<PAGE>
Annual Report
DIVERSIFIED
SMALL-CAP
GROWTH FUND
-----------------
DECEMBER 31, 1999
-----------------
[LOGO OF T. ROWE PRICE]
<PAGE>
REPORT HIGHLIGHTS
------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund
. The market posted a strong advance for 1999, although returns were
concentrated in technology.
. Within the Russell 2000 Index, companies with losses sharply outperformed
those that were profitable.
. The fund's returns exceeded 20% for both the second half and year, but lagged
benchmarks due to our emphasis on such fundamentals as earnings growth.
. Portfolio holdings continued to have strong fundamentals, as measured by
consistently rising earnings estimates.
. Despite the concentration of market returns, we remain committed to a
well-diversified portfolio of emerging growth companies.
UPDATES AVAILABLE
For updates on T. Rowe Price funds following the end of each calendar quarter,
please see our Web site at www.troweprice.com.
<PAGE>
FELLOW SHAREHOLDERS
A powerful fourth quarter advance, led by surging technology stocks, carried the
stock market to record highs at the end of the year. The Standard & Poor's 500
Stock Index gained more than 20% for an unprecedented fifth straight year, and
the Russell 2000, a broad measure of small-cap stock performance, edged past the
S&P 500 in the closing moments of the year. Robust economic growth,
stronger-than-expected corporate profits, benign inflation, and consumer
confidence created a positive investment climate.
Although the bull market finally broadened enough to benefit the small-company
sector, the average small-cap stock underperformed the broad indices by a
substantial margin for the sixth year in a row. Within the small-cap sector, the
advance was led by a relatively narrow group of technology and biotech stocks.
- ----------------------
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
Periods Ended 12/31/99 6 Months 12 Months
- --------------------------------------------------------------------------------
Diversified Small-Cap
Growth Fund 24.65% 27.69%
Russell 2000 Growth Index 26.83 43.09
Lipper Small Cap Fund Index 29.71 41.93
Against this backdrop, your fund posted strong returns of 24.65% for the six
months and 27.69% for the full year. These were slightly behind our benchmarks
for the second half but trailed by a larger amount for the full year. Our
disciplined approach to stock selection, which focuses on fundamentals such as
earnings growth, meant that we tended to avoid the high-flying Internet stocks.
The performance gap for the year reflected the fund's lower technology weighting
in the first half, which we later increased. Overall, our strategy was not in
sync with the speculative tenor of last year's market activity.
MARKET ENVIRONMENT
Chalking up a fourth consecutive year of growth over 4%, the U.S. economy was
much stronger in 1999 than most economists
1
<PAGE>
predicted and created a strong underpinning for continued stock market gains. In
fact, the economy is entering its tenth year of growth, an all-time record.
Corporate profits also continue to exceed forecasts despite the drag from weaker
overseas economies. Unemployment remained at record lows, inflation at a low 2%,
and consumer confidence at record highs. The only negative was the steady rise
in interest rates, as the Federal Reserve hiked the federal funds rate three
times to forestall higher inflation. As a result, the bond market suffered its
worst year since 1994, but stocks shrugged off the increase in rates.
Stock prices declined in the third quarter but rallied powerfully late in the
year. The advance, however, was narrow, with technology stocks and a small group
of large-cap blue chips the only real winners. Only seven stocks accounted for
half of the S&P 500's gain. Tech stocks accounted for nearly 70% of the gain in
the S&P 500 and only slightly less of the increase in the Russell 2000. Many
tech and Internet stocks posted triple-digit returns. Without technology, the
S&P 500 would have gained only 3.1% (Leuthold Group data).
- -----------------------
SMALL-CAP STOCK RETURNS
- --------------------------------------------------------------------------------
Periods Ended 12/31/99 6 Months 12 Months
- --------------------------------------------------------------------------------
Russell 2000 Index 10.96% 21.26%
Russell 2000 Growth Index 26.83 43.09
Russell 2000 Value Index -6.41 -1.49
Within the small-cap sector, an enormous gap developed between growth and value
stocks -- the largest spread ever recorded. Investor attitudes strongly favored
high-risk, high-expectation stocks, while ignoring many companies with excellent
earnings growth that happened to operate far from the technology-driven "new
economy." As a result, value issues actually declined, as shown in the table.
