Annual Report
December 31, 1999
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Mid-Cap Equity Growth Fund
Dear Investor
The U.S. stock market continued its relentless upward climb with a strong finish
to 1999. In fact, the large-cap S&P 500 Stock Index rose more than 20% for an
unprecedented fifth year in a row. Although large-company stocks have dominated
in recent years, small- and mid-cap stocks kept pace during the last 12 months.
Technology and telecom stocks dominated the market's advance, while most other
sectors languished.
Performance Comparison
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Periods Ended 12/31/99 6 Months 12 Months
---------------------------------------------------------------------------
Mid-Cap Equity Growth Fund 11.96% 25.10%
S&P MidCap Index 7.34 14.72
Russell Midcap Growth Index 32.49 51.29
Lipper Mid-Cap Core Fund Index 19.34 28.19
After a 21.45% gain in 1998, the Mid-Cap Equity Growth Fund rose a solid
25.10% in 1999, as shown in the table. This result exceeded the return of
the unmanaged S&P MidCap Index, but trailed the returns of the Russell
Midcap Growth Index and the fund's new peer group, the Lipper Mid-Cap Core
Fund Index, as our weightings in technology and Internet issues lagged
these benchmarks. With this report, we are introducing the fund's new
Lipper category. Previously, Lipper Inc. assigned a fund to a category
based on its objective as outlined in its prospectus. The new categories
are based on the major characteristics of each fund's actual portfolio
holdings, such as market capitalization, price/earnings ratios and other
valuation measures, earnings growth rates, and so on. Since inception on
July 31, 1996, the fund has gained 108.83%, in line with 111.56% for the
S&P MidCap Index and exceeding 93.91% for the Lipper Mid-Cap Core Fund
Index.
MARKET ENVIRONMENT
As we began the 1990s, with the economy sputtering under the weight of high
unemployment, low consumer confidence, and a decline in the stock market,
who would have predicted that the decade would end with the longest
economic expansion in U.S. history? As we begin the new millennium, the
economy appears to be in nearly perfect condition: Economic growth remains
robust, consumer confidence is at record levels, and inflation is close to
a 30-year low. But amid the exuberance of our time, subtle harbingers of
inflation give us pause. Asian economies have begun to recover from their
deep recessions, and European growth is also accelerating. Energy prices
rose sharply in 1999, as demand began to increase. Since weak Asian demand
and low energy prices had been viewed as key underpinnings of the
disinflationary environment in recent years, investors sold bonds, causing
long-term interest rates to rise from 5% to 6.5% during the year. The
Federal Reserve, trying to preempt a rise in inflation, increased
short-term interest rates three times-in June, August and November- yet
still seems behind the curve.
While rising interest rates are not normally conducive to good stock market
performance, investor sentiment remained ebullient, especially toward
technology stocks, and Internet stocks in particular. Technology stocks
more than doubled during the year, and have now more than tripled from
their lows of October 1998. As if this performance were not remarkable
enough, Internet stocks rose considerably more. This was a very speculative
market, in which stocks of companies without earnings rose the most.
Winners were clustered in the technology, telecom, and biotech sectors,
while stocks in other industries generally declined for the year. In fact,
more New York Stock Exchange stocks fell than rose for the year, and the
median NYSE stock fell 7.4%.
After five years of large-cap hegemony, small- and mid-cap stocks performed
comparably to large-cap stocks in 1999. However, the larger story was
investment style. Riding the technology tsunami, growth investment
approaches at all capitalization levels trounced value investing,
delivering by some measures the largest-ever annual differential between
the two styles. Reflecting current investment performance, the press fawned
over Generation X entrepreneurs and pilloried icons of value investing such
as Warren Buffett.
PORTFOLIO REVIEW
Given the narrowness of the market's advance and the magnitude of the rally
in technology, telecom, and biotech stocks, it is not surprising that
virtually all of the fund's top contributors for both the last six months
and the year came from these three sectors. The top technology contributors
in both periods were PMC-Sierra, a leader in communications semiconductors,
Analog Devices, a leading semiconductor supplier specializing in
analog-to-digital processors, and SCI Systems, one of the top electronics
suppliers to the computer and telecommunications industries, which we
bought at depressed prices last spring.
