<PAGE>
Semiannual Report
DIVERSIFIED
SMALL-CAP
GROWTH FUND
JUNE 30, 1999
[GRAPHIC APPEARS HERE]
T. ROWE PRICE
<PAGE>
Report Highlights
- --------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund
. Stocks continued to advance in the first half, but leadership began to
shift from large-cap growth stocks to cyclicals and small- and mid-cap
issues.
. The fund's strong performance in the second quarter was undercut by a very
weak first quarter, resulting in a small six-month gain.
. The fund's comparative results suffered when the market was focused on
hyper-growth, very high-valuation stocks.
. Technology and telecommunications were among our best-performing sectors;
health care was one of the weakest.
. Small-cap stocks remain undervalued relative to large-caps, and we are
optimistic their recent momentum can be sustained.
<PAGE>
FELLOW SHAREHOLDERS
After a long period in the doldrums, small-cap stocks became market leaders in
the second quarter. Continued evidence of the U.S. economy's strength encouraged
investors to venture beyond blue chip growth stocks into economically sensitive
stocks, which typically include small companies. The frenetic rally in Internet
stocks-- in which the portfolio had relatively little participation--stalled in
April but revived late in the quarter.
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
Periods Ended 6/30/99 6 Months 12 Months
- --------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund 2.44% -0.23%
Russell 2000 Growth Index 12.82 8.30
Lipper Small Cap Fund Index 9.43 1.92
Although your fund advanced strongly during the second quarter, achieving a
13.20% gain, returns for the first half were dragged down by negative first
quarter results. In the early months of 1999, the market was infatuated with the
concept of hyper-growth and was willing to overlook both company fundamentals
and stock valuations. Our relatively conservative structure was at a decided
disadvantage. We were underexposed to companies with the highest projected
earnings growth rates, mainly because the stocks were very highly valued even
using measures designed to adjust for the lack of earnings. In addition, the
fund's unfavorable comparative results reflected our continued reluctance to
commit assets to the Internet frenzy. Despite their April setback, these stocks
are still up substantially from year-end and provided considerable thrust to the
first half performance of indexes and mutual funds that were exposed to them.
Very few of these stocks meet our criteria for sustained earnings growth
potential.
Portfolio Review
Since we have alluded to our strategy, we thought it might be helpful to
summarize it before reviewing some specifics of the last six months. The fund
invests in the shares of small companies that are growing their earnings
rapidly. Unlike many other funds investing in this sector of the market, this
fund has a very broadly diversified portfolio, with approximately 300 companies.
On June 30, the 25 largest positions
1
<PAGE>
accounted for only about 17% of assets. Our objective with wide diversification
is to capture the general performance of the small-cap sector while minimizing
the impact of any individual stock. Small-cap stocks can be extremely volatile.
The stocks typically carry relatively high valuations based on forecasts of
future growth, and when a company announces disappointing news, its stock can
fall 50% or more in a single day. This is a fact of life in the small-cap growth
arena, so we prefer to limit the weight of a single name in the portfolio.
Another key aspect of our program is the use of quantitative strategies for
determining the overall characteristics of the portfolio and as an aid in
selecting stocks. Our database of investment-related information ranges from
historical accounting data to prospective earnings forecasts. We also take
advantage of T. Rowe Price's considerable resources devoted to fundamental
research on small companies. Since few managers have demonstrated the ability to
successfully time the market, we remain fully committed to stocks. The rapid
rotation in market leadership from large-cap to small-cap stocks in the second
quarter--after small-caps were pummeled in the first quarter--illustrates the
difficulty of correctly anticipating such turning points. Finally, trading costs
for smaller companies can be high, and we think shareholder value can be
maximized by maintaining a buy-and-hold approach.
- -----------------------------------------------------
INFORMATION ON YEAR-END DISTRIBUTIONS
- --------------------------------------------------------------------------------
To help you with tax planning, we try to give you a good idea of the per-share
income and capital gain amounts our funds may distribute near year-end. In late
October, we will provide estimates of these amounts, which will be paid on
December 16, 1999, to shareholders of record on December 14. These preliminary
numbers will be included in The Price Report mailing to shareholders in late
October and will also be available on our Web site--www.troweprice.com.