PORTFOLIO AND STRATEGY REVIEW
While our overall investment strategy remained more conservative than that of
many small-cap growth funds, we raised our target growth rate for stock
selection purposes. As a result, almost 50% of the portfolio was invested in
technology, computer software and services, and telecommunications at year-end.
Among the industry groups with higher weightings at year-end than at midyear
were computer software (our largest industry holding), semiconductors
2
<PAGE>
and components (second largest), networking and telecom equipment, computer
hardware, e-commerce, and telecom services. Sector diversification at year-end
and midyear is shown in a table following this letter.
For the most part, sectors related to technology also generated the best
performance for the fund. Top performers included Liberate Technologies
(Internet software), QLogic (computer connectivity), Proxim (wireless
networking), and, in the business services area, Emmis Communications (radio and
TV broadcaster).
As we increased exposure to technology and telecom-related sectors, we trimmed
some other allocations such as miscellaneous business services, media and
advertising, hard goods retailers, and health care services. Retail, health
care, and business services generally had negative returns. Among our holdings
that hurt results were Consolidated Graphics, a consolidator in the commercial
printing business that missed earnings estimates, Pediatrix Medical Group, a
physician management group with weak earnings that we eliminated early in the
year, and Engineering Animation, a software company that had lower growth than
expected.
OUTLOOK
We do not expect the huge spread between growth and value stocks to continue.
There were many signs of speculative excess in last year's market, particularly
the emergence of risk-insensitive investors and the huge number of initial
public offerings, which deteriorated in quality as the months wore on. We expect
that ultimately stock returns and company fundamentals, such as earnings, will
again become closely linked and that valuations will matter. Valuations in the
small-cap
- -------------------------
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------------------------------
Diversified
Small-Cap
As of 12/31/99 Growth Fund S&P 500
- --------------------------------------------------------------------------------
Market Cap (Investment-
Weighted Median) $1.3 billion $92.9 billion
Earnings Growth Rate
Estimated Next 5 Years* 25.0% 13.9%
P/E Ratio (Based on Next 12
Months' Estimated Earnings) 31.0X 28.1X
* Forecasts are based on T. Rowe Price research and are in no way an indication
of future investment returns.
3
<PAGE>
growth market vary widely, but overall the sector is still at the low end of its
historical relative valuation range even though technology is at the top of its
range.
We believe that market leadership will broaden this year to include areas left
behind in 1999. The fund's diversified approach to small-cap investing should
provide some downside protection while ensuring that investors are exposed to
all the sectors of this part of the market.
Respectfully submitted,
/s/ Richard T. Whitney
Richard T. Whitney
President and Chairman of the Investment Advisory Committee
January 27, 2000
4
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/99
- --------------------------------------------------------------------------------
Proxim 1.0%
Rsa Security 1.0
Emmis Broadcasting 1.0
QRS 1.0
Liberate Technologies 0.9
- --------------------------------------------------------------------------------
QLogic 0.9
USinternetworking 0.8
Cox Radio 0.7
CDW Computer Centers 0.7
Novellus Systems 0.7
- --------------------------------------------------------------------------------
Micrel 0.7
Burr Brown 0.7
Lattice Semiconductor 0.7
Arbor Software 0.7
Peregrine Systems 0.7
- --------------------------------------------------------------------------------
Kopin 0.7
USWeb 0.6
InfoUSA 0.6
InterVoice 0.6
Imax 0.6
- --------------------------------------------------------------------------------
Semtech 0.6
Dollar Tree Stores 0.6
Affiliated Managers Group 0.6
National Instruments 0.6
Gilat Satellite Networks 0.6
- --------------------------------------------------------------------------------
Total 18.3%
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
6/30/99 12/31/99
- --------------------------------------------------------------------------------
Computer Software 8.6% 12.3%
Semiconductors 7.4 11.2
Miscellaneous Business Services 8.9 6.9
Media and Advertising 6.0 5.5
Networking and Telecom Equipment 2.9 5.5
- --------------------------------------------------------------------------------
Computer Hardware 4.6 5.1
E-Commerce 2.7 4.3
Computer Services 5.9 4.1
Hard Goods Retailers 5.0 3.6
Telecom Services 2.3 3.2
- --------------------------------------------------------------------------------
Health Care Services 4.2 2.5
Consumer Nondurables 2.9 2.2
Pharmaceuticals 2.3 2.2
Medical Instruments and Devices 2.4 2.2
Financial Services 2.4 2.2
- --------------------------------------------------------------------------------
Consumer Services 2.6 2.0
Entertainment 3.3 1.8
Distribution 3.0 1.6
Soft Goods Retailers 2.1 1.6
Biotechnology 1.7 1.6
- --------------------------------------------------------------------------------
Restaurants 2.0 1.5
Machinery 0.3 1.3
Transportation 2.1 1.1
Engineering and Construction 1.7 1.1
Energy Services 0.9 1.1
- --------------------------------------------------------------------------------
Total 88.2% 87.7%
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 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.