The two top contributors to performance for both the 6- and 12-month
periods were Western Wireless, a leading rural cellular service provider in
the mountain states that is posting strong revenue growth, and VoiceStream
Wireless, an urban wireless company that we believe to be in the process of
leveraging its regional operation to become a much more valuable national
wireless provider. Actually, VoiceStream was spun off from Western Wireless
in May 1999, so both stocks originate from the same investment. The two
stocks combined were up about ninefold at year-end from our purchase price
in the spring of 1998 and easily comprise the best investment in the fund's
history. The meteoric ascent of both stocks reflects strong competitive
positioning, outstanding management, and the market's infatuation with
wireless stocks.
The worst detractor to fund performance for the year was Network
Associates, a network security software company that fell well short of
earnings expectations after stumbling badly while integrating several
acquisitions. We eliminated the stock. The worst detriment to second half
performance came from Warnaco Group, a leading apparel company, which also
posted disappointing earnings results. Many of our worst contributors were
health care service companies. Most experienced disappointing earnings
results. We tend to sell companies that miss our expectations over time.
However, we added significantly to two health care holdings on the worst
contributors list-Omnicare, an institutional pharmacy provider, and
AmeriSource Health, a drug distributor-at prices we believed to be very
depressed. While both companies suffered unexpected pressures on their
businesses in 1999, in our opinion they are well managed and their
long-term growth prospects are little changed. We believe that, in
retrospect, the dramatic declines in both stocks will prove to have been
gross overreactions.
The fund remains well diversified across industry sectors. We have sold
some of our consumer stocks since midyear, and our technology weighting has
increased, mostly due to the sector's outperformance. Significant new
holdings since our last report include Hertz, the world's leading car
rental company, Manpower, a leader in staffing services, and TJX, an
off-price retail chain whose best known brands are T.J. Maxx and Marshalls.
Sector Diversification
--------------------------------------------------------------------------
6/30/99 12/31/99
--------------------------------------------------------------------------
Financial 10% 10%
Health Care 13 13
Consumer 20 14
Technology 13 19
Business Services 32 33
Energy 3 5
Industrial 5 4
Basic Materials -- --
Reserves 4 2
---------------------------------------------------------------------------
Total 100% 100%
INVESTMENT STRATEGY AND OUTLOOK
Though the Mid-Cap Equity Growth Fund's absolute return of 25.10% was very
respectable (and more than we should expect for most years going forward),
this was not as strong a period in relation to our benchmarks as many
others in the fund's history. This was primarily attributable to our lack
of emphasis on technology, particularly in the high-flying Internet
companies where we view valuations as problematic. This fund has always
invested in companies that, in our view, have strong managements, proven
business models, good financial characteristics, and reasonable valuations.
These companies were not generally rewarded in the stock market in 1999.
In the last year, we have seen a dramatic dichotomy develop in the market.
On one hand, the New Economy stocks, consisting of technology,
telecommunications, biotechnology, and especially Internet issues, were
irrepressible. Hundreds of companies came public with little or no revenues
and scant prospects of earnings or positive cash flow for many years, yet
garnered fabulous valuations. It will be many years before we know whether
most of these new companies' business models work, and during that time,
they will be dependent on the capital markets to fund their losses. Day
traders drive many of these stocks, and their valuations are increasingly
divorced from reality. However, institutional investors have also joined
the fray, following the momentum of stock price performance. On the other
hand, Old Economy stocks have drifted, even though many of these companies
continue to grow nicely, generate strong cash flow, and sell at already
modest valuations. Wall Street views New Economy stocks as attractive at 20
times sales, but ignores Old Economy stocks at 10 times earnings. In the
mid-cap universe in 1999, the median gain for 58 stocks with negative
earnings was 34.3%; conversely, the median loss for 804 stocks with real
earnings was -10.3%. The best investment strategy in 1999 was to invest in
companies that lose money.
It is conceivable that technology companies will continue to grow and
maintain extraordinary rates of growth for years to come-but this would be
unprecedented. The technology sector is cyclical, and its structural
dynamics change rapidly. Many of today's darlings will be tomorrow's road
kill. Traditionally, failure rates have been highest in technology stocks.
Investors may be underestimating the difficulty these companies will have
staying ahead of the obsolescence curve.
The rapid innovation that is taking place is not good for incumbents, and
may not be good for investors, either, when the mania subsides. Let's look
at recent history. In the early 1980s, euphoria over the limitless
potential of the personal computer swept the market. Ultimately, the PC did
change our lives, but most of the stocks from that period failed miserably.
In the early 1990s, biotech stocks soared as investors dreamt of huge
advances in medical technology. Once again, the industry fulfilled much of
its promise, but investors suffered huge losses. In the nineteenth and
early twentieth centuries, similar waves of enthusiasm centered on exciting
industries of the future, such as railroads, electricity and autos, and the
pattern was eerily similar. The lesson is clear: Most of today's upstarts
will be unable to build enduring companies or achieve profitability, but,
for a few, the rewards will be enormous.
