Semiannual Report
June 30, 2000
Institutional Small-Cap Stock Fund
T. Rowe Price Invest with Confidence (registered trademark)
Dear Investor
This is the first report of the Institutional Small-Cap Stock Fund, and as such
it covers only the three-month period between the fund's inception on March 31,
2000, and the end of the first half. The assets of the fund were transferred
over from the former T. Rowe Price Small-Cap Stock Trust during the second
quarter, and we would like to thank the large majority of trust shareholders who
elected to have their investments transferred to the Institutional Small-Cap
Stock Fund. The fund's investment strategy, objective, and portfolio manager are
the same as those of the trust were; only the corporate structure has changed.
In the future, Institutional Small-Cap Stock Fund investors will receive
reports every six months, featuring portfolio information and manager
commentary dated June 30 (semiannual) and December 31 (annual). The
upcoming annual report will cover the first nine months of the fund's
existence through December 31, 2000, but will focus on the second half of
the year.
MARKET ENVIRONMENT
Amid extreme volatility and another Federal Reserve rate hike in the second
quarter of 2000, the Institutional Small-Cap Stock Fund advanced. Last
year's high-flying sectors such as technology, biotechnology, and telecom
fell sharply through late May (at one point the Nasdaq Composite suffered a
37% correction) before rallying again in June. With sector and style
rotation coming fast and furiously, our balanced approach served
shareholders well.
Small-cap stocks corrected more sharply than large-caps during the second
quarter, with high-priced growth stocks leading on the downside, but
maintained the advantage year-to-date. Equally important for our
shareholders, fundamentals such as earnings, cash flow, and financial
viability once again became key determinants of stock market success. The
Russell 2000 Value Index rose 1.95% in the quarter and a solid 5.85% in the
first six months of the year. Small-cap stocks are the only market segment
in which value stocks led growth stocks in the first half. The valuations
of many small-cap stocks became too attractive for investors to ignore. The
lack of profits at many Internet firms also became too glaring for the
market to overlook, and the group remained generally out of favor for much
of the period even as other sectors rebounded. In fact, while Internet
stocks drove much of the Russell 2000!s performance in 1999, they were a
liability in the second quarter (and in the first half).
Performance Comparison
---------------------------------------------------------------------------
Period Ended 6/30/00 3 Months
---------------------------------------------------------------------------
Institutional Small-Cap
Stock Fund 2.60%
Russell 2000 Index -3.78
Lipper Small-Cap
Core Fund Index -1.60
Your fund's 2.60% gain in the three months ended June 30 was modest in
absolute terms but shone in comparison with the losses suffered by both our
benchmarks. As stock picking and fundamental analysis replaced the market's
Internet casino mentality, the strength of T. Rowe Price's research gave us
an edge. Our stable core of small-cap value stocks also held us in good
stead as formerly red-hot growth stocks fizzled in the second quarter.
PORTFOLIO HIGHLIGHTS
Since this is our first report under the fund's new organization, we
thought it might be helpful to review some of our top holdings. The
Institutional Small-Cap Stock Fund employs a stable blend of growth and
value strategies, with an emphasis on value. We do not chase performance or
investment fads, but remain true to our valuation disciplines and long-term
orientation.
Our top holding as of June 30 will not be in the portfolio for long.
Tucson-based Burr-Brown, a maker of analog and mixed-signal processing
chips that are critical in communications and other applications, agreed to
be acquired by Texas Instruments for a hefty premium in late June. As
small-cap managers, we often find that some of our best holdings end up
being acquired by larger companies and, eventually, we have to let them go
to stay within our objective.
Littelfuse, our second-largest holding, is another technology stock that
illustrates how our patience and value orientation often pay off in the
long run. The Des Plaines, Illinois-based company makes fuses and other
circuit-protection devices for a variety of industrial uses-many of them
mundane. But investors have recently discovered the value of its products
in the burgeoning field of communications networks, sparking the shares to
a healthy gain.
