<PAGE> 1
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
FOR ASSISTANCE WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. ROWE PRICE
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 of the T. Rowe Price OTC
Fund.
[T.ROWE PRICE INVEST WITH CONFIDENCE(R) LOGO]
OTC
[T.ROWE PRICE LOGO]
-------------------
OTC FUND
DECEMBER 31, 1995
<PAGE> 2
- --------------------------------------------------------------------------------
Fellow Shareholders
Small stocks had a banner year in 1995, with the Russell 2000 returning nearly
30%. While large - capitalization stocks soared even higher, putting a slight
damper on our celebration, a 30% gain is excellent by any measure.
Although your fund lagged the technology-laden Nasdaq Composite and the
large - company - dominated Standard & Poor's 500 Stock Index for the full year,
it outperformed both unmanaged indices for the six months ended December 31,
with a gain of 16.8%. Meanwhile, the fund outpaced the small - cap Russell 2000
in both periods. Looking ahead, we continue to see good investment opportunities
in small-cap stocks, and feel certain they remain attractively valued relative
to their larger counterparts. More on this in the Outlook section.
- ------------------------------------------------------
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended
12/31/95
6 Months 12 Months
-------- ---------
<S> <C> <C>
OTC Fund 16.8% 33.9%
Russell 2000 12.3 28.4
Nasdaq Composite* 12.7 39.9
S&P 500 14.5 37.6
</TABLE>
- ------------------------------------------------------
* Principal only
YEAR-END DISTRIBUTIONS
Your Board of Directors declared a fourth quarter dividend of $0.12 per share
and also a $2.01 per share capital gain distribution, of which $0.66 represented
short-term and $1.35 long-term gains. These distributions were paid on December
28 to shareholders of record on December 26. In early January, we mailed your
check or statement reflecting this distribution, and Form 1099-DIV, reporting
this payment for tax purposes, was sent in late January.
INVESTMENT REVIEW
Where did these extraordinary returns come from? Two sectors accounted for half
of the Russell 2000's 28.4% return. Technology stocks rose more than 48% for the
year, buoyed by semiconductor stocks, an ebullient IPO (initial public offering)
market, and a frenzy over the Internet. Financial service firms such as banks
and insurance companies also racked up heady returns exceeding 38%, helped by
the sharp decline in interest rates. Both categories were well represented in
your fund.
In the financial services arena, two of our holdings, PREMIER BANCORP and
BELL BANCORP, were acquired by larger banks, boosting performance. Finally,
health care stocks did well, rising nearly 40% for the year, mostly in the
second half. Your fund had substantially increased its weighting in this area
before it rebounded.
Stock selection played an important part in the fund's performance, and our
largest holdings were particularly beneficial. Star performers included many of
the names you are familiar with from previous letters: ORTHODONTIC CENTERS OF
AMERICA, RICHFOOD HOLDINGS, HOLOPHANE, and SELECTIVE INSURANCE were the top four
contributors.
In the June letter, we mentioned the emerging value in REIT stocks (real
estate investment trusts). REITs, which now compose a significant part of the
Russell 2000, are under-followed, under - owned, unloved, and unappreciated by
most investors -- just the kind of opportunity we look for. Driven by the
compounding of substantial annual dividends, REIT stocks have historically
performed well versus the major indices, according to Goldman Sachs. As we
wrote in our semiannual report, we've begun tapping the cream of this sector.
<PAGE> 3
Our largest purchase in the last six months (as shown in the table following
this letter) was PRIME RETAIL, a REIT invested in high-quality, income-producing
factory outlet malls. Prime Retail has arguably the best management, best
layouts, and best tenants in its industry. With consumers becoming
simultaneously more value- and brand-conscious, top-flight factory outlet
operators should grow and prosper. The management at Prime Retail is setting the
standard in this industry for design and tenants.
The technology sector generated the most headlines last year, first due to
stellar returns and, of late, to its emerging weakness. Your fund sold
substantial positions in technology in the second half as they became, in our
view, fully valued. Major sales included ADOBE SYSTEMS, SYMANTEC, and SILICON
VALLEY GROUP, all of which were quite successful investments for the fund.
However, there were still some bargains available among technology stocks.
Our largest purchase in the sector was PANAMSAT, a firm offering satellite
transmission services to broadcasters, long-distance companies, and private
businesses. PanAmSat has three satellites in orbit and a fourth scheduled to
launch in early January. Once in orbit, satellites generate high-margin,
predictable cash streams since most business is conducted under long-term
contract. We made a major commitment to this company on the strength of its 70%
profit margins and a theoretical discounted cash flow value that was 50% higher
than our purchase price.
The Internet was another media darling, with offerings like Netscape and
UUNET generating astronomical single - day returns to IPO investors. Your fund
invested in VERITY, a maker of software that helps users search the Internet and
other electronic media for key words and topics. The firm is growing rapidly and
appears to have the search tool of choice in today's market.