[GRAPH]
DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Russell 2000 Growth Lipper Small Cap Index DSG Growth
------------------- ---------------------- ----------
6/30/97 10,000 10,000 10,000
12/31/97 10,734 10,852 10,710
12/31/98 10,866 10,760 11,094
12/31/99 15,548 15,271 14,167
- ------------------------------------
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 12/31/99 1 Year Inception Date
- --------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund 27.69% 14.93% 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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- -------------------------------------------------------------------------------------------------------
Year 6/30/97
Ended Through
12/31/99 12/31/98 12/31/97
NET ASSET VALUE
<S> <C> <C> <C>
Beginning of period $ 11.05 $ 10.70 $ 10.00
Investment activities
Net investment income (loss) (0.11)* (0.09)* (0.03)*
Net realized and unrealized gain (loss) 3.17 0.46 0.74++
Total from investment activities 3.06 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 $ 14.11 $ 11.05 $ 10.70
-----------------------------------------------------
Ratios/Supplemental Data
Total return(R) 27.69%* 3.58%* 7.10%*
Ratio of total expenses
to average net assets 1.25%* 1.25%* 1.25%+*
Ratio of net investment income (loss)
to average net assets (0.99)%* (0.83)%* (0.67)%+*
Portfolio turnover rate 49.4% 39.8% 13.4%
Net assets, end of period
(in thousands) $ 74,804 $ 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
++ The amount presented is calculated pursuant to a methodology prescribed by
the Securities and Exchanges 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
- --------------------------------------------------------------------------------
December 31, 1999
- -----------------------
STATEMENT OF NET ASSETS Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
COMMON STOCKS 95.1%
FINANCIAL 4.2%
Bank and Trust 1.0%
City National 7,100 $ 234
Commerce Bancorp 6,201 251
Community First Bankshares 11,800 185
TeleBanc Financial * 4,400 114
-------------
784
-------------
Insurance 1.0%
Advance Paradiam * 9,100 196
E.W. Blanch 3,100 190
Protective Life 3,700 118
Radian Group 5,499 262
-------------
766
-------------
Financial Services 2.2%
Affiliated Managers Group * 11,000 445
AmeriCredit * 11,900 220
DLJdirect * 1,500 20
First Sierra Financial * 9,000 154
Heller Financial 1,061 21
Investment Technology Group 5,000 144
Legg Mason 3,832 139
Nationwide Financial Services (Class A) 3,800 106
Waddell & Reed Financial (Class A) 14,100 382
-------------
1,631
-------------
Total Financial 3,181
-------------
TECHNOLOGY 38.4%
Semiconductors 11.2%
Advanced Energy Industries * 5,100 251
American Xtal Technology * 8,400 146
Amphenol * 1,600 106
Artesyn Technologies * 5,800 122
ATMI * 6,700 221
Benchmark Electronics * 3,600 83
Burr Brown * 14,325 517
Cognex * 6,300 245
9
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Cohu 9,900 $ 305
CTS 2,800 211
Cymer * 5,100 235
Dallas Semiconductor 6,600 425
DII Group * 1,900 135
Dionex * 4,800 198
Etec Systems * 5,500 247
Globespan Semiconductor * 3,200 208
Lattice Semiconductor * 10,700 507
Maxim Integrated Products * 4,800 226
Micrel * 9,200 524
Microchip Technology * 5,800 398
Novellus Systems * 4,400 539
Plexus * 7,200 319
PMC-Sierra * 1,600 256
QLogic * 4,100 656
S3 * 15,000 173
Semtech * 8,600 448
Transwitch * 5,500 399