We hope that these preliminary numbers will be useful to you in approximating
the income and capital gains taxes you may pay on distributions to taxable
accounts. If your fund distributed any capital gains earlier in 1999, you can
find the amounts on your statements and should include them in your tax planning
calculations. Please keep in mind that the numbers are not final and are likely
to be revised before the December 14 declaration and record date. As the fall
progresses, you may want to check our Web site for revisions.
If you would like information on tax matters relating to mutual funds, please
visit our Web site to download our Insights report, Tax Information for Mutual
Fund Investors, or call 1-800-225-5132 to request a copy.
2
<PAGE>
During the six-month period, technology, which is one of our largest sectors
(about 17% of net assets), was among the fund's best-performing groups as many
of these companies revised their earnings upward. Telecommunications stocks, a
sizable component of our large consumer services sector, also did well, as did
financial stocks and some cyclicals. Economically sensitive sectors had solid
gains in the second quarter, including industrial products and durable goods,
but these are fairly small weights in the fund. Weaker performers included
health care, where drug stocks are suffering from fears of price regulation, and
other consumer nondurables.
- -----------------------------
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------------------------------
Diversified
Small-Cap
As of 6/30/99 Growth Fund S&P 500
- --------------------------------------------------------------------------------
Market Cap (Investment-
Weighted Median) $1.4 billion $70.2 billion
- --------------------------------------------------------------------------------
Earnings Growth Rate
Estimated Next 5 Years* 23.2% 13.4%
- --------------------------------------------------------------------------------
P/E Ratio (Based on Next 12
Months' Estimated Earnings) 23.2X 27.9X
- --------------------------------------------------------------------------------
*Forecasts are based on T. Rowe Price research and are in no way an indication
of future investment returns.
We did not make any notable alterations in our sector allocations during the
first half but did shift modestly to emphasize more rapidly growing--but still
reasonably valued--stocks. Portfolio additions were in a variety of sectors,
including U.S. Cellular in telephone services, MetroNet Communications and Crown
Castle International in media and communications, and Polycom in electronic
systems. One of our largest sales was E*TRADE, which soared during the Internet
stock rally and provided a nice gain.
The fundamental performance of portfolio companies continued to improve. For the
past three calendar quarters, the percent of our holdings whose earnings
estimates were revised positively rose consecutively from 46% to 55% to 62%.
Outlook
Now that small-company growth stocks have achieved some momentum, we are
reasonably optimistic it can be maintained. Small-cap stocks remain quite
attractive from a valuation perspective. On average, the portfolio trades at
roughly a 20% discount on forward price/earnings estimates to the S&P 500
despite earnings growth rates roughly double that of the index, as shown in the
Portfolio Characteristics table. While the
3
<PAGE>
surge in second quarter performance brought valuations up from all-time lows,
they are still at levels rarely seen during the past 40 years--levels that have
historically signaled attractive opportunities for investment in small-company
stocks. We will stick to our strategy of selecting stocks with solid, long-term
growth potential that represent reasonable values at the time of purchase.
Respectfully submitted,
/s/ Richard T. Whitney
Richard T. Whitney
President and Chairman of the Investment Advisory Committee
July 23, 1999
4
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
- ---------------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/99
- --------------------------------------------------------------------------------
Proxim 0.9%
Sanmina 0.8
QLogic 0.8
VISX 0.8
Symbol Technologies 0.8
- --------------------------------------------------------------------------------
Comverse Technology 0.7
Outdoor Systems 0.7
Lattice Semiconductor 0.7
VERITAS Software 0.7
Uniphase 0.7
- --------------------------------------------------------------------------------
Synopsys 0.7
Micrel 0.7
Outback Steakhouse 0.7
Dollar Tree Stores 0.7
Chancellor Media 0.6
- --------------------------------------------------------------------------------
QuickResponse Services 0.6
Dycom Industries 0.6
Waddell & Reed Financial 0.6
Imax 0.6
Teradyne 0.6
- --------------------------------------------------------------------------------
NCO Group 0.6
Emmis Broadcasting 0.6
CDW Computer Centers 0.6
Gentex 0.6
Insight Enterprises 0.6
- --------------------------------------------------------------------------------
Total 17.0%
Note: Table excludes reserves.