The largest sale in the past six months was FIRST UNION, which we acquired
through the company's merger with United Financial of South Carolina. We
reinvested a portion of
EDGAR DESCRIPTION: A PIE CHART SHOWING SECTOR DIVERSIFICATION ON 12/31/95
AMONG BUSINESS SERVICES/TRANSPORTATION (19%), CONSUMER NONDURABLES (19%),
FINANCIAL (16%), CONSUMER SERVICES/CONSUMER CYCLICALS (12%), RESERVES (9%)
CAP. EQUIP/PROCESS IND./BASIC MAT. (9%), ENERGY/UTILITIES/MISC. (8%),
TECHNOLOGY (8%).
<TABLE>
<CAPTION>
Sector Diversification
<S> <C>
Business Services/Transportation 19%
Consumer Nondurables 19%
Financial 16%
Consumer Services/Cyclicals 12%
Reserves 9%
Cap. Equip./Process Ind./Basic Mat. 9%
Energy/Utilities/Misc. 8%
Technology 8%
</TABLE>
- ----------------------------------------
12/31/95
these proceeds in several smaller thrifts, including FIRST BELL BANCORP, which
we acquired at 95% of book value. The Pittsburgh-based firm is well managed and
well capitalized, and possesses an attractive franchise. The stock is
statistically cheap and may eventually prove attractive to a larger financial
institution.
We've written extensively of our search for solidly positioned, well-managed
niche companies. Earlier in the year we discovered just such a stock when a
Baltimore firm, SINCLAIR BROADCAST GROUP, went public. The stock did quite well
initially, but retreated late in 1995 as investors grew concerned about the
slowing economy's impact on broadcasting revenue and the loss of a Fox affiliate
station. We took advantage of the pullback to purchase more shares. Sinclair
owns six Fox and UPN (United Paramount Network) affiliated UHF television
stations. The firm also has local marketing management arrangements with five
other stations. Sinclair's management holds substantial equity in the company.
Priced at just three-quarters of comparable firms' cash flow multiples, Sinclair
is a growing position in your fund.
2
<PAGE> 4
OUTLOOK
The financial markets had an exceptional year in 1995, described by many
observers as "near perfect" for equity investors -- rising earnings, falling
interest rates, expanding price/earnings multiples, and the prospect of fiscal
discipline and a capital gains tax cut from Washington. It is doubtful that the
markets can do better in 1996. Nevertheless, we remain confident that the
current environment will remain favorable for selective small - cap investors
and your OTC Fund.
First, cash flows into aggressive small - cap funds remain strong, bringing
a favorable supply/demand backdrop to the sector. Second, with the economic
expansion now in its fifth year and showing signs of slowing, investors should
again be drawn to companies that can consistently deliver dependable earnings
gains. In particular, smaller, nimbler domestic companies should attract more
attention than those whose earnings are cyclically driven.
Finally, though small - caps again underperformed large - caps in 1995, we
believe they will reassume leadership in 1996. Relative valuations remain at
reasonable levels. Although some sectors, such as technology, may already be
correcting as we write, your fund's focus on both growth and value stocks helps
us find attractive investment opportunities, avoid the speculative manias, and,
we hope, deliver solid returns with moderate volatility. Thank you for your
continued support and welcome to all our new shareholders.
Respectfully submitted,
/s/ GREG MCCRICKARD
--------------------
Greg McCrickard
President and Chairman of the
Investment Advisory Committee
January 17, 1996
- --------------------------------------------------------------------------------
A Word on Market Corrections
After the stock market's spectacular run in 1995, concerns about a
"correction" have intensified. Most market observers consider a correction to
be a short and sometimes steep decline following a period of rising prices.
Moderate corrections of around 10% have been quite common, occurring on
average about once every two years over the last half-century, according to
Ned Davis Research.
The market as measured by the Dow Jones Industrial Average has not
experienced a moderate correction since early 1994. Furthermore, the Dow last
hit a bear market bottom -- defined as a drop of at least 20% -- in October
1990. Therefore, it would not be surprising to see a modest pullback in 1996,
on the order of 5% to 10%. In fact, as we write, the market has gotten off to
a rocky start.
Corrections are not only common, but can be beneficial for long-term
investors, especially those who invest in regular amounts through dollar cost
averaging. In a correction, overall stock prices decline, often leading to
more attractive valuations and good buying opportunities. History has shown
that investors who continue to buy through a downturn fare quite well. In
fact, the Dow has proven resilient in the aftermath of past corrections of
around 10%, taking an average of just six months to recover its losses,
according to Ned Davis. (To realize the benefits of dollar cost averaging, you
should be prepared to continuously purchase securities over a period of time,
in up and down markets. This approach does not assure a gain nor protect you
from a loss in declining markets.)
We raise the issue of a market correction not as a prediction, but as a
reminder that stock prices do not move in only one direction. If you are
satisfied that your investments are appropriate for your various objectives,
we recommend that you stay the course when a correction eventually occurs.