Vitesse Semiconductor * 5,000 262
-------------
8,362
-------------
Computer Hardware 5.1%
Activision * 12,400 191
American Power Conversion * 5,000 132
Apex * 2,400 78
C-Cube Microsystems * 3,100 194
Cybex Computer Products * 10,050 411
Electronics For Imaging * 3,100 182
KEMET * 6,100 275
Kopin * 11,600 493
Mercury Computer Systems * 8,400 291
MIPS Technologies * 4,400 229
Pinnacle * 8,400 340
Sanmina * 2,500 249
SCI Systems * 2,400 197
Symbol Technologies 5,525 351
Teradyne * 3,600 238
-------------
3,851
-------------
10
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Computer Software 12.3%
Actuate * 7,400 $ 317
Arbor Software * 11,400 496
Ardent Software * 7,400 287
AVT * 7,700 362
Citrix Systems * 2,500 308
Clarify * 2,500 317
Cognos * 6,600 302
Dendrite International * 5,150 174
Electronic Arts * 1,600 135
Factset Research Systems 4,700 374
Great Plains Software * 4,000 299
Infocure * 7,000 219
Intervu * 700 73
Intuit * 6,900 413
ISS Group * 6,000 426
Legato Systems * 4,900 337
Macromedia * 5,700 417
Mercury Interactive * 3,900 421
Micromuse * 1,400 238
National Instruments * 11,550 444
Network Associates * 5,400 144
Peregrine Systems * 5,900 496
Remedy * 5,400 257
Rsa Security * 10,000 775
Symantec * 6,800 399
Synopsys * 3,300 220
TSI International Software * 1,800 102
Verity * 3,700 157
Wind River Systems * 7,800 286
-------------
9,195
-------------
Networking and Telecom Equipment 5.5%
Alpha Industries * 3,600 206
Andrew * 6,900 131
Black Box * 5,800 389
Carrier Access * 3,900 265
Comverse Technology * 1,300 188
Concord Communications 5,400 241
11
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Inter-Tel 12,700 $ 317
Polycom * 6,800 434
Powerwave Technologies * 5,000 292
Proxim * 7,000 780
Spectrian * 10,800 304
Time Warner Telecom (Class A) * 7,200 358
Xircom * 2,700 203
-------------
4,108
-------------
E-Commerce 4.3%
1-800-FLOWERS.com * 8,200 88
Beyond.com * 12,600 98
Liberate Technologies * 2,700 693
Netopia * 3,500 191
Pegasus Systems * 5,400 325
Preview Travel * 1,000 52
PSiNet * 2,600 161
Sterling Commerce * 2,406 82
USinternetworking * 8,850 618
USWeb * 10,550 469
WebTrends * 5,400 436
-------------
3,213
-------------
Total Technology 28,729
-------------
ENERGY 1.7%
Energy Services 1.1%
BJ Services * 6,200 259
Maverick Tube * 5,700 140
Oceaneering International * 9,300 139
Smith International * 2,000 100
UTI Energy * 8,200 189
-------------
827
-------------
Exploration and Production 0.6%
Barrett Resources * 4,000 118
Cal Dive International * 4,600 152
Noble Affiliates 7,100 152
-------------
422
-------------
Total Energy 1,249
-------------
12
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
BASIC MATERIALS 0.6%
Miscellaneous Materials 0.6%
Gilat Satellite Networks * 3,700 $ 439
-------------
Total Basic Materials 439
-------------
CONSUMER 13.2%
Restaurants 1.5%
Applebee's 7,500 221
Brinker * 6,600 158
CEC Entertainment * 2,100 59
Outback Steakhouse * 5,450 142
PF Chang's China Bistro * 4,100 103
Papa John's * 6,200 162
Rare Hospitality International * 4,500 98
Sonic * 5,700 161
-------------
1,104
-------------
Entertainment 1.8%
Imax * 16,700 458
Jakks Pacific * 9,900 185
Network Event Theater * 2,500 74
Premier Parks * 8,000 231
SFX Entertainment (Class A) * 5,800 210
Steinway Musical Instruments * 8,400 170
-------------
1,328
-------------
Food and Beverages 0.5%
Ben & Jerry's * 3,300 81
Hain Food Group * 8,400 188