Do not mistake us for Luddites. We own and use plenty of technology. The
current technology mania ultimately will be good for America. The deluge of
capital being lavished on the Internet sector is spurring tremendous
technological innovation which, in turn, is pushing workplace productivity
to new levels and providing consumers with a panoply of new choices that
enhance many aspects of daily life. The technology sector's fundamentals
are outstanding. But what does one pay for a New Economy stock? Valuations
based on earnings and cash flows have been discarded; even price-to-revenue
ratios are giving way to the notion of price-to-market opportunity. In this
environment, stocks take on a life of their own, detached from any inherent
value, moving in whichever direction the momentum takes them. Who's to say
a stock is worth $50, or even $500? Prices are restrained only by the
limits of imagination.
In the Mid-Cap Equity Growth Fund, we are focused on identifying companies
we believe will be long-term beneficiaries of the Internet economy, and
sprinkling new names into the portfolio where we can justify their
valuations. For example, during the year we purchased Citrix Systems, a
leader in Internet application software, and Peregrine Systems, a provider
of electronic infrastructure management software. Recognizing that many Old
Economy companies will be losers in this fast-changing environment, we are
working to identify and eliminate holdings that will be negatively affected
over the long run. Nevertheless, we believe that one of the surprises of
the new year may be that many Old Economy companies, such as Circuit City,
with its new on-line shopping site, and Sotheby's, with its on-line auction
network, will successfully adapt their business models to the Internet
environment. If this were to narrow the valuation chasm between the new and
old economy stocks, watch out!
Moving beyond the Internet, we believe that earnings growth remains the key
to reestablishing mid-cap outperformance. The fact of the matter is that
large U.S. companies have grown their earnings at a faster rate than small-
and mid-caps over the last several years. This is a direct outgrowth, in
our opinion, of a revolution in American corporate management philosophy
that emphasizes efficiency, return on investment, and shareholder value.
However, large-company earnings have grown much faster than sales over this
period, and the question is, how long can this last? At some point, the
higher internal growth of small- and mid-cap companies will be recognized,
probably as large-cap earnings momentum begins to slow. Even though mid-cap
stocks have recovered slightly from their record-low relative valuations
last April, we believe they remain compelling in comparison with
large-caps. We continue to believe that the Mid-Cap Equity Growth Fund
remains well positioned to achieve attractive returns over time.
Respectfully submitted,
Brian W.H. Berghuis
President and
Chairman of the Investment Advisory Committee
John F. Wakeman
Executive Vice President
January 8, 2000
Portfolio Highlights
Twenty-Five Largest Holdings
Percent of
Net Assets
12/31/99
- --------------------------------------------------------------------------------
VoiceStream Wireless 3.7%
Western Wireless 3.0
Analog Devices 2.3
SCI Systems 2.2
Circuit City Stores 2.1
NOVA 1.9
BJ Services 1.8
Waddell & Reed Financial 1.6
Affiliated Computer Services 1.6
Teva Pharmaceutical Industries 1.6
MedImmune 1.5
CIBER 1.5
BJ's Wholesale Club 1.4
Catalina Marketing 1.3
Whole Foods Market 1.3
U.S. Foodservice 1.3
Xilinx 1.2
Novell 1.2
Hertz 1.2
Smith International 1.2
Intuit 1.2
Jones Apparel Group 1.2
Synopsys 1.2
Wellpoint Health Networks 1.2
Keane 1.1
- --------------------------------------------------------------------------------
Total 40.8%
- --------------------------------------------------------------------------------
Note: Table excludes reserves.
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 benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
Mid-Cap Equity Growth Fund
As of 12/31/99
Mid-Cap S&P Lipper
Equity Mid-Cap Mid-Cap Core
Growth Fund Index Fund Index
7/31/96 10,000 10,000 10,000
12/96 11,610 11,707 11,483
12/97 13,745 15,482 14,035
12/98 16,693 18,441 15,127
12/99 20,883 21,156 19,391
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 12/31/99
Since Inception
1 Year 3 Years Inception Date
- --------------------------------------------------------------------------------
25.10% 21 .61% 24.04% 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.