3
<PAGE> 5
- ------------------------------------------------------
Twenty-Five Largest Holdings
December 31, 1995
<TABLE>
<CAPTION>
Percent of
Company Net Assets
- --------------------------------------- ----------
<S> <C>
Richfood Holdings 3.5%
- --------------------------------------------------
Orthodontic Centers of America 2.2
Selective Insurance 1.9
- --------------------------------------------------
Insituform Technologies 1.7
Weatherford Enterra 1.6
- --------------------------------------------------
Holophane 1.4
Electro Rent 1.4
- --------------------------------------------------
Collective Bancorp 1.4
JP Foodservice 1.4
- --------------------------------------------------
Glacier Bancorp 1.3
Prime Retail 1.2
- --------------------------------------------------
Harleysville Group 1.2
WestPoint Stevens 1.2
- --------------------------------------------------
Analogic 1.1
Adobe Systems 1.1
- --------------------------------------------------
Maxim Integrated Products 1.1
FelCor Suites Hotels 1.1
- --------------------------------------------------
Analysts International 1.1
Home Beneficial 1.1
- --------------------------------------------------
Atwood Oceanics 1.0
Unitog 1.0
- --------------------------------------------------
Shiva 1.0
Mercantile Bancorporation 1.0
- --------------------------------------------------
Boston Acoustics 1.0
Woodward Governor 1.0
- --------------------------------------------------
Total 34.0%
- --------------------------------------------------
</TABLE>
- ------------------------------------------------------
Major Portfolio Changes
Six Months Ended December 31, 1995
Listed in descending order of size
- ------------------------------------------------------
TEN LARGEST PURCHASES
<TABLE>
<S> <C>
Prime Retail*
- --------------------------------------------------
Petrolite*
Richfood Holdings
- --------------------------------------------------
PanAmSat*
ITI Technologies*
- --------------------------------------------------
Raytel Medical*
GT Bicycles*
- --------------------------------------------------
Northfield Laboratories*
COREStaff*
- --------------------------------------------------
United Insurance*
- --------------------------------------------------
</TABLE>
- ------------------------------------------------------
TEN LARGEST SALES
<TABLE>
<S> <C>
First Union**
- --------------------------------------------------
St. Jude Medical
American City Business Journals**
- --------------------------------------------------
Chiron**
Lindsay Manufacturing**
- --------------------------------------------------
Adobe Systems
Symantec**
- --------------------------------------------------
Multicare**
Silicon Valley Group**
- --------------------------------------------------
Consolidated Graphics
- --------------------------------------------------
</TABLE>
* Position added
** Position eliminated
4
<PAGE> 6
Performance Comparison
as of 12/31/95
<TABLE>
<CAPTION> Nasdaq Russell
OTC Fund Composite 2000
<S> <C> <C> <C>
12/85 $ 10,000 $ 10,000 $ 10,000
12/86 10,472 10,736 10,568
12/87 9,166 10,171 9,641
12/88 11,649 11,737 12,041
12/89 13,878 13,997 13,998
12/90 11,037 11,505 11,267
12/91 15,297 18,045 16,456
12/92 17,424 20,834 19,485
12/93 20,630 23,907 23,169
12/94 20,647 23,142 22,747
12/95 27,636 32,380 29,217
</TABLE>
Note: The Index return does not reflect expenses, which have been deducted
from the fund's return.
- ------------------------------------------------------
Average Annual Compound Total Return*
Periods Ended December 31, 1995
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- --------- ----------- ------------
<S> <C> <C>
33.85% 20.15% 10.70%
</TABLE>
- ------------------------------------------------------
* Performance prior to 9/2/92
reflects investment managers other
than T. Rowe Price.
Investment return and principal
value represent past performance and
will vary. Shares may be worth more
or less at redemption than at
original purchase.
5
<PAGE> 7
- --------------------------------------------------------------------------------
Investment Record
T. Rowe Price OTC Fund
The table below shows the investment record of one share of the T. Rowe Price
OTC Fund purchased at the initial price of $16.67, for the period 9/2/92 through
12/31/95. Over this time, stock prices in general have risen. The results shown
should not be considered as a representation of the income or capital gain or
loss which may be realized from an investment made in the fund today.
- --------------------------------------------------------------------------------
Per Share Data
<TABLE>
<CAPTION>
With Capital Gains and Income Dividends Annual Total
Return
Taken in Cash Reinvested in Additional Shares on Investment
--------------------------- ------------------------------------------ % Change
Year Net Capital Capital ---------------
Ended Asset Gain Income Gain Income Value of
12/31 Value Distributions(1) Dividends Distributions Dividends Investment Fund S&P 500
- ------- ------ ------------- --------- ------------- --------- ---------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992(2) $14.37 $4.64 $0.07 $ 4.64 $0.07 $19.20 15.2% -1.8%
------------------------------------------------------------------------------------------------------------------
1993 15.39 1.58 -- 2.11 -- 22.74 18.4 5.3
1994 13.80 1.56 0.03 2.30 0.04 22.76 0.1 1.3
------------------------------------------------------------------------------------------------------------------
1995 16.32 2.01 0.12 3.31 0.20 30.46 33.9 37.6
------------------------------------------------------------------------------------------------------------------
Total $9.79 $0.22 $ 12.36 $0.31
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes short-term capital gains of $0.50 in 1992; $0.41 in 1993; $0.12 in
1994; and $0.66 in 1995.