Sector Diversification
---------------------------------------------------------------------------
Business Services and Transportation 23
Capital Equipment, Process Industries, and Basic Materials 7
Technology 14
Consumer Services, Cyclicals, and Education 19
Financial 10
Energy and Utilities 8
Consumer Nondurables 15
Reserves 4
Newport Beach, California-based Downey Financial is a well-run thrift with
a high return on equity, lean expenses, and strong market share in
California. The stock soared in the second quarter, but the valuation
remains reasonable, and the company may be an attractive consolidation
candidate.
Keynote Systems, a recent purchase and our fourth-largest holding, provides
Web site performance measurement services to more than 1,000 customers in
the U.S. The company evaluates the quality of service a consumer receives
from the Web site, which is valuable information for the managers of that
site. Following a 75% drop in the stock, we started purchasing Keynote
Systems. Though the company is small, it is growing more than 400% annually
and expects to become profitable in 2001.
Fifth-largest holding Technitrol-like Littelfuse-surged as Wall Street
discovered its strong position in networking and telecom equipment
components. We significantly reduced our position in the stock as it met
our valuation target after nearly doubling in the second quarter. Inhale
Therapeutic Systems is a promising biotech firm with a unique pulmonary
drug delivery system that captured investors' fancy as they began to focus
on its inhaleable diabetes drug currently under development with Pfizer.
We recently added to our positions in the energy industry to take advantage
of rising commodity prices and improving fundamentals. Two of our holdings
include oil and gas exploration and production companies Barrett Resources
and Noble Affiliates. Late in the second quarter we invested in Cross
Timbers Oil, another exploration and production company with-despite its
name-a focus on natural gas in Texas and Oklahoma. We purchased Cross
Timbers at under six times cash flow, a sizable discount to its peers.
Companies with exposure to natural gas are performing well due to positive
long-term forecasts for supply-and-demand and gas prices.
Of course, not all of our top holdings and new purchases worked well during
the second quarter. Poor performers included iGate Capital, Progress
Software, and Methode Electronics. iGate Capital, an operator and incubator
of information technology and e-commerce software and services firms,
announced a strategic reorganization during the quarter and also got caught
in the downdraft of most Internet-related stocks. Progress Software makes
applications that enable independent software developers to distribute
products on the Internet. Methode Electronics, which had risen on
enthusiasm about the initial public offering of its optical components
division, declined in the second quarter as the IPO market deteriorated.
OUTLOOK
The first half and second quarter of 2000 were accompanied by record market
volatility and aggressive, seemingly hourly rotation into and out of hot
sectors like technology, biotech, and telecom. Keith Mullins, the
well-respected small-cap strategist at Salomon Smith Barney, recently wrote
that year-to-date through late June, the Nasdaq Composite had posted 13
single-day moves of 5% or more. No wonder our antacid consumption reached
record highs in recent months. However, volatility provides opportunity. As
the market's enthusiasm for the latest hot sectors waxes and wanes rapidly,
we find opportunities to nimbly acquire excellent companies at bargain
prices.
To illustrate the market's skittishness, consider the case of Keynote
Systems, discussed in the portfolio highlights section, which measures
customer satisfaction with Web sites. Keynote is a well-managed software
company in a hot area (e-commerce). Studies show that if a Web surfer
experiences even a minor delay in site performance, he'll move elsewhere
quickly, taking his business with him. Investors bid Keynote up to a high
of $177 early in March only to cut it down as low as $26.50 in April. We
picked up shares in the $30s at that time, and by the end of the first half
the stock traded at $65. Fickle investors give patient investors great
opportunities, but the ride can be rough.