5
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
- -----------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION
Twenty-Five Largest Industries
Percent of Percent of
Net Assets Net Assets
12/31/98 6/30/99
- --------------------------------------------------------------------------------
Computer Service and Software 17.5% 18.0%
Media and Communications 6.6 8.9
Miscellaneous Business Services 9.9 8.2
Electronic Components 5.2 7.8
Specialty Merchandisers 6.2 5.2
- --------------------------------------------------------------------------------
Hospital Supplies/Hospital Management 6.0 5.1
Pharmaceuticals 4.0 3.9
Electronic Systems 2.4 2.8
Financial Services 1.7 2.6
Distribution Services 2.7 2.4
- --------------------------------------------------------------------------------
Entertainment and Leisure 2.6 2.4
Telecommunications Equipment 2.2 2.2
Miscellaneous Consumer Products 1.7 2.1
Bank and Trust 2.2 1.9
Specialized Computers 1.5 1.7
- --------------------------------------------------------------------------------
Health Care Services 2.2 1.7
Telephone Services 0.8 1.6
Transportation Services 2.1 1.6
General Merchandisers 2.0 1.6
Biotechnology 1.9 1.6
- --------------------------------------------------------------------------------
Automobiles and Related 1.7 1.6
Restaurants 1.3 1.5
Reserves 1.4 1.5
Education 1.3 1.3
Building and Construction 1.5 1.3
- --------------------------------------------------------------------------------
Total 88.6% 90.5%
6
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
- -------------------------
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
- --------------------------------------------
DIVERSIFIED ANNUAL COMPOUND TOTAL RETURN
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Russell 2000 Lipper Small Cap Diversified Small-Cap
Growth Index Fund Index Growth Fund
Jun-97 10,000 10,000 10,000
Jun-98 11,319 11,552 11,391
Jun-99 12,258 11,774 11,365
- ---------------------------------------
AVERAGE ANNUAL COMPOUND TOTAL RETURN
- --------------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 6/30/99 1 Year Inception Date
- --------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund -0.23% 6.61% 6/30/97
- --------------------------------------------------------------------------------
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
7
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Unaudited
- ----------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Months Year 6/30/97
Ended Ended Through
6/30/99 12/31/98 12/31/97
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 11.05 $ 10.70 $ 10.00
Investment activities
Net investment income (0.06)* (0.09)* (0.03)*
Net realized and unrealized gain (loss) 0.33 0.46 0.74ss.
----------------------------------------------------------
Total from investment activities 0.27 0.37 0.71
----------------------------------------------------------
Distributions
Net realized gain - (0.03) (0.01)
Redemption fees added to paid-in-capital - 0.01 -
NET ASSET VALUE
End of period $ 11.32 $ 11.05 $ 10.70
----------------------------------------------------------
Ratios/Supplemental Data
Total return++ 2.44%* 3.58%* 7.10%*
Ratio of total expenses to average net assets 1.25%*+ 1.25%* 1.25%+*
Ratio of net investment income to
average net assets (1.05)%*+ (0.83)%* (0.67)%+*
Portfolio turnover rate 30.3%+ 39.8% 13.4%
Net assets, end of period (in thousands) $ 61,215 $ 70,444 $ 72,071
</TABLE>
++ 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 and payment of no redemption or account fees.
* Excludes expenses in excess of a 1.25% voluntary expense limitation in
effect through 12/31/00.