(2) From inception 9/2/92 to 12/31/92. Performance prior to 9/2/92 reflects
investment managers other than T. Rowe Price.
6
<PAGE> 8
- --------------------------------------------------------------------------------
Statement of Net Assets
T. Rowe Price OTC Fund / December 31, 1995
(values in thousands)
<TABLE>
<CAPTION>
Value
---------
- ------------------------------------------------------
Common Stocks & Warrants -- 89.9%
- ------------------------------------------------------
<S> <C>
FINANCIAL -- 15.9%
BANK AND TRUST -- 7.4%
30,000 shs Albank Financial............. $ 902
60,000 Bell Bancorp................. 2,156
150,000 Collective Bancorp........... 3,825
100,000 * First Bell Bancorp........... 1,338
50,000 First Security............... 1,912
112,000 Frankfort First.............. 1,463
176,000 + Glacier Bancorp.............. 3,498
30,000 Marshall & Ilsley............ 778
61,500 Mercantile Bancorporation.... 2,829
55,000 Premier Bancorp.............. 1,282
52,500 ValliCorp Holdings........... 722
20,705
INSURANCE -- 7.7%
35,000 Foremost..................... 1,785
105,000 Harleysville Group........... 3,399
125,000 Home Beneficial (Class B).... 3,016
75,000 PartnerRe Holdings........... 2,048
70,400 Poe & Brown.................. 1,734
146,400 Selective Insurance.......... 5,216
100,000 * United Insurance............. 1,881
42,500 W. R. Berkley................ 2,274
21,353
FINANCIAL SERVICES -- 0.8%
60,000 * Cityscape Financial.......... 1,252
70,000 * Imperial Thrift.............. 858
2,110
TOTAL FINANCIAL....................................... 44,168
- ------------------------------------------------------
UTILITIES -- 0.7%
ELECTRIC UTILITIES -- 0.7%
105,000 * Public Service of New
Mexico.................... 1,851
TOTAL UTILITIES....................................... 1,851
- ------------------------------------------------------
CONSUMER NONDURABLES -- 18.8%
FOOD PROCESSING -- 1.5%
20,000 * Lone Star Steakhouse &
Saloon.................... 767
164 Makepeace.................... 1,066
<CAPTION>
Value
---------
<S> <C>
65,200 shs * Seneca Foods (Class A)....... $ 1,206
65,200 * Seneca Foods (Class B)....... 1,247
4,286
HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT -- 2.5%
100,000 Allied Healthcare Products... 1,600
35,000 * OccuSystems.................. 700
110,000 * Quorum Health Group.......... 2,406
52,500 * St. Jude Medical............. 2,251
6,957
PHARMACEUTICALS -- 1.6%
40,000 * Biogen....................... 2,450
175,000 * Perrigo...................... 2,089
4,539
BIOTECHNOLOGY -- 0.6%
150,000 * Cell Genesys................. 1,500
HEALTH CARE SERVICES -- 5.1%
4,700 * Apria Healthcare............. 134
60,000 * EmCare Holdings.............. 1,418
88,000 * Inphynet Medical
Management................ 2,101
35,000 * NeoPath...................... 807
100,000 * Northfield Laboratories...... 1,869
130,000 * Orthodontic Centers of
America................... 6,256
187,900 * Raytel Medical............... 1,644
14,229
MISCELLANEOUS CONSUMER PRODUCTS -- 7.5%
120,000 Boston Acoustics............. 2,820
34,500 + Crown City Plating........... 233
174,662 Culp......................... 1,921
90,800 DiMon........................ 1,600
360,000 Richfood Holdings............ 9,720
65,000 * TSC.......................... 1,316
167,300 * Westpoint Stevens............ 3,336
20,946
TOTAL CONSUMER NONDURABLES............................ 52,457
- ------------------------------------------------------
CONSUMER SERVICES -- 8.4%
GENERAL MERCHANDISERS -- 0.5%
75,000 * Carson Pirie Scott........... 1,491
SPECIALTY MERCHANDISERS -- 1.4%
48,000 * CSS Industries............... 1,056
50,000 * Egghead...................... 322
</TABLE>
7
<PAGE> 9
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
---------
<S> <C>
175,000 shs * GT Bicycles.................. $ 1,641
100,000 * Pacific Sunwear.............. 937
3,956
ENTERTAINMENT AND LEISURE -- 1.3%
109,000 FelCor Suites Hotels, REIT... 3,038
160,000 * Noble Roman's................ 560
3,598
MEDIA AND COMMUNICATIONS -- 5.2%
54,000 * American Radio Systems (Class
A)........................ 1,492
30,000 Cadmus Communications........ 799
72,398 * Comnet Cellular.............. 2,099
48,978 + Cowles Media................. 1,163
75,000 * Mobile Telecommunication
Technologies.............. 1,603
40,000 * Shiva........................ 2,920
100,000 * Sinclair Broadcast Group