Smithfield Foods * 6,000 144
-------------
413
-------------
Consumer Services 2.0%
Apollo Group (Class A) * 9,550 191
Avis Rent A Car * 5,500 140
Bright Horizons Family Solution * 8,900 166
Devry * 6,100 114
ITT Educational Service * 9,800 151
Learning Tree International * 12,400 347
13
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Metris 4,700 $ 168
Sunterra * 17,200 198
-------------
1,475
-------------
Consumer Nondurables 2.2%
Chattem * 5,500 103
Fossil * 8,000 185
Kenneth Cole Productions (Class A) * 5,700 261
Linens `n Things * 5,400 160
Mohawk Industries * 12,700 335
Quicksilver * 11,650 181
Rayovac * 6,000 113
Topps * 13,700 142
Wesley Jessen VisionCare * 5,500 208
-------------
1,688
-------------
Hard Goods Retailers 3.6%
Barnes & Noble * 4,500 93
CDW Computer Centers * 6,900 542
Cost Plus * 6,550 233
Dollar Tree Stores * 9,225 447
Duane Reade * 10,700 295
Insight Enterprises * 2,450 99
O'Reilly Automotive * 13,200 287
Tweeter Home Entertainment Group * 7,900 279
Whole Foods Market * 3,600 166
Wild Oats Markets * 5,100 113
Williams-Sonoma * 2,300 106
-------------
2,660
-------------
Soft Goods Retailers 1.6%
Bed Bath & Beyond * 4,300 149
Buckle * 1,500 22
Family Dollar Stores 5,200 85
Men's Wearhouse * 9,700 286
Neiman Marcus Group * 8,100 226
Pacific Sunwear * 9,150 291
Ross Stores 7,400 134
-------------
1,193
-------------
Total Consumer 9,861
-------------
14
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
INDUSTRIAL 2.8%
Aerospace and Defense 0.3%
Orbital Sciences * 7,300 $ 135
Triumph Group * 5,000 121
-------------
256
-------------
Machinery 1.3%
Applied Science & Technology * 9,300 311
Asyst Technologies * 5,200 341
Pentair 2,700 104
Terex * 7,500 208
-------------
964
-------------
Specialty Chemicals 0.4%
Macdermid 6,300 259
-------------
259
-------------
Auto Related 0.6%
Gentex * 10,900 304
Group One Automotive * 8,400 117
-------------
421
-------------
Building Products 0.2%
Simpson Manufacturing * 4,000 175
-------------
175
-------------
Total Industrial 2,075
-------------
HEALTH CARE 9.3%
Pharmaceuticals 2.2%
Andrx * 4,500 189
Forest Laboratories * 3,200 197
Jones Pharma 9,600 417
K-V Pharmaceutical * 3,900 86
Shire Pharmaceuticals ADR * 13,662 395
Theragenics * 16,600 150
Watson Pharmaceuticals * 6,300 226
-------------
1,660
-------------
Biotechnology 1.6%
Biogen * 1,000 84
Inhale Therapeutic Systems * 8,500 362
15
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Liposome * 8,400 $ 102
Medco Research * 9,400 283
Serologicals * 18,000 110
Techne * 4,500 248
-------------
1,189
-------------
Health Care Services 2.5%
Express Scripts (Class A) * 2,400 154
First Consulting Group * 6,051 93
First Health Group * 5,300 143
Lincare * 8,800 306
Medquist * 9,400 242
Omnicare 22,600 271
Renal Care Group * 8,900 209
TLC Laser Eye Centers * 4,300 57
Universal Health Services * 6,100 220
Ventana Medical Systems * 3,000 75
Veterinary Centers of America * 6,100 79
-------------
1,849
-------------
Medical Equipment 0.8%
Dentsply International 6,600 156
Uniphase * 1,800 291
VISX * 2,900 150
-------------
597
-------------
Medical Instruments and Devices 2.2%
Cytyc * 5,400 330
Hanger Orthopedic Group * 6,400 64
Mentor 13,800 358
Molecular Devices * 2,100 109
Priority Healthcare (Class B) * 6,600 191
PSS World Medical * 10,275 98
ResMed * 3,600 150
Sybron International * 6,500 161
Xceed * 4,200 174