+ Annualized
ss. The amount presented is calculated pursuant to a methodology prescribed by
the Securities and Exchange Commission for a share outstanding throughout
the period. This amount is inconsistent with the fund's aggregate gains and
losses because of the timing of sales and redemptions of the fund's shares
in relation to fluctuating market values for the investment portfolio.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Unaudited June 30, 1999
- -------------------------
STATEMENT OF NET ASSETS Shares Value
- --------------------------------------------------------------------------------
In thousands
COMMON STOCKS 98.5%
FINANCIAL 5.7%
Bank and Trust 1.9%
City National 7,100 $ 266
Commerce Bancorp 6,201 265
Community First Bankshares 11,800 281
North Fork Bancorporation 9,500 203
TeleBanc Financial * 4,400 170
---------
1,185
---------
Insurance 1.2%
E.W. Blanch 2,600 177
Inspire Insurance Solutions * 3,000 44
Protective Life 5,800 191
Radian Group 5,499 269
---------
681
---------
Financial Services 2.6%
Affiliated Managers Group * 10,100 305
AmeriCredit * 17,000 272
HealthCare Financial Partners * 5,800 198
Legg Mason 7,332 282
Metris Companies 3,700 151
Waddell & Reed Financial (Class A) 14,100 387
1,595
---------
Total Financial 3,461
---------
UTILITIES 1.6%
Telephone Services 1.6%
Comverse Technology * 6,000 453
ICG Communications * 9,000 192
Intervoice * 11,600 167
U. S. Cellular * 3,500 187
---------
Total Utilities 999
---------
CONSUMER NONDURABLES 15.1%
Cosmetics 0.2%
Chattem * 4,500 143
---------
143
---------
9
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
Food Processing 0.5%
Smithfield Foods * 9,900 $ 329
---------
329
---------
Hospital Supplies/Hospital Management 5.1%
Dentsply International 6,600 191
First Health Group * 8,500 183
Lincare * 11,400 285
Medquist * 6,900 302
Mentor 13,800 259
Omnicare 12,200 154
Patterson Dental * 4,950 172
Priority Healthcare (Class B) * 6,900 239
PSS World Medical * 10,275 115
Renal Care Group * 6,900 178
Steris * 6,800 132
Universal Health Services * 6,100 291
Ventana Medical Systems * 4,000 77
Veterinary Centers of America * 4,100 55
VISX * 6,000 476
---------
3,109
---------
Pharmaceuticals 3.9%
Barr Laboratories * 4,700 187
Biogen * 4,800 309
Duane Reade * 7,500 230
Express Scripts (Class A) * 4,500 271
Forest Laboratories * 3,200 148
Jones Pharma 7,100 279
K-V Pharmaceutical (Class A) * 3,300 51
Liposome * 8,400 160
Roberts Pharmaceutical * 9,300 226
Shire Pharmaceuticals ADR * 4,800 124
Theragenics * 16,600 115
Watson Pharmaceuticals * 7,800 274
---------
2,374
---------
Biotechnology 1.6%
Covance * 7,000 168
Cytyc * 10,000 195
Inhale Therapeutic Systems * 8,500 203
10
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
Medco Research * 9,400 $ 247
Serologicals * 18,000 147
---------
960
---------
Health Care Services 1.7%
Concentra Managed Care * 9,472 140
Henry Schein * 5,300 168
Novoste * 8,200 172
Orthodontic Centers of America * 16,300 230
PacifiCare Health Systems (Class A) * 3,000 216
US Oncology * 9,100 110
---------
1,036
---------
Miscellaneous Consumer Products 2.1%
Blyth Industries * 9,000 309
Fossil * 4,000 193
Jones Apparel Group * 8,300 285
Mohawk Industries * 3,100 94
Quicksilver * 7,950 207
Wesley Jessen VisionCare * 5,500 177
1,265
---------
Total Consumer Nondurables 9,216
---------
CONSUMER SERVICES 19.6%
Restaurants 1.5%
Applebee's 7,500 227