(Class A)................. 1,700
44,600 * Vanguard Cellular............ 898
100,000 * Wireless One................. 1,687
14,361
TOTAL CONSUMER SERVICES............................... 23,406
- ------------------------------------------------------
CONSUMER CYCLICALS -- 3.6%
AUTOMOBILES AND RELATED -- 0.4%
7,756 Adrian Steel................. 1,222
BUILDING AND REAL ESTATE -- 1.8%
200,000 + Prime Retail, REIT........... 2,412
50,000 * Starwood Lodging, REIT....... 1,487
50,000 Storage Trust Realty, REIT... 1,138
5,037
MISCELLANEOUS CONSUMER DURABLES -- 1.4%
20,970 wts *# Craftmatic Contour,
12/31/02.................. 0
200,000 shs Ellett Brothers.............. 1,575
55,000 Juno Lighting................ 866
50,000 * Vallen....................... 975
30,000 X-Rite....................... 431
3,847
TOTAL CONSUMER CYCLICALS.............................. 10,106
- ------------------------------------------------------
TECHNOLOGY -- 8.1%
ELECTRONIC COMPONENTS -- 3.1%
175,000 Analogic..................... 3,150
50,000 * Cirrus Logic................. 991
<CAPTION>
Value
---------
<S> <C>
35,000 shs Linear Technology............ $ 1,378
80,000 * Maxim Integrated Products.... 3,080
8,599
ELECTRONIC SYSTEMS -- 0.9%
70,000 * ITI Technologies............. 2,056
50,000 * Lifeline Systems............. 597
2,653
INFORMATION PROCESSING -- 0.2%
22,500 * DH Technology................ 531
TELECOMMUNICATIONS -- 2.9%
55,000 * Cellular Communications of
Puerto Rico............... 1,499
125,000 * Inter-Tel.................... 1,937
125,000 * PanAmSat..................... 2,766
42,500 * SITEL........................ 1,296
40,000 * TriQuint Semiconductor....... 543
8,041
AEROSPACE AND DEFENSE -- 1.0%
37,900 Woodward Governor............ 2,814
TOTAL TECHNOLOGY...................................... 22,638
- ------------------------------------------------------
CAPITAL EQUIPMENT -- 3.8%
ELECTRICAL EQUIPMENT -- 1.8%
110,000 * Advanced Lighting
Technologies.............. 1,110
180,000 * Holophane.................... 3,983
5,093
MACHINERY -- 2.0%
161,000 AMTROL....................... 2,515
22,800 Greenfield Industries........ 710
16,450 # Laser Alignment.............. 236
276,000 * Sudbury...................... 2,139
5,600
TOTAL CAPITAL EQUIPMENT............................... 10,693
- ------------------------------------------------------
BUSINESS SERVICES AND TRANSPORTATION -- 18.9%
COMPUTER SERVICE AND
SOFTWARE -- 4.8%
50,000 Adobe Systems................ 3,106
100,000 Analysts International....... 3,038
31,000 * Dataworks.................... 391
35,000 * Expert Software.............. 494
50,000 * PLATINUM technology.......... 922
30,000 * Premenos Technology.......... 799
30,000 * SunGard Data Systems......... 844
</TABLE>
8
<PAGE> 10
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
---------
<S> <C>
50,000 shs * Synopsys..................... $ 1,906
46,100 * Verity....................... 2,017
13,517
DISTRIBUTION SERVICES -- 1.6%
200,000 * JP Foodservice............... 3,800
135,000 Primesource.................. 793
4,593
ENVIRONMENTAL -- 1.2%
100,000 * Continental Waste............ 1,131
90,000 * EMCON........................ 349
50,108 Heidemij..................... 457
200,000 * TRC.......................... 1,300
3,237
TRANSPORTATION SERVICES -- 3.1%
60,000 Expeditors International of
Washington................ 1,567
40,000 * Fritz Companies.............. 1,665
53,885 * Heartland Express............ 1,091
101,562 International Shipholding.... 2,107
70,000 * M.S. Carriers................ 1,383
20,000 * Midwest Express Holdings..... 555
18,600 * Team Rental Group............ 156
8,524
MISCELLANEOUS BUSINESS
SERVICES -- 7.9%
50,000 * Consolidated Graphics........ 1,281
65,000 * COREStaff.................... 2,397
180,000 * Electro Rent................. 3,825
414,200 * Insituform Technologies
(Class A)................. 4,763
40,000 * International Imaging
Materials................. 1,005
120,000 McGrath RentCorp............. 2,280
50,000 * Nobel Education Dynamics..... 838
186,000 * Shorewood Packaging.......... 2,674
120,000 Unitog....................... 2,925
21,988
RAILROADS -- 0.3%
27,400 * North Carolina Railroad...... 754
TOTAL BUSINESS SERVICES AND TRANSPORTATION............ 52,613
- ------------------------------------------------------
ENERGY -- 5.4%
ENERGY SERVICES -- 3.8%
115,000 * Atwood Oceanics.............. 2,925