-------------
1,635
-------------
Total Health Care 6,930
-------------
BUSINESS SERVICES 24.9%
Environmental 0.6%
Casella Waste Systems (Class A) * 14,700 278
16
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Catalytica * 13,000 $ 177
-------------
455
-------------
Miscellaneous Business Services 6.9%
CIBER * 5,300 146
Commscope * 4,300 173
Consolidated Graphics * 7,800 117
CORT Business Services * 8,100 141
F. Y. I. * 5,600 191
Fair, Issac and Company 4,800 254
G & K Services 3,100 99
Global Imaging Systems * 7,100 87
InfoUSA * 33,100 462
Keane * 3,800 121
Lason * 3,600 39
Mastech * 9,300 230
META Group * 12,800 245
Metamor Worldwide * 5,900 172
Modis Professional Services * 20,200 288
National Computer Systems 6,400 240
Navigant Consulting * 3,000 33
NCO Group * 9,800 292
Power Integrations * 4,700 223
Prepaid Legal Services * 5,800 139
Professional Staff ADR * 16,000 91
Profit Recovery Group International * 4,300 114
Quanta Services * 7,900 223
Rent Way * 6,300 118
Romac International * 4,200 57
Visual Networks * 3,500 277
Whittman-Hart * 2,700 145
Zebra Technologies (Class B) * 7,200 418
-------------
5,135
-------------
Distribution 1.6%
Jack Henry & Associates 5,900 311
MSC * 6,300 83
Patterson Dental * 4,950 211
SCP Pool * 2,600 68
Tech Data * 5,900 160
U.S. Foodservice * 10,800 181
17
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Watsco (Class A) 17,750 $ 205
-------------
1,219
-------------
Transportation 1.1%
Alaska Air Group * 3,600 126
C.H. Robinson Worldwide 1,800 72
Eagle USA Air Freight * 1,700 74
Mesaba Holdings * 13,200 154
Swift Transportation * 12,075 213
USFreightways 4,500 214
-------------
853
-------------
Telecom Services 3.2%
AT & T (Class B) * 5,200 209
Caprock Communications * 4,500 146
Crown Castle International * 12,000 385
ICG Communications * 9,000 169
InterVoice * 19,700 459
ITC Deltacom * 9,500 262
Northeast Optic Network * 1,000 63
Pinnacle Holdings * 4,300 184
Radiant Systems * 1,400 56
U. S. Cellular * 3,500 353
USA Networks * 2,000 110
-------------
2,396
-------------
Computer Services 4.1%
Acxiom * 1,700 41
Affiliated Computer Services (Class A) * 5,500 253
American Management Systems * 5,700 178
BISYS Group * 5,800 378
Cognizant Technology Solutions * 1,400 153
Digital River * 5,300 177
Inspire Insurance Solutions * 16,200 76
MicroStrategy (Class A) * 300 63
National Data 4,500 153
NOVA * 10,796 341
QRS * 6,800 716
SunGard Data Systems * 5,200 123
Sykes Enterprises * 9,300 408
-------------
3,060
-------------
Media and Advertising 5.5%
A.C. Nielson * 7,200 177
18
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
American Tower Systems (Class A) * 11,000 $ 336
Catalina Marketing * 2,800 324
Cox Radio (Class A) * 5,500 549
Emmis Broadcasting (Class A) * 6,000 748
Getty Images * 3,300 162
Harte-Hanks 8,800 191
Hispanic Broadcasting * 2,000 184
Lamar Advertising * 1,800 109
Macrovision * 3,400 251
Pegasus Communications * 2,100 203
Price Communications * 2,500 70
TMP Worldwide * 1,600 227
Univision Communications * 600 61
Young Broadcasting (Class A) 4,600 235
Zomax Optical Media * 6,300 285
-----------
4,112
-----------
Real Esate Services 0.8%
Apartment Investment & Management, REIT 8,012 319
Catellus Development * 10,800 139
Costar Group * 3,500 125
-----------
583
-----------
Engineering and Construction 1.1%
Dycom Industries * 6,950 306
Insituform Technologies (Class A) * 8,000 224