Small-Cap Expectations
FUND
"1984" 1.44
1.47
'86 1.47
1.50
'88 1.41
1.44
'90 1.40
1.32
'92 1.33
1.50
1.46
6/94 1.50
1.51
1.39
1.41
6/95 1.42
1.40
1.46
1.48
6/96 1.48
1.49
1.53
1.48
6/97 1.46
1.44
1.47
1.42
6/98 1.41
1.39
1.39
1.28
6/99 1.27
1.29
1.41
1.17
6/00 1.14
Despite the recent strong performance of small-cap shares, the valuations
remain very attractive compared with large-caps, and we continue to see
excellent long-term value in the sector. Positive earnings surprises could
serve as a catalyst for the sector. After the past year of robust large-cap
earnings growth, investors now expect large-cap earnings to continue
growing at nearly the same rate as small-cap earnings-a historically
unsustainable feat. Merrill Lynch's small-cap strategist recently published
an interesting chart, reproduced here, that illustrates relative earnings
expectations for large-caps versus small-caps. A rising line indicates
investors expect great small-cap earnings. Conversely, a falling line
indicates investors are expecting relatively stronger large-cap earnings.
This chart shows that small-cap earnings growth expectations are at a
record low compared with expectations for large-caps. Therefore, we have
reason to believe that the likelihood of positive earnings surprises going
forward is much greater with small-caps than with large companies.
As the market comes back to fundamentals, we expect that our small-cap
research team here at T. Rowe Price can continue to produce strong
performance compared with our small-cap benchmarks. We believe our blend of
growth and value strategies will continue to serve us well in the future.
Thank you for your support.
Respectfully submitted,
Greg A. McCrickard
President and Chairman of the Investment Advisory Committee
July 27, 2000
Portfolio Highlights
--------------------------------------------------------------------------------
Twenty-Five Largest Holdings
Percent of
Net Assets
6/30/00
Burr-Brown 1.9%
Littelfuse 1.7
Downey Financial 1.5
Keynote Systems 1.4
Technitrol 1.4
Inhale Therapeutic Systems 1.4
Matthews International 1.4
Cleco 1.3
Methode Electronics 1.3
Mentor 1.2
Brown and Brown 1.2
Progress Software 1.2
A.O. Smith 1.1
Chittenden 1.1
Parkway Properties 1.1
Southwest Bancorp 1.1
Noble Affiliates 1.1
SCP Pool 1.0
Arch Chemicals 1.0
Barret Resources 1.0
International Multifoods 0.9
F.Y.I 0.9
U.S. Can 0.9
Emmis Broadcasting 0.9
Harman International 0.9
--------------------------------------------------------------------------------
Total 29.9%
--------------------------------------------------------------------------------
Note: Table excludes reserves.
Financial Highlights
T. Rowe Price Institutional Small-Cap Stock Fund
(Unaudited)
For a share outstanding
throughout the period
-----------------------
3/31/00
Through
6/30/00
NET ASSET VALUE
Beginning of period $ 10.00
Investment activities
Net investment income (loss) -*
Net realized and
unrealized gain (loss) 0.26
Total from
investment activities 0.26
NET ASSET VALUE
End of period $ 10.26
---------
Ratios/Supplemental Data
Total return (diamond) 2.60%*
Ratio of total expenses to
average net assets 0.75%*'
Ratio of net investment
income (loss) to average
net assets 1.01%*'
Portfolio turnover rate 19.5%'
Net assets, end of period (in thousands) $ 74,741
(diamond) Total return reflects the rate that an investor would have earned on
an investment in the fund during the period, assuming reinvestment
of all distributions.
* Excludes expenses in excess of a 0.75% voluntary expense limitation
in effect through 12/31/01.