50,000 Cooper Cameron............... 1,775
10,000 * Geophysique (FRF)............ 329
<CAPTION>
Value
---------
<S> <C>
100,000 shs * Maverick Tube................ $ 756
187,100 * Oceaneering International.... 2,409
61,500 Petroleum Helicopters........ 861
33,500 Petroleum Helicopters (non-
voting)................... 457
50,000 * Smith International.......... 1,175
10,687
EXPLORATION AND PRODUCTION -- 1.6%
152,100 * Weatherford Enterra.......... 4,392
TOTAL ENERGY.......................................... 15,079
- ------------------------------------------------------
PROCESS INDUSTRIES -- 3.1%
SPECIALTY CHEMICALS -- 2.6%
55,000 A. Schulman.................. 1,231
27,300 Furon........................ 546
360,000 * Hauser Chemical Research..... 1,642
100,000 Petrolite.................... 2,787
100,000 * Sybron Chemical.............. 1,100
7,306
PAPER AND PAPER PRODUCTS -- 0.5%
125,000 * Jefferson Smurfit............ 1,180
TOTAL PROCESS INDUSTRIES.............................. 8,486
- ------------------------------------------------------
BASIC MATERIALS -- 1.5%
METALS -- 0.4%
54,300 Matthews International....... 1,039
MINING -- 1.1%
9,295 + Coal Creek................... 925
50,000 Pittston Minerals............ 694
15,728 Rochester & Pittsburgh....... 452
164,000 * TVX Gold..................... 1,168
3,239
TOTAL BASIC MATERIALS................................. 4,278
MISCELLANEOUS COMMON STOCKS -- 1.7%................... 4,784
TOTAL COMMON STOCKS & WARRANTS
(COST $179,650)..................................... 250,559
</TABLE>
9
<PAGE> 11
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
---------
<S> <C>
- ------------------------------------------------------
Preferred Stocks -- 0.2%
30,000 shs + Prime Retail, REIT, Cum.,
10.50%, Series A.......... $ 582
TOTAL PREFERRED STOCKS (COST $570).................... 582
- ------------------------------------------------------
Convertible Preferred Stocks -- 0.6%
51,000 ICO, $25.00.................. 1,036
25,000 + Prime Retail, REIT, 8.50%,
Series B.................. 456
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $1,504)....................................... 1,492
- ------------------------------------------------------
Convertible Bonds -- 0.5%
$1,000,000 Arch Communications (144a),
6.75%, 12/1/03............ 1,460
TOTAL CONVERTIBLE BONDS (COST $1,150)................. 1,460
- ------------------------------------------------------
Short-Term Investments -- 9.3%
CERTIFICATES OF DEPOSIT -- 1.1%
3,000,000 Banque Nationale de Paris,
5.82%, 2/14/96............ 3,000
COMMERCIAL PAPER -- 7.5%
2,000,000 ANZ (Delaware), 5.668%,
2/9/96.................... 1,971
3,000,000 AT&T, 5.70%, 1/25/96......... 2,950
2,000,000 Caisse des Depots et
Consignations, 4(2),
5.76%, 1/17/96............ 1,986
4,000,000 Dean Witter Discover, 5.68%,
1/31/96................... 3,933
3,000,000 Ford Credit Europe, 5.68%,
2/12/96................... 2,944
2,075,347 Investments in Commercial
Paper through a joint
account, 5.90-6.05%,
1/2/96.................... 2,074
2,000,000 KFW International, 5.75%,
2/8/96.................... 1,978
3,000,000 U.S. Bancorp, 5.73%,
1/22/96................... 2,969
20,805
<CAPTION>
Value
---------
<S> <C>
MEDIUM-TERM NOTES -- 0.7%
$2,000,000 Morgan Stanley Group, VR,
6.063%, 1/31/97........... $ 2,001
TOTAL SHORT-TERM INVESTMENTS (COST $25,806)........... 25,806
- ------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES --
100.5% OF NET ASSETS (COST $208,680)................ 279,899
- ------------------------------------------------------
OTHER ASSETS LESS LIABILITIES......... (1,286)
---------
Value
-------
NET ASSETS CONSIST OF:
Accumulated net investment income --
net of distributions................ $ 50
Accumulated net realized gain/loss --
net of distributions................ 5,817
Net unrealized gain (loss)............ 71,219
Paid-in-capital applicable to
17,074,565 shares of $0.50 par value
capital stock outstanding;
200,000,000 shares authorized....... 201,527
-------
NET ASSETS............................ $ 278,613
=========
NET ASSET VALUE PER SHARE............. $16.32
======
</TABLE>
- ------------------------------------------------------
<TABLE>
<C> <S>
+ Affiliated company
* Non-income producing
# Securities contain some restrictions as to public
resale -- total of such securities at year-end amounts
to 0.08% of net assets.