NCI Building Systems * 4,200 78
Tetra Tech * 15,406 238
-----------
846
-----------
Total Business Services 18,659
-----------
Total Common Stocks (Cost $50,447) 71,123
-----------
SHORT-TERM INVESTMENTS 4.4%
Money Market Funds 4.3%
Reserve Investment Fund, 6.16% # 3,267,476 3,267
-----------
3,267
-----------
U.S. Government Obligations 0.1%
U.S. Treasury Bills, 5.145%, 3/30/00 $ 75,000 74
-----------
74
-----------
Total Short-Term Investments (Cost $3,341) 3,341
-----------
19
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
In thousands
- --------------------------------------------------------------------------------------------
<S> <C>
Total Investments in Securities
99.5% of Net Assets (Cost $53,788) $ 74,464
<CAPTION>
Futures Contracts
In thousands
Contract Unrealized
Expiration Value Gain (Loss)
---------- -------- -----------
<S> <C> <C> <C>
Long, 5 Russell 2000 Stock Index
contracts, $75,000 of U.S. Treasury Bills
pledged as initial margin 3/00 $ 1,275 $ 27
Net payments (receipts) of variation
margin to date (3)
<CAPTION>
<S> <C>
Variation margin receivable
(payable) on open futures contracts 24
Other Assets Less Liabilities 316
NET ASSETS $ 74,804
---------------
Net Assets Consist of:
Accumulated net realized gain/loss - net of distributions $ (2,432)
Net unrealized gain (loss) 20,703
Paid-in-capital applicable to 5,300,583 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares authorized 56,533
NET ASSETS $ 74,804
---------------
NET ASSET VALUE PER SHARE $ 14.11
---------------
</TABLE>
# 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.
20
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
- -----------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/99
Investment Income (Loss)
Income
Dividend $ 86
Interest 74
Total income 160
Expenses
Investment management 292
Shareholder servicing 261
Custody and accounting 101
Prospectus and shareholder reports 62
Registration 19
Legal and audit 13
Directors 6
Miscellaneous 4
Total expenses 758
Net investment income (loss) (598)
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 4,762
Change in net unrealized gain or loss
Securities 10,745
Futures 27
Change in net unrealized gain or loss 10,772
Net realized and unrealized gain (loss) 15,534
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 14,936
--------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
- ----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ (598) $ (585)
Net realized gain (loss) 4,762 (7,194)
Change in net unrealized gain or loss 10,772 9,852
Increase (decrease) in net assets from operations 14,936 2,073
Distributions to shareholders
Net realized gain - (191)
Capital share transactions *
Shares sold 16,751 35,966
Distributions reinvested - 190
Shares redeemed (27,343) (39,729)
Redemption fees received 16 64
Increase (decrease) in net assets from capital
share transactions (10,576) (3,509)
Net Assets
Increase (decrease) during period 4,360 (1,627)
Beginning of period 70,444 72,071
End of period $ 74,804 $ 70,444
--------------------
* Share information
Shares sold 1,477 3,404
Distributions reinvested - 19
Shares redeemed (2,553) (3,779)
Increase (decrease) in shares outstanding (1,076) (356)
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
December 31, 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. Financial futures contracts are
valued at closing settlement prices.