' Annualized
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
Institutional Small-Cap Stock Fund
June 30, 2000 (Unaudited)
Shares Value
--------------------------------------------------------------------------------
In thousands
Common Stocks 96.2%
FINANCIAL 10.2%
Bank and Trust 6.2%
Charter One Financial 10,573 $ 243
Chittenden 34,900 853
Citizens Banking 23,100 375
Downey Financial 37,700 1,093
First Bell Bancorp 3,900 59
First Mariner Bancorp 600 3
First Security 6,600 90
Frankfort First Bancorp 2,900 36
Glacier Bancorp 20,323 266
Marshall & IIsley 1,100 46
Southwest Bancorporation * 38,600 803
Summit Bancorp 8,400 207
WestAmerica 20,100 526
4,600
Insurance 3.5%
Brown and Brown 17,400 905
Harleysville Group 8,400 139
London Pacific Group ADR 25,600 333
Medical Assurance 23,900 269
PartnerRe Holdings 18,700 663
Selective Insurance 6,000 113
W. R. Berkley 11,500 215
2,637
Financial Services 0.5%
Delta Financial * 11,300 19
Financial Federal * 13,600 236
ITLA Capital * 8,200 115
370
Total Financial 7,607
UTILITIES 2.5%
Electric Utilities 1.4%
Cleco 29,500 988
Unisource Energy 3,900 59
1,047
Telephone 0.9%
Rural Cellular (Class A) * 4,400 337
Western Wireless * 6,000 327
664
Water Utilities 0.2%
United Water Resources 4,100 $ 143
143
Total Utilities 1,854
CONSUMER NONDURABLES 15.3%
Food Processing 1.5%
American Italian Pasta * 13,000 269
International Multifoods 40,800 706
Seneca Foods (Class A) * 6,800 79
Seneca Foods (Class B) * 2,900 35
1,089
Hospital Supplies/Hospital Management 4.3%
Airgas * 24,900 142
Cephalon * 6,900 419
Lincare * 21,300 524
Mentor 34,100 926
Molecular Devices * 5,900 408
Quorum Health Group * 5,800 60
Renal Care Group * 22,300 546
Steris * 20,400 181
3,206
Pharmaceuticals 1.7%
Aurora Biosciences * 6,200 421
Boron Lepore & Associates * 4,200 39
Imclone Systems * 1,200 92
Immunomedics * 1,100 27
Incyte Genomics * 2,400 197
Noven Pharmaceuticals * 3,900 117
NPS Pharmaceuticals * 7,600 204
Triangle Pharmaceuticals * 21,300 196
1,293
Biotechnology 3.6%
Abegenix * 1,600 192
Alkermes * 8,500 400
Anesta * 7,200 179
COR Therapeutics * 4,400 375
Cubist Pharmaceuticals * 2,700 133
Gilead Sciences * 1,100 78
Inhale Therapeutic Systems * 10,200 1,035
Neurocrine Biosciences * 4,100 145
Serologicals * 15,800 80
Viropharma * 2,900 46
2,663
Health Care Services 0.8%
AmeriPath * 17,700 $ 155
Orthodontic Centers of America * 11,600 263
Packard BioScience* 10,500 178
596
Miscellaneous Consumer Products 3.2%
Cone Mills * 29,000 179
Culp 10,400 53
Dan River * 38,100 181
Polymer Group 12,300 114
Quicksilver * 10,300 160
Reebok * 11,200 178
Sola * 39,100 191
Stride Rite 34,900 214
Unifi * 22,600 280
U.S. Can * 40,100 697
WestPoint Stevens 13,600 151
2,398
Cosmetics 0.2%
Chattem * 13,300 182
182
Total Consumer Nondurables 11,427
CONSUMER SERVICES 8.8%
Restaurants 1.7%
Applebee's 5,700 173
Buca * 31,000 484
PJ America * 11,000 109
Ruby Tuesday 24,700 310
Uno Restaurant 15,500 166
1,242
General Merchandisers 2.1%
Bon-Ton Stores * 20,100 46
Casey's General Stores 64,400 670
Columbia Sportswear * 15,500 416
Neiman Marcus Group * 15,700 474
1,606
Specialty Merchandisers 1.5%
CompuCom Systems * 49,000 82
O'Charley's * 30,500 414
PurchasePro.com * 6,500 267
Urban Outfitters * 17,100 151
Wild Oats Markets * 13,600 170
1,084
Entertainment and Leisure 1.0%
Houghton Mifflin 2,500 $ 117
Papa John's * 15,500 380
Sonic * 8,100 238
735
Media and Communications 2.5%