REIT Real Estate Investment Trust
VR Variable rate
4(2) Commercial paper sold within terms of a private
placement memorandum, exempt from registration under
section 4.2 of the Securities Act of 1933, as amended,
and may be sold only to dealers in that program or
other "accredited investors."
144a Security was purchased pursuant to Rule 144a under the
Securities Act of 1933 and may not be resold subject
to that rule except to qualified institutional
buyers -- total of such securities at year-end amounts
to 0.50% of net assets.
FRF French franc
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 12
- --------------------------------------------------------------------------------
Statement of Operations
T. Rowe Price OTC Fund / Year Ended December 31, 1995
(in thousands)
<TABLE>
<S> <C>
INVESTMENT INCOME
Income
Dividend........................................................................ $ 2,426
Interest........................................................................ 2,012
-------
Total income.................................................................... 4,438
-------
Expenses
Investment management........................................................... 1,897
Shareholder servicing........................................................... 507
Custody and accounting.......................................................... 137
Prospectus and shareholder reports.............................................. 59
Registration.................................................................... 45
Legal and audit................................................................. 25
Directors....................................................................... 12
Miscellaneous................................................................... (18)
-------
Total expenses.................................................................. 2,664
-------
Net investment income............................................................. 1,774
-------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on securities.......................................... 30,377
Change in net unrealized gain or loss........................................... 37,772
-------
Net realized and unrealized gain (loss)........................................... 68,149
-------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................................. $69,923
========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 13
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
T. Rowe Price OTC Fund
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1994
------------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income.................................... $ 1,774 $ 468
Net realized gain (loss)................................. 30,377 20,036
Change in net unrealized gain or loss.................... 37,772 (20,462)
---------- ----------
Increase (decrease) in net assets from operations........ 69,923 42
---------- ----------
Distributions to shareholders
Net investment income.................................... (1,809) (383)
Net realized gain........................................ (30,304) (19,961)
---------- ----------
Decrease in net assets from distributions................ (32,113) (20,344)
---------- ----------
Capital share transactions*
Shares sold.............................................. 69,748 34,781
Distributions reinvested................................. 30,002 18,722
Shares redeemed.......................................... (55,673) (41,084)
---------- ----------
Increase (decrease) in net assets from capital share
transactions........................................... 44,077 12,419
---------- ----------
Increase (decrease) in net assets.......................... 81,887 (7,883)
NET ASSETS
Beginning of period........................................ 196,726 204,609
---------- ----------
End of period.............................................. $ 278,613 $ 196,726
===================== =====================
- --------------------------------------------------------------------------------------------------------
* Share information
Shares sold.............................................. 4,412 2,284
Distributions reinvested................................. 1,857 1,367
Shares redeemed.......................................... (3,448) (2,695)
---------- ----------
Increase (decrease) in shares outstanding................ 2,821 956
===================== =====================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 14
- --------------------------------------------------------------------------------
Notes to Financial Statements
T. Rowe Price OTC Fund / December 31, 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price OTC Fund (the fund) is registered under the Investment Company Act
of 1940 as a diversified, open-end management investment company.
A) Valuation - Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price at the time 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 that are not traded on a particular day and
securities that are 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.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost which, when combined with
accrued interest, approximates fair value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
B) Affiliated Companies - Investments in companies 5% or more of whose
outstanding voting securities are held by the fund are defined as "Affiliated
Companies" in Section 2(a)(3) of the Investment Company Act of 1940.
C) Currency Translation - Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated into
U.S. dollars at the prevailing exchange rate on the dates of such transactions.
The effect of changes in foreign exchange rates on realized and unrealized
security gains and losses is reflected as a component of such gains and losses.
D) 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.
NOTE 2 - INVESTMENT TRANSACTIONS
A) Commercial Paper Joint Account - The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
B) Other - Purchases and sales of portfolio securities, other than short-term
securities, aggregated $131,498,000 and $119,562,000, respectively, for the year
ended December 31, 1995.
13
<PAGE> 15
- --------------------------------------------------------------------------------
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.
At December 31, 1995, the aggregate cost of investments for federal income
tax and financial reporting purposes was $208,680,000 and net unrealized gain
aggregated $71,219,000, of which $77,750,000 related to appreciated investments
and $6,531,000 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 $182,000 was payable at December 31, 1995. The fee is computed daily
and paid monthly, and consists of an Individual Fund Fee equal to 0.45% 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 0.31% for assets in excess of $34 billion. At
December 31, 1995, and for the year then ended, the effective annual Group Fee
rate was 0.34%. The fund pays a pro rata share of the Group Fee based on the
ratio of its net assets to those of the Group.
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 $474,000 for the year ended
December 31, 1995, of which $57,000 was payable at period-end.