Dave & Buster * 10,200 295
Outback Steakhouse * 10,350 406
---------
928
---------
General Merchandisers 1.6%
Bed Bath & Beyond * 4,300 165
Dollar Tree Stores * 9,225 406
Family Dollar Stores 4,200 101
Kenneth Cole Productions (Class A) * 3,800 106
Neiman-Marcus * 8,100 208
---------
986
---------
Specialty Merchandisers 5.2%
Barnes & Noble * 4,500 123
Borders Group * 2,500 40
Buckle * 6,000 173
11
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
CDW Computer Centers * 8,200 $ 361
Insight Enterprises * 14,550 360
Linens `n Things * 5,400 236
Men's Wearhouse * 8,700 224
Office Depot * 12,300 271
Pacific Sunwear * 9,150 223
Rent A Center * 11,000 264
Ross Stores 3,700 186
SLI * 7,900 213
Whole Foods Market * 3,700 178
Williams-Sonoma * 9,000 313
---------
3,165
---------
Entertainment and Leisure 2.4%
Brinker * 7,600 206
Imax * 16,700 378
SFX Entertainment (Class A) * 5,200 333
Sonic * 3,800 123
Steinway Musical Instruments * 6,900 183
Sunterra * 17,200 240
---------
1,463
---------
Media and Communications 8.9%
A.C. Nielson * 7,200 218
American Tower Systems (Class A) * 11,000 264
AT & T (Class B) * 2,600 166
Catalina Marketing * 2,800 258
Century Communications (Class A) * 6,200 285
Chancellor Media * 7,200 397
Cox Radio * 5,000 271
Crown Castle International * 9,400 195
Emmis Broadcasting (Class A) * 7,500 369
Harte-Hanks 7,000 190
Hispanic Broadcasting * 3,900 296
Infousa (Class A) * 17,400 152
Infousa (Class B) * 15,700 132
Level One * 6,000 294
Media General 2,600 133
Outdoor Systems * 11,775 430
TCA Cable TV 5,000 277
12
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
TV Guide * 8,200 $ 299
Univision Communications * 5,000 330
Valassis Communications * 5,400 198
World Color Press * 4,200 115
Young Broadcasting (Class A) * 4,600 196
5,465
--------------
Total Consumer Services 12,007
--------------
CONSUMER CYCLICALS 2.8%
Automobiles and Related 1.6%
Gentex * 12,900 361
Group 1 Automotive * 4,700 100
O'Reilly Automotive * 6,600 332
Tower Automotive * 6,300 160
--------------
953
--------------
Building and Real Estate 1.0%
Apartment Investment & Management (Class A), REIT 8,012 342
Premier Parks * 8,000 294
--------------
636
--------------
Miscellaneous Consumer Durables 0.2%
HA-LO Industries * 13,050 129
129
--------------
Total Consumer Cyclicals 1,718
--------------
TECHNOLOGY 16.5%
Electronic Components 7.8%
Analog Devices * 3,900 196
Burr Brown * 9,550 353
Cybex Computer Products * 10,050 281
Dallas Semiconductor 6,600 333
Electronics for Imaging * 3,900 200
Etec Systems * 3,200 106
Lattice Semiconductor * 6,900 429
Maxim Integrated Products * 5,000 332
Micrel * 5,500 408
Microchip Technology * 5,800 274
Plexus * 7,200 215
13
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
PMC-Sierra * 4,300 $ 253
QLogic * 3,800 502
Sanmina * 6,800 516
Vitesse Semiconductor * 5,200 352
--------------
4,750
--------------
Electronic Systems 2.8%
Black Box * 5,800 291
Dionex * 4,800 194
Novellus Systems * 3,900 266
Polycom * 4,800 187
Teradyne * 5,200 373
Uniphase * 2,500 415
--------------
1,726
--------------
Information Processing 1.1%
Data Processing Resources * 8,000 189
First USA Paymentech * 4,000 101
SCI Systems * 6,800 323
--------------
613
--------------
Specialized Computer 1.7%
Pinnacle * 10,200 344
Security Dynamics Technologies * 12,400 262
Symbol Technologies 12,525 462
--------------
1,068
--------------
Telecommunications 2.2%