American Tower Systems
(Class A) * 2,400 100
Classic Communications * 11,300 102
Emmis Broadcasting (Class A) * 16,800 696
Pegasus Communications * 6,900 338
Sinclair Broadcast Group
(Class A) * 34,500 378
Young Broadcasting (Class A) * 10,100 259
1,873
Total Consumer Services 6,540
CONSUMER CYCLICALS 10.0%
Automobiles and Related 3.2%
A.O. Smith (Class B) 41,000 859
Keystone Automotive * 10,100 70
Littelfuse * 26,300 1,300
Strattec Security * 5,400 178
2,407
Building and Real Estate 5.0%
Apartment Investment &
Management, REIT 5,800 251
Arden Realty, REIT 19,500 458
EastGroup Properties, REIT 28,800 607
First Washington Realty
Trust, REIT 12,800 283
Glenborough Realty Trust, REIT 18,700 326
JP Realty, REIT 20,000 356
Parkway Properties, REIT 6,500 808
Reckson Associates Realty
(Class B), REIT 8,884 226
Woodhead Industries 23,300 425
3,740
Miscellaneous Consumer Durables 1.8%
CompX 12,300 250
Harman International 11,200 683
Intranet Solutions * 9,900 380
1,313
Total Consumer Cyclicals 7,460
TECHNOLOGY 13.9%
Electronic Components 6.9%
American Superconductor * 6,500 $ 313
Analogic 16,300 646
Benchmark Electronics * 16,700 611
Burr-Brown * 16,100 1,396
Exar * 5,850 511
Manufacturers Services Limited * 8,300 171
Methode Electronics (Class A) 25,000 966
QuickLogic * 6,900 155
SIPEX * 13,700 380
5,149
Electronic Systems 1.5%
Applied Micro Circuits * 2,400 237
Armor Holdings * 38,400 499
Lifeline Systems * 11,100 155
Lo-Jack * 27,900 195
1,086
Telecommunications 1.7%
Aether Systems * 500 102
Airgate PCS * 3,100 163
Airnet Commerce * 1,000 26
Avant * 10,600 198
Ditech Communications * 4,600 436
Vyyo * 3,800 103
West TeleServices * 9,000 228
1,256
Aerospace and Defense 0.8%
DONCASTERS ADR * 3,900 42
Harsco 15,900 406
Woodward Governor 6,200 173
621
Information Processing 1.3%
Cybersource * 3,300 46
F.Y.I. * 21,000 706
Source Information Management * 16,800 255
1,007
Specialized Computer 0.3%
Virata * 3,600 215
215
Office Automation 1.4%
Technitrol 10,900 1,056
1,056
Total Technology 10,390
CAPITAL EQUIPMENT 1.3%
Electrical Equipment 0.8%
hi/fn * 7,900 $ 351
LSI Industries 17,700 269
620
Machinery 0.5%
Kennametal 11,600 248
NN 13,600 138
386
Total Capital Equipment 1,006
BUSINESS SERVICES AND TRANSPORTATION 22.6%
Computer Service and Software 8.7%
724 Solutions * 500 22
Actuate * 3,700 197
Analysts International 22,600 209
BISYS Group * 6,000 371
Cambridge Technology Partners * 11,600 101
Concord Communications * 7,000 287
Digital Impact * 6,700 94
Electronic Arts * 2,000 146
Great Plains Software * 4,900 96
iGate Capital* 15,500 214
Interact Commerce * 8,300 98
Jack Henry & Associates 1,900 95
Keynote Systems * 15,500 1,081
Loislaw * 3,200 27
net.Genesis* 9,700 175
NetIQ * 7,700 459
Netsolve * 2,100 55
Peerless Systems * 15,400 29
Progress Software * 47,800 875
PSINet * 14,700 369
Quest Software * 2,300 128
Sonicwall * 700 62
SPSS * 10,100 293
SunGard Data Systems * 1,400 43
Synopsys * 400 14
USInternetworking * 9,100 186
Verity * 3,300 125
Websense* 2,400 60
WebTrends * 10,400 401
Zebra Technologies (Class A) * 4,100 181
6,493
Distribution Services 3.2%
MSC * 15,900 $ 333
Performance Food Group * 6,100 195
Primesource 8,400 43
SCP Pool * 32,300 755
SunSource * 8,100 41
United Stationers * 19,500 632
Watsco (Class A) 29,050 363
2,362
Environmental 0.6%
CUNO * 14,700 340
IT Group * 19,200 94
Waterlink * 4,300 11
445
Transportation Services 2.5%
C.H. Robinson Worldwide 11,400 564