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. Payments ("variation margin") made or received
by the fund to settle the daily fluctuations in the value of futures contracts
are recorded as unrealized gains or losses until the contracts are closed.
Unrealized gains and losses on futures contracts are included in Change in net
unrealized gain or loss in the accompanying financial statements. Credits earned
on daily uninvested cash balances at the custodian are used to reduce the fund's
custody charges.
23
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Futures Contracts At December 31, 1999, the fund was a party to futures
contracts, which provide for the future sale by one party and purchase by
another of a specified amount of a specific financial instrument at an agreed
upon price, date, time, and place. Risks arise from possible illiquidity of the
futures market and from movements in security values.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $29,762,000 and $43,626,000, 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. The fund utilized capital loss carryforwards of $3,298,000 in
1999. As of December 31, 1999, the fund has capital loss carryforwards for
federal income tax purposes of $2,345,000, all of which expires in 2006. The
fund intends to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
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.
- --------------------------------------------------------------------------------
Undistributed net investment income $ 598,000
Undistributed net realized gain (4,000)
Paid-in-capital (594,000)
24
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
At December 31, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled $53,788,000.
Net unrealized gain aggregated $20,676,000 at period-end, of which $24,659,000
related to appreciated investments and $3,983,000 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 $41,000 was payable at December 31, 1999. The fee is computed daily and
paid monthly, and consists of an individual fund fee equal to 0.35% of average
daily net assets and a group fee. The group fee is based on the combined assets
of certain mutual funds sponsored by the manager or Rowe Price-Fleming
International, Inc. (the group). The group fee rate ranges from 0.48% for the
first $1 billion of assets to 0.295% for assets in excess of $120 billion. At
December 31, 1999, and for the year 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 total 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
declined sufficiently to allow reimbursement without causing the fund's ratio of
total expenses to average net assets to exceed 1.25%. Pursuant to this
agreement, $114,000 of management fees were not accrued by the fund for the year
ended December 31, 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
25
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
party agreements totaling approximately $280,000 for the year ended December 31,
1999, of which $30,000 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 $74,000
and are reflected as interest income in the accompanying Statement of
Operations.
26
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND
- --------------------------------------------------------------------------------
- ---------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Diversified Small-Cap Growth Fund, Inc.
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
T. Rowe Price Diversified Small-Cap Growth Fund, Inc. (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 custodians and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 20, 2000
27
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
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 September 1999 survey for representative-assisted stock trades.
Services vary by firm, and commissions may vary depending on size of order.
28
<PAGE>
T. ROWE PRICE MUTUAL FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value
Spectrum Growth
Tax-Efficient Growth
Total Equity Market Index
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Growth & Income
International Stock
Japan
Latin America
New Asia
Spectrum International
BOND FUNDS
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-Free
California Tax-Free Bond
Florida Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Bond
International Bond
MONEY MARKET FUNDS+
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
BLENDED ASSET FUNDS
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD
VARIABLE ANNUITY
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Closed to new investors.
+ Investments in the funds are not insured or guaranteed by the FDIC or any
other government agency. Although the funds seek to preserve the value of
your investment at $1.00 per share, it is possible to lose money by
investing in the funds.
Please call for a prospectus. Read it carefully before investing.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY. T.
Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
29
<PAGE>
For fund and account information or to conduct transactions,
24 hours, 7 days a week
By touch-tone telephone
Tele*Access 1-800-638-2587
By Account Access on the Internet
www.troweprice.com/access
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132
To open a brokerage account or obtain information, call:
1-800-638-5660
Internet address:
www.troweprice.com
Plan Account Lines for retirement plan participants:
The appropriate 800 number appears on your retirement account statement.
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.
Walk-In Investor Centers:
For directions, call 1-800-225-5132
or visit our Web site
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
Boston Area
386 Washington Street
Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills
Tampa
4200 West Cypress Street
10th Floor
Washington, D.C.
900 17th Street N.W.
Farragut Square
[LOGO OF T. ROWE PRICE]
T. Rowe Price Investment Services, Inc., Distributor. F20-050 12/31/99