Inter-Tel 5,400 98
ITC Deltacom * 6,700 187
Pacific Gateway Exchange * 5,300 154
Premisys Communications * 6,100 44
Proxim * 10,000 581
USA Networks * 7,700 309
--------------
1,373
--------------
Aerospace and Defense 0.9%
AAR 6,300 143
Avondale Industries * 1,500 59
Orbital Sciences * 7,300 172
Triumph Group * 6,700 171
545
--------------
Total Technology 10,075
--------------
14
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
EDUCATION 1.3%
Apollo Group (Class A) * 9,550 $ 253
ITT Educational Service * 6,200 162
Learning Tree International * 12,400 136
Sylvan Learning Systems * 9,750 265
--------------
Total Education 816
--------------
CAPITAL EQUIPMENT 0.5%
Electrical Equipment 0.2%
American Power Conversion * 7,400 149
--------------
149
--------------
Machinery 0.3%
Terex * 5,900 179
179
--------------
Total Capital Equipment 328
--------------
BUSINESS SERVICES AND
TRANSPORTATION 31.6%
Computer Service and Software 18.0%
Affiliated Computer Services (Class A) * 6,700 339
American Management Systems * 1,600 51
AVT * 5,200 197
BISYS Group * 5,800 339
Cadence Design Systems * 8,200 105
CIBER * 10,000 191
Citrix Systems * 6,100 344
Clarify * 4,500 186
Cognos * 6,600 145
Cotelligent Group * 6,900 54
DST Systems * 4,700 295
Earthlink Network * 3,200 197
Electronic Arts * 6,300 341
Engineering Animation * 4,300 91
Factset Research Systems 3,700 209
Gartner Group (Class A) * 3,600 74
Great Plains Software * 4,000 187
15
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
Hyperion Solutions * 11,400 $ 203
IMRglobal * 7,800 151
International Network Services * 7,350 295
Intuit * 3,500 316
Keane * 6,400 145
Legato Systems * 5,700 329
Lexmark International Group (Class A) * 2,600 172
Macromedia * 3,700 131
Mapics * 5,600 59
Mastech * 11,700 217
Mercury Interactive * 5,000 177
National Data 8,400 359
National Instruments * 7,700 310
Netgravity * 5,900 135
Network Associates * 5,400 79
PSINet * 2,600 113
Pegasus Systems * 3,900 147
Peregrine Systems * 5,900 151
Preview Travel * 7,600 166
QRS * 5,000 391
Saville Systems ADR * 11,500 167
Sterling Commerce * 5,106 186
Summit Design * 14,200 43
SunGard Data Systems * 8,100 279
Sykes Enterprises * 9,300 310
Symantec * 6,800 174
Synopsys * 7,500 414
Transaction Systems Architects * 7,400 289
USInternetworking * 4,500 189
USWeb * 12,050 268
VERITAS Software * 4,450 423
Visio * 5,000 190
WebTrends * 5,400 249
Wind River Systems * 10,700 172
Zebra Technologies (Class B) * 7,200 276
--------------
11,020
--------------
Distribution Services 2.4%
AmeriSource Health * 10,200 260
Aviation Sales * 3,000 119
16
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
Jack Henry & Associates 4,300 $ 168
MSC (Class A) * 6,300 65
Richfood Holdings 9,800 173
Tech Data * 5,900 225
U.S. Foodservice * 5,400 230
Watsco (Class A) 14,250 233
--------------
1,473
--------------
Environmental 0.7%
Casella Waste Systems (Class A) * 9,200 238
Catalytica * 9,000 126
--------------
364
--------------
Transportation Services 1.6%
Avis Rent A Car * 5,500 160
Coach USA * 8,500 357
Swift Transportation * 12,075 265
USFreightways 4,500 207
--------------
989
--------------
Miscellaneous Business Services 8.2%
Carriage Services (Class A) * 6,700 126
Concord EFS * 7,350 311
Consolidated Graphics * 6,000 300
CORT Business Services * 8,100 194
Fair, Issac and Company 4,800 168
First Consulting Group * 12,551 131
G & K Services (Class A) 5,600 293