Comfort Systems USA * 30,100 120
EGL * 12,950 398
Expeditors International
of Washington 11,700 553
Frozen Food Express 800 2
Heartland Express * 3,200 53
Hub Group (Class A) * 3,800 57
International Shipholding 5,500 48
Seacor Smit * 2,100 81
1,876
Miscellaneous Business Services 7.1%
AnswerThink * 10,300 170
Consolidated Graphics * 6,800 64
Electro Rent * 22,900 272
G&K Services 10,700 268
Herman Miller 5,900 152
Insituform Technologies
(Class A) * 24,500 670
Iron Mountain * 19,100 649
Ivex Packaging * 32,900 366
kforce.com * 15,600 108
Maximus * 27,500 608
McGrath RentCorp 7,900 132
MPW Industrial Services Group * 22,300 171
New England Business Service 33,800 549
Strayer Education 16,900 404
Tetra Tech * 27,400 628
Visual Networks * 3,600 103
5,314
Airlines 0.5%
Midwest Express Holdings * 18,000 $ 387
387
Total Business Services and Transportation 16,877
ENERGY 6.0%
Energy Services 1.2%
Cooper Cameron * 3,600 238
Grant Prideco * 5,400 135
Smith International * 3,900 284
Weatherford International * 5,400 215
872
Exploration and Production 4.8%
Barrett Resources * 23,500 715
Chieftain International * 23,300 444
Cross Timbers Oil 19,400 429
Forest Oil * 26,100 416
Key Energy * 42,600 410
National Oilwell * 12,900 424
Noble Affiliates 21,300 794
3,632
Total Energy 4,504
PROCESS INDUSTRIES 3.1%
Specialty Chemicals 0.3%
A. Schulman 7,800 94
Hauser * 3,475 6
MacDermid 3,900 91
191
Paper and Paper Products 0.4%
Buckeye Technologies * 10,700 235
Smurfit-Stone Container * 7,700 99
334
Building and Construction 1.0%
Layne Christensen * 14,000 65
Simpson Manufacturing * 5,400 258
Trex * 2,500 125
U.S. Aggregates 14,900 270
718
Diversified Chemicals 1.4%
Arch Chemicals 33,100 724
Cabot Microelectronics * 7,600 349
1,073
Total Process Industries 2,316
BASIC MATERIALS 2.3%
Metals 1.9%
Gibraltar Steel 7,700 $ 110
Material Sciences * 28,100 281
Matthews International (Class A) 35,200 1,025
1,416
Mining 0.4%
Battle Mountain Gold * 86,200 189
Lihir Gold (EUR) * 324,000 128
317
Total Basic Materials 1,733
EDUCATION 0.2%
Education 0.2%
ITT Educational Service * 7,700 135
Total Education 135
Total Common Stocks (Cost $65,059) 71,849
SHORT-TERM INVESTMENTS 4.0%
Money Market Funds 4.0%
Reserve Investment Fund
6.68% # 3,008,792 3,009
Total Short-Term Investments
(Cost $3,009) 3,009
Total Investments in Securities
100.2% of Net Assets (Cost $68,068) $ 74,858
Other Assets Less Liabilities (117)
NET ASSETS $ 74,741
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 21
Accumulated net realized gain/loss -
net of distributions (91)
Net unrealized gain (loss) 6,790
Paid-in-capital applicable to 7,288,284
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of
Corporation authorized 68,021
NET ASSETS $ 74,741
----------
NET ASSET VALUE PER SHARE $ 10.26
----------
# Seven-day yield
* Non-income producing
ADR American Depository Receipt
REIT Real Estate Investment Trust
EUR Euro
Statement of Operations
Institutional Small-Cap Stock Fund
(Unaudited)
In thousands
3/31/00
Through
6/30/00
Investment Income (Loss)
Income
Dividend $ 30
Interest 6
Total income 36
Expenses
Custody and accounting 22
Prospectus and shareholder reports 2
Legal and audit 2
Directors 1
Reimbursed by manager (12)
Total expenses 15
Net investment income (loss) 21
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (91)
Change in net unrealized gain or loss on securities 2,137
Net realized and unrealized gain (loss) 2,046