14
<PAGE> 16
- --------------------------------------------------------------------------------
Financial Highlights
T. Rowe Price OTC Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each period
----------------------------------------------------
Year Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $13.80 $15.39 $14.37 $16.86 $12.72
------ ------ ------ ------ ------
Investment activities
Net investment income........................... 0.12 0.04 -- 0.02 0.07
Net realized and unrealized gain (loss)......... 4.53 (0.04) 2.60 2.20 4.84
------ ------ ------ ------ ------
Total from investment activities................ 4.65 -- 2.60 2.22 4.91
------ ------ ------ ------ ------
Distributions
Net investment income........................... (0.12) (0.03) -- (0.07) (0.09)
Net realized gain............................... (2.01) (1.56) (1.58) (4.64) (0.68)
------ ------ ------ ------ ------
Total distributions............................. (2.13) (1.59) (1.58) (4.71) (0.77)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD.................... $16.32 $13.80 $15.39 $14.37 $16.86
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total return...................................... 33.9% 0.1% 18.4% 13.9% 38.6%
Ratio of expenses to average net assets........... 1.11% 1.11% 1.20% 1.32% 1.34%
Ratio of net investment income to average net
assets.......................................... 0.74% 0.24% (0.01)% 0.03% 0.48%
Portfolio turnover rate........................... 57.8% 41.9% 40.8% 30.7% 31.2%
Net assets, end of period (in thousands).......... $278,613 $196,726 $204,609 $186,838 $266,584
- --------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Board of Directors of
T. Rowe Price OTC Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe Price OTC
Fund, Inc. as of December 31, 1995, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
four years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. We did not audit the financial highlights for year ended
December 31, 1991. Those statements were derived from the financial statements
which were audited by other independent auditors whose report expressed
unqualified opinions thereon.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of T.
Rowe Price OTC Fund, Inc., the results of its operations, the changes in its net
assets, and financial highlights for each of the respective periods stated in
the first paragraph, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
January 18, 1996
16
<PAGE> 18
- --------------------------------------------------------------------------------
Shareholder Services
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety
of information and services--at no extra cost.
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE--Shareholder service representatives are available from 8 a.m. to 10
p.m. Monday - Friday, and weekends from 8:30 a.m. to 5 p.m. ET. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
IN PERSON--Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. While there,
you can drop off applications or obtain prospectuses and other literature.
AUTOMATED 24-HOUR SERVICES
Tele*Access(R) (1-800-638-2587) provides information such as account
balance, date and amount of your last transaction, latest dividend payment, and
fund prices and yields. Additionally, you have the ability to request
prospectuses, statements, account and tax forms; reorder checks; and initiate
purchase, redemption, and exchange orders for identically registered accounts.
PC*Access(R) provides the same information as Tele*Access, but on a
personal computer via dial-up modem.
ACCOUNT SERVICES
Checking--Write checks for $500 or more on any money market and most
bond fund accounts (except the High Yield Fund and Emerging Markets Bond Fund).
Automatic Investing--Build your account over time by investing
directly from your bank account or paycheck with Automatic Asset Builder.
Additionally, Automatic Exchange enables you to set up systematic investments
from one fund account into another, such as from a money fund into a stock
fund. A low, $50 minimum makes it easy to get started.
Automatic Withdrawal--If you need money from your fund account on a
regular basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options--Reinvest all or some of
your distributions, or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement--A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type--stock, bond, and money
market. Detail pages itemize account transactions by fund.
Shareholder Reports--Portfolio managers review the performance of the
funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report--A quarterly newsletter with relevant
articles on market trends, personal financial planning, and T. Rowe Price's
economic perspective.
Performance Update--A quarterly report reviewing recent market
developments and providing comprehensive performance information for every T.
Rowe Price fund.
Insights--A library of information that includes reports on mutual
fund tax issues, investment strategies, and financial markets.
Detailed Investment Guides--Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use), and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
You can trade stocks, bonds, options, precious metals, and other securities at
a substantial savings over regular commission rates. Call a shareholder
service representative for more information.
17
<PAGE> 19
- -----------------------------------------------------------------------------
T. Rowe Price No-Load Mutual Funds
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money
Market
Tax-Exempt Money
CONSERVATIVE INCOME
Short-Term Bond
Short-Term Global Income
Short-Term U.S. Government
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate
Tax-Free
Maryland Short-Term
Tax-Free Bond
Summit Municipal
Intermediate
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Tax-Free Income
Virginia Tax-Free Bond
AGGRESSIVE INCOME
Corporate Income
Emerging Markets Bond
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE
GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Equity Index
Global Stock
Growth & Income
Spectrum Growth
Value
GROWTH
Blue Chip Growth
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
OTC
Small-Cap Value
AGGRESSIVE GROWTH
Capital Opportunity
Health Sciences
Emerging Markets Stock
International Discovery
Latin America
New America Growth
New Asia
New Horizons
Science & Technology
PERSONAL STRATEGY FUNDS
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
Call if you want to know about any T. Rowe Price fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
T. Rowe Price Investment Services, Inc., Distributor.
18
