,000,
respectively, for the year ended December 31, 1997.
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.
In order for the fund's capital accounts and distributions to
shareholders to reflect the tax character of certain
transactions, the following reclassifications were made during
the year ended December 31, 1997. The results of operations and
net assets were not affected by the increases/(decreases) to
these accounts.
Undistributed net investment income $ 38,000
Undistributed net realized gain (38,000)
At December 31, 1997, the aggregate cost of investments for
federal income tax and financial reporting purposes was
$57,642,000 and net unrealized gain aggregated $5,857,000 of
which $7,412,000 related to appreciated investments and
$1,555,000 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
management fee, of which $25,000 was payable at December 31,
1997. The fee is computed daily and paid monthly, and is equal
to 0.60% of the fund's average daily net assets.
Under the terms of the investment management agreement, the
manager is required to bear any expenses through December 31,
1997, which would cause the fund's ratio of expenses to average
net assets to exceed 0.85%. Thereafter, 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 0.85%. Pursuant to this agreement, $68,000 of
management fees were not accrued by the fund for the year ended
December 31, 1997 and $48,000 remains unaccrued from prior
periods.
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 $66,000 for the
year ended December 31, 1997, of which $6,000 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, 1997, totaled $46,000 and
are reflected as interest income in the accompanying Statement
of Operations.
T. Rowe Price Mid-Cap Equity Growth Fund
Tax Information for the Tax Year Ended 12/31/97
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 $76,000 from short-term capital gains, and
o $38,000 from long-term capital gains.
For corporate shareholders, 84% of the fund's distributed income
and short-term capital gains qualified for the
dividends-received deduction.
Report of Independent Accountants
To the Board of Directors of Institutional Equity Funds, Inc.
and Shareholders of Mid-Cap Equity Growth Fund
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 Mid-Cap Equity Growth Fund
(constituting Institutional Equity Funds, Inc., hereafter
referred to as the "Fund") at December 31, 1997, the results of
its operations for the year then ended, and the changes in its
net assets and the financial highlights for the year then ended
and for the period July 31, 1996 (commencement of operations)
through December 31, 1996, 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, 1997 by
correspondence with custodians and, where appropriate, the
application of alternative auditing procedures for unsettled
security transactions, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 21, 1998