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 2,067
----------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
Institutional Small-Cap Stock Fund
(Unaudited)
In thousands
3/31/00
Through
6/30/00
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 21
Net realized gain (loss) (91)
Change in net unrealized
gain or loss 2,137
Increase (decrease) in net
assets from operations 2,067
Capital share transactions *
Shares sold 72,674
Net Assets
Increase (decrease) during period 74,741
Beginning of period --
End of period $ 74,741
----------
*Share information
Shares sold 7,288
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
Institutional Small-Cap Stock Fund
June 30, 2000 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Institutional Equity Funds, Inc. (the corporation) is registered under the
Investment Company Act of 1940. The Institutional Small-Cap Stock Fund (the
fund), a diversified, open-end management investment company, is one of the
portfolios established by the corporation and commenced operations on March
31, 2000. The fund seeks to provide long-term capital growth by investing
primarily in stocks of small companies.
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 that 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.
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. Credits earned on
daily uninvested cash balances at the custodian 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 $64,472,000 and $938,000, respectively, for the
period ended June 30, 2000.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
qualify as a regulated investment company and distribute all of its taxable
income.
At June 30, 2000, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$68,068,000. Net unrealized gain aggregated $6,790,000 at period-end, of
which $14,956,000 related to appreciated investments and $8,166,000 to
depreciated investments.
NOTE 4 - ACQUISITION OF ASSETS
On June 22, 2000, the fund acquired substantially all of the assets of the
T. Rowe Price Small-Cap Stock Trust (the trust) in a tax-free exchange for
7,088,284 shares of the fund. The value of trust assets at that date was
$70,670,196, which included $4,652,526 of unrealized appreciation. Net
assets of the trust were combined with those of the fund, resulting in
aggregate net assets of $72,664,837. All fund shares acquired in the
exchange were subsequently distributed to the outstanding unit-holders of
the trust, and the trust was terminated.
NOTE 5 - 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. The fee, computed daily and paid monthly, is equal to 0.65% of average
daily net assets.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through December 31, 2001, which would cause
the fund's ratio of total expenses to average net assets to exceed 0.75%.
Thereafter, through December 31, 2003, 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 total expenses to average net assets to exceed
0.75%. Pursuant to this agreement, $12,000 of management fees were not
accrued by the fund for the period ended June 30, 2000 and $12,000 of other
expenses were borne by the manager.
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 $16,000 for the period ended June 30, 2000, of which $5,000
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 period ended June
30, 2000, totaled $5,000 and are reflected as interest income in the
accompanying Statement of Operations.