Portfolio Highlights
Contributions to the Change in Net Asset Value Per Share
6 Months Ended 12/31/99
TEN BEST CONTRIBUTORS
- --------------------------------------------------------------------------------
VoiceStream Wireless 84(cents)
Western Wireless 42
PMC-Sierra 22
Analog Devices 22
MedImmune 20
SCI Systems 19
Omnipoint ** 15
Xilinx 13
Novell * 13
Intuit 12
- --------------------------------------------------------------------------------
Total 262(cents)
TEN WORST CONTRIBUTORS
- --------------------------------------------------------------------------------
Warnaco Group -17(cents)
Galileo International 15
Republic Services 14
Ingram Micro ** 9
AmeriSource Health 9
Covance ** 9
United Rentals 8
Henry Schein 8
Shopko Stores 8
Total Renal Care Holdings ** 7
- --------------------------------------------------------------------------------
Total - 104(cents)
12 Months Ended 12/31/99
TEN BEST CONTRIBUTORS
- --------------------------------------------------------------------------------
VoiceStream Wireless * 86(cents)
Western Wireless 77
PMC-Sierra 35
Analog Devices 33
SCI Systems * 32
Xilinx 27
Omnipoint ** 24
MedImmune 24
BJ Services 23
Circuit City Stores 22
- --------------------------------------------------------------------------------
Total 383(cents)
TEN WORST CONTRIBUTORS
- --------------------------------------------------------------------------------
Network Associates ** -16(cents)
AmeriSource Health * 15
Warnaco Group 15
Romac International ** 15
Henry Schein 14
Total Renal Care Holdings ** 14
Omnicare 14
Covance ** 12
Suiza Foods ** 10
Ingram Micro *** 10
- --------------------------------------------------------------------------------
Total - 135(cents)
* Position added
** Position eliminated
*** Position added and eliminated
Financial Highlights
Mid-Cap Equity Growth Fund
For a share outstanding throughout each period
---------------------------------------------------
Year 7/31/96
Ended Through
12/31/99 12/31/98 12/31/97 12/31/96
NET ASSET VALUE
Beginning of period $ 16.28 $ 13.69 $ 11.59 $ 10.00
Investment activities
Net investment
income (loss) (0.02) (0.04) (0.01)* 0.02*
Net realized and
unrealized gain (loss) 4.08 2.94 2.14 1.59
Total from
investment activities 4.06 2.90 2.13 1.61
Distributions
Net investment income -- -- -- (0.02)
Net realized gain (0.27) (0.31) (0.03) --
Total distributions (0.27) (0.31) (0.03) (0.02)
NET ASSET VALUE
End of period $ 20.07 $ 16.28 $ 13.69 $ 11.59
-----------------------------------------------
Ratios/Supplemental Data
Total return (diamond) 25.10% 21.45% 18.39%* 16.10%*
Ratio of total expenses
to average net assets 0.70% 0.85% 0.85%* 0.85%*!
Ratio of net investment
income (loss) to average
net assets (0.13)% (0.35)% (0.12)%* 0.43%*!
Portfolio turnover rate 55.4% 52.8% 41.0% 31.3%!
Net assets, end of period
(in thousands) $265,724 $131,575 $ 57,974 $ 14,367
(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.
* 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
Mid-Cap Equity Growth Fund
December 31, 1999
Shares Value
- --------------------------------------------------------------------------------
In thousands
COMMON STOCKS 97.7%
FINANCIAL 10.0%
Bank and Trust 1.0%
First Tennessee National 25,500 $ 727
North Fork Bancorporation 109,000 1,907
2,634
Insurance 3.7%
ACE Limited 95,500 1,594
E.W. Blanch 23,500 1,439
MGIC Investment 38,000 2,287
Protective Life 66,500 2,115
Radian Group 49,000 2,340
9,775
Financial Services 5.3%
Capital One Financial 54,000 2,602
eSpeed (Class A) * 6,700 239
Federated Investors (Class B) 125,500 2,518
Heller Financial (Class A) 127,500 2,558
Nextcard * 13,000 375
The CIT Group (Class A)* 80,000 1,690
Waddell & Reed Financia
(Class A) 123,500 3,350
Waddell & Reed Financial
(Class B) 37,500 942
14,274
Total Financial 26,683
HEALTH CARE 13.5%
Pharmaceuticals 3.3%
Mylan Laboratories 89,000 2,242
Shire Pharmaceuticals ADR * 70,000 2,026
Teva Pharmaceutical
Industries ADR 58,000 4,152
Watson Pharmaceuticals * 10,500 376
8,796
Biotechnology 5.2%
Affymetrix * 9,500 1,612
Biogen * 32,000 2,703
Gilead Sciences * 48,000 2,595
MedImmune * 24,000 3,980
QLT PhotoTherapeutics * 17,900 1,049
Sepracor * 20,100 1,997
13,936
Medical Instruments and Devices 2.7%