Insituform Technologies (Class A) * 8,000 172
Lason * 6,300 313
META Group * 12,800 198
Metamor Worldwide * 11,400 273
Metzler Group * 6,500 179
Modis Professional Services * 21,600 297
National Computer Systems 6,400 216
NCO Group * 9,800 371
NOVA * 10,796 270
Prepaid Legal Services * 5,800 158
Professional Staff ADR * 16,000 105
Rent Way * 9,900 244
Romac International * 13,300 118
17
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
StaffMark * 5,900 $ 59
Strayer Education 3,800 116
Superior Services * 6,000 160
Tetra Tech * 16,406 273
--------------
5,045
--------------
Airlines 0.7%
Alaska Air Group * 2,800 117
Comair Holdings 10,425 217
Mesaba Holdings * 7,800 99
433
--------------
Total Business Services and Transportation 19,324
--------------
ENERGY 1.1%
Energy Services 0.8%
BJ Services * 8,600 253
Oceaneering International * 11,700 189
Smith International * 2,000 87
--------------
529
--------------
Exploration and Production 0.3%
Noble Affiliates 6,100 172
172
--------------
Total Energy 701
--------------
PROCESS INDUSTRIES 2.0%
Specialty Chemicals 0.7%
Macdermid 2,800 130
Sybron International * 12,100 334
--------------
464
--------------
Building and Construction 1.3%
Dycom Industries * 6,950 389
NCI Building Systems * 9,800 209
Simpson Manufacturing * 4,000 190
788
--------------
Total Process Industries 1,252
--------------
18
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
In thousands
BASIC MATERIALS 0.7%
Miscellaneous Materials 0.7%
Gilat Satellite Networks * 6,700 $ 352
Select Comfort * 8,200 73
Total Basic Materials 425
--------------
Total Common Stocks (Cost $49,099) 60,322
--------------
SHORT-TERM INVESTMENTS 1.2%
Money Market Funds 1.2%
Reserve Investment Fund, 5.05% # 722,241 722
--------------
Total Short-Term Investments (Cost $722) 722
--------------
Total Investments in Securities
99.7% of Net Assets (Cost $49,821) $ 61,044
Other Assets Less Liabilities 171
--------------
NET ASSETS $ 61,215
--------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (317)
Accumulated net realized gain/loss - net of distributions (7,485)
Net unrealized gain (loss) 11,223
Paid-in-capital applicable to 5,405,495 shares of $0.0001 par
value capital stock outstanding; 1,000,000,000 shares authorized 57,794
--------------
NET ASSETS $ 61,215
--------------
NET ASSET VALUE PER SHARE $ 11.32
--------------
# Seven-day yield
* Non-income producing
ADR American depository receipt
REIT Real Estate Investment Trust
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND>
- --------------------------------------------------------------------------------
Unaudited
- -----------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
6/30/99
Investment Income
Income
Dividend $ 40
Interest 18
--------------
Total income 58
--------------
Expenses
Shareholder servicing 147
Investment management 127
Custody and accounting 48
Prospectus and shareholder reports 32
Registration 12
Legal and audit 5
Directors 3
Miscellaneous 1
--------------
Total expenses 375
--------------
Net investment income (317)
--------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (295)
Change in net unrealized gain or loss on securities 1,292
--------------
Net realized and unrealized gain (loss) 997
--------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 680
--------------
The accompanying notes are an integral part of these financial statements.