Millipore 65,000 $ 2,511
Sybron International * 112,500 2,777
Waters * 38,000 2,014
7,302
Health Care Services 2.3%
Omnicare 241,500 2,898
Wellpoint Health Networks * 47,000 3,099
5,997
Total Health Care 36,031
CONSUMER 14.4%
Soft Goods Retailers 1.8%
Family Dollar Stores 153,500 2,504
TJX 115,000 2,350
4,854
Hard Goods Retailers 8.1%
BJ's Wholesale Club * 102,000 3,723
Borders Group * 71,000 1,140
Circuit City Stores 124,000 5,588
Consolidated Stores * 108,000 1,755
Costco Wholesale * 18,500 1,688
O'Reilly Automotive * 94,000 2,047
Shopko Stores * 87,000 2,001
Whole Foods Market * 76,000 3,510
21,452
Consumer Non-Durables 1.3%
Jones Apparel Group * 117,000 3,174
Warnaco Group (Class A) 30,000 369
3,543
Restaurants 0.8%
Outback Steakhouse * 83,500 2,171
2,171
Entertainment 1.9%
Premier Parks * 89,000 2,570
Royal Caribbean Cruises 51,000 2,515
5,085
Consumer Services 0.5%
Apollo Group (Class A) * 14,100 283
Sotheby's (Class A) 29,500 885
1,168
Total Consumer 38,273
TECHNOLOGY 18.7%
Computer Software 4.5%
Citrix Systems * 12,500 $ 1,537
Intuit * 53,000 3,175
Parametric Technology * 94,200 2,546
Peregrine Systems * 18,000 1,514
Synopsys * 47,000 3,130
11,902
Semiconductors and Components 8.3%
Analog Devices * 67,000 6,231
KLA-Tencor * 19,000 2,115
Lattice Semiconductor * 21,000 994
Maxim Integrated Products * 64,000 3,018
Molex (Class A) 60,000 2,700
PMC-Sierra * 16,500 2,645
Quantum * 78,000 1,180
Xilinx * 72,000 3,274
22,157
Networking and Telecom Equipment 2.0%
ADC Telecommunications * 26,348 1,911
Novell * 82,000 3,272
5,183
E-Commerce 1.1%
CNET * 9,500 538
EarthLink Network * 13,000 554
PSINet * 27,000 1,670
Safeguard Scientifics * 1,300 211
2,973
Computer Hardware/Peripherals 2.8%
Sanmina * 16,000 1,594
SCI Systems * 70,500 5,794
7,388
Total Technology 49,603
BUSINESS SERVICES 32.8%
Telecom Services 10.3%
Allegiance Telecom * 6,000 551
Charter Communications
(Class A) * 79,500 1,739
Crown Castle International * 82,000 2,629
McLeod USA * 18,500 1,088
Pinnacle Holdings * 49,800 2,129
Rogers Communications
(Class B) * 54,500 1,349
Tritel (Class A) * 6,000 $ 190
VoiceStream Wireless * 69,000 9,805
Western Wireless (Class A) * 119,000 7,936
27,416
Computer Services 7.5%
Affiliated Computer Services
(Class A) * 93,000 4,278
Ceridian 122,000 2,631
Concord EFS * 23,750 611
Galileo International 81,500 2,440
National Data 73,500 2,494
NOVA * 163,500 5,160
SunGard Data Systems * 95,500 2,268
19,882
Distribution 3.5%
AmeriSource Health (Class A) * 162,000 2,460
Henry Schein * 54,000 714
MSC (Class A) * 71,500 947
Tech Data * 67,000 1,820
U.S. Foodservice * 200,000 3,350
9,291
Media and Advertising 2.9%
Catalina Marketing * 30,700 3,554
Infinity Broadcasting (Class A) * 65,875 2,384
Univision Communications
(Class A) * 17,500 1,788
7,726
Environmental 1.0%
Republic Services (Class A) * 190,500 2,738
2,738
Miscellaneous Business Services 6.4%
CIBER * 140,500 3,864
Hertz (Class A) 64,500 3,233
Keane * 95,500 3,032
Manpower 70,500 2,653
Robert Half International * 39,500 1,128
Viad 108,500 3,024
16,934
Transportation 0.7%
C.H. Robinson Worldwide 32,500 1,293
Expeditors International
of Washington 13,200 576
1,869
Engineering and Construction 0.5%
Martin Marietta Materials 33,000 $ 1,353
1,353
Total Business Services 87,209
ENERGY 4.6%
Exploration and Production 1.6%
Devon Energy 87,000 2,860
Ocean Energy * 175,000 1,356
4,216
Energy Services 3.0%
BJ Services * 112,500 4,704
Smith International * 65,000 3,230
7,934
Total Energy 12,150
INDUSTRIAL 3.7%
Specialty Chemicals 0.6%
Great Lakes Chemical 37,500 1,432
1,432
Machinery 3.1%
Danaher 44,000 2,123
Pentair 75,500 2,907
Teleflex 54,000 1,691
United Rentals * 93,000 1,593
8,314
Total Industrial 9,746
Total Common Stocks (Cost $193,977) 259,695
SHORT-TERM INVESTMENTS 2.1%
Money Market Funds 2.1%
Government Reserve Investment
Fund, 4.80% # 5,576,970 5,577
Total Short-Term Investments
(Cost $5,577) 5,577
Total Investments in Securities
99.8% of Net Assets (Cost $199,554) $ 265,272
Other Assets Less Liabilities 452
NET ASSETS $ 265,724
----------
Net Assets Consist of:
Accumulated net realized gain/loss -
net of distributions $ 5,564
Net unrealized gain (loss) 65,718
Paid-in-capital applicable to 13,237,474
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
Corporation authorized 194,442
NET ASSETS $ 265,724
----------
NET ASSET VALUE PER SHARE $ 20.07
----------
# Seven-day yield
* Non-income producing
ADR American Depository Receipt
The accompanying notes are an integral part of these financial statements.
Statement of Operations
Mid-Cap Equity Growth Fund
In thousands
Year
Ended
12/31/99
Investment Income (Loss)
Income
Dividend $ 688
Interest 466
Total income 1,154
Expenses
Investment management 1,238
Custody and accounting 111
Registration 22
Legal and audit 14
Shareholder servicing 11
Directors 7
Prospectus and shareholder reports 5
Miscellaneous 4
Total expenses 1,412
Expenses paid indirectly (1)
Net expenses 1,411
Net investment income (loss) (257)
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 9,423
Change in net unrealized gain
or loss on securities 42,471
Net realized and unrealized gain (loss) 51,894
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 51,637
----------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
Mid-Cap Equity Growth Fund
In thousands
Year
Ended
12/31/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ (257) $ (338)
Net realized gain (loss) 9,423 1,824
Change in net unrealized
gain or loss 42,471 17,390
Increase (decrease) in net
assets from operations 51,637 18,876
Distributions to shareholders
Net realized gain (3,557) (2,366)
Capital share transactions *
Shares sold 106,463 61,424
Distributions reinvested 3,226 2,191
Shares redeemed (23,620) (6,524)
Increase (decrease) in net
assets from capital
share transactions 86,069 57,091
Net Assets
Increase (decrease) during period 134,149 73,601
Beginning of period 131,575 57,974
End of period $ 265,724 $ 131,575
-----------------------
*Share information
Shares sold 6,333 4,141
Distributions reinvested 176 150
Shares redeemed (1,355) (442)
Increase (decrease) in
shares outstanding 5,154 3,849
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
Mid-Cap Equity Growth Fund
December 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
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. 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.
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 and are used to reduce the fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $187,191,000 and $106,787,000, respectively, for the
year ended December 31, 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.
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, 1999. The
results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
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Undistributed net investment income $257,000
Undistributed net realized gain (257,000)
At December 31, 1999, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$199,554,000. Net unrealized gain aggregated $65,718,000 at period-end, of
which $82,972,000 related to appreciated investments and $17,254,000 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 $127,000 was payable at December 31, 1999. The fee is
computed daily and paid monthly, and consists of an individual fund fee
equal to 0.60% of average daily net assets.
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 $73,000 for the year ended December 31, 1999, of which $7,000
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, 1999, totaled $466,000 and are reflected as interest income in
the accompanying Statement of Operations.
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 (comprising Institutional Equity Funds, Inc.,
hereafter referred to as the "Fund") at December 31, 1999, and the results
of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United
States, 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, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 20, 2000
Mid-Cap Equity Growth Fund
Tax Information (Unaudited) for the Tax Year Ended 12/31/99
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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 $1,713,000 from short-term capital gains,
o $1,844,000 from long-term capital gains, subject to the 20% rate gains
category.
For corporate shareholders, $622,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