20
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T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Unaudited
- ----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
6/30/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ (317) $ (585)
Net realized gain (loss) (295) (7,194)
Change in net unrealized gain or loss 1,292 9,852
--------------------------
Increase (decrease) in net assets from operations 680 2,073
--------------------------
Distributions to shareholders
Net realized gain -- (191)
--------------------------
Capital share transactions *
Shares sold 8,192 35,966
Distributions reinvested -- 190
Shares redeemed (18,116) (39,729)
Redemption fees received 15 64
--------------------------
Increase (decrease) in net assets from capital
share transactions (9,909) (3,509)
--------------------------
Net Assets
Increase (decrease) during period (9,229) (1,627)
Beginning of period 70,444 72,071
--------------------------
End of period $ 61,215 $ 70,444
--------------------------
* Share information
Shares sold 783 3,404
Distributions reinvested -- 19
Shares redeemed (1,755) (3,779)
--------------------------
Increase (decrease) in shares outstanding (972) (356)
The accompanying notes are an integral part of these financial statements.
21
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T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
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Unaudited June 30, 1999
- -----------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Diversified Small-Cap Growth Fund, Inc. (the fund) is
registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company and commenced operations on June
30, 1997.
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. Credits
earned on daily, uninvested cash balances at the custodian are used to
reduce the fund's custody charges.
22
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T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
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NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $9,235,000 and $19,388,000, respectively, for the
six months ended June 30, 1999.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends
to continue to qualify as a regulated investment company and distribute
all of its income. As of December 31, 1998, the fund had capital loss
carryforwards for federal income tax purposes of $5,643,000, all of which
expires in 2006.
At June 30, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$49,821,000. Net unrealized gain aggregated $11,223,000 at period-end, of
which $15,955,000 related to appreciated investments and $4,732,000 to
depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and the manager
provides for an annual investment management fee, of which $20,000 was
payable at June 30, 1999. The fee is computed daily and paid monthly, and
consists, of an individual fund fee equal to 0.35% of average daily net
assets and a group fee. The group fee is based on the combined assets of
certain mutual funds sponsored by the manager or Price Associates (the
group). The group fee rate ranges from 0.48% for the first $1 billion of
assets to 0.30% for assets in excess of $80 billion. At June 30, 1999, and
for the six months then ended, the effective annual group fee rate was
0.32% . The fund pays a pro-rata share of the group fee based on the ratio
of its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through December 31, 2000, which would cause
the fund's ratio of expenses to average net assets to exceed 1.25%.
Thereafter, through December 31, 2002, the fund is required to reimburse
the manager for these expenses, provided that average net assets have
grown or expenses have
23
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T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
declined sufficiently to allow reimbursement without causing the fund's
ratio of expenses to average net assets to exceed 1.25%. Pursuant to this
agreement, $75,000 of management fees were not accrued by the fund for the
six months ended June 30, 1999. Additionally, $240,000 of unaccrued
management fees related to a previous expense limitation are subject to
reimbursement through December 31, 2000.
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 $155,000 for the six months ended June 30, 1999, of which
$34,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the six months ended
June 30, 1999, totaled $18,000 and are reflected as interest income in the
accompanying Statement of Operations.
24
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your
distributions.
Automated 24-Hour Services Including Tele*Access(R) and the T.
Rowe Price Web site on the Internet. Address: www.troweprice.com
BROKERAGE SERVICES*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over full-service commission
rates.**
INVESTMENT INFORMATION
Combined Statement Overview of all your accounts with T. Rowe
Price.
Shareholder Reports Fund managers' reviews of their strategies
and results.
T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund
results.
Insights Educational reports on investment strategies and
financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit,
Diversifying Overseas: A Guide to International Investing,
Personal Strategy Planner, Retirees Financial Guide, and
Retirement Planning Kit.
* T. Rowe Price Brokerage is a division of T. Rowe Price
Investment Services, Inc., Member NASD/SIPC.
** Based on a January 1999 survey for representative-assisted
stock trades. Services vary by firm, and commissions may
vary depending on size of order.
25
<PAGE>
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a brokerage account
or obtain information, call:
1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
4200 West Cypress St.
10th Floor
Tampa, FL 33607
4410 ArrowsWest Drive
Colorado Springs, CO 80907
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills, CA 91367
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T. Rowe Price Investment Services, Inc., Distributor.
