Semiannual Report
OTC Fund
June 30, 1996
T. Rowe Price
Report Highlights
o Small-cap stocks have regained a slight edge over their larger
counterparts so far in 1996. Despite rising interest rates, the stock
market advanced to new highs.
o The OTC Fund outperformed its benchmarks in the six months ended June 30
and significantly outpaced them over the 12-month period.
o The fund benefited from its holdings in energy and media stocks, as
energy prices rose and consumer spending picked up.
o We saw value in insurance and technology stocks and added shares of
selected companies. We trimmed some energy holdings after their strong
runup.
o While there are signs of speculative excess, small-cap valuations have
not reached extreme levels, and we expect these companies to outperform
in coming months.
Fellow Shareholders
Small-cap stocks regained a slight edge over their larger counterparts in the
first half of 1996. The unmanaged Russell 2000 index of small-company shares
rose 10.39% versus 10.10% for the large-company Standard & Poor's 500 index.
The stock market overcame rising interest rates to advance to new highs.
Performance Comparison
Periods Ended 6/30/96 6 Months 12 Months
OTC Fund 13.85% 32.93%
Nasdaq Composite* 12.63 26.95
Russell 2000 10.39 23.92
S&P 500 10.10 26.00
*Principal only
The Russell 2000 was paced by strong returns in energy stocks, which rose
26.92% in the half, and consumer discretionary issues (particularly retail,
entertainment, and media), which gained 22.80%. These areas were propelled by
a rise in energy prices and a surprising pickup in consumer spending. Laggards
included utilities and producer durable goods, up 3.2% and 4.4% respectively
over the last six months.
Fortunately, your OTC Fund was overweighted in energy services and media
stocks and underweighted in utilities. As a result, the fund outperformed the
Russell 2000 and the S&P 500 and also held an edge over the technology-laden
Nasdaq Composite for the first half of 1996. The fund outpaced all of these
benchmarks by a wide margin for the 12-month period ended June 30.
After rallying sharply from February through early June, small-cap stocks
subsequently retreated, along with most areas of the stock market. In June,
the Russell 2000 Index fell 4.2%, and technology stocks, which were
particularly hard hit, dropped nearly 14%. Insulated by its less volatile core
of value stocks and an underweighting in technology, the OTC Fund declined a
more moderate 1.75% in June as the first half came to a close.
It remains to be seen whether the recent pullback represents the long-awaited
market correction or just a temporary pause in the upward march of stock
prices. However, we are optimistic that this latest round of volatility is a
normal pause in the continuing small-cap bull market. More on this in the
Outlook section.
Investment Review
The fund enjoyed outstanding performance from four holdings in particular.
Sinclair Broadcast Group, Shiva, SITEL, and Richfood Holdings each gained more
than $2 million in market value during the first half. Sinclair, the best
performer, was spotlighted in our December annual report. The stock rebounded
nicely from its 1995 low and, helped by an attractive broadcasting
acquisition, recaptured investor favor. Shiva, a remote access networking
provider, performed well as investors rewarded its accelerating revenues and
earnings with a higher price/earnings multiple. SITEL, a fast-growing
telecommunications outsourcing company, continued to exceed investors'
expectations and was rewarded accordingly.
Our faithful readers will no doubt recall our favorite wholesale grocery
distributor - Richfood Holdings. The company's acquisition of food distributor
Super Rite, which we wrote about a year ago, captured the attention of
investors, leading to a 47% gain in Richfood's stock price over the last 12
months. While the company's fundamentals remain solid, the stock's large gain
warranted a modest reduction in our position. Nevertheless, Richfood remained
our largest holding, representing 2.8% of net assets, as shown in the table
following this letter.
Of course, we are not infallible. We lost over $1 million in three stocks over
the last six months. First, pipeline repair outfit Insituform Technologies,
another old favorite, experienced both slowing revenues and difficulty
integrating its acquisition of Insituform Mid-America. Second, software maker
Adobe Systems performed poorly due to slower-than-expected sales of its new
Pagemaker product and difficulty in assimilating its recent acquisition of
Frame, another software firm. Finally, Holophane, a manufacturer of industrial
and commercial lighting equipment, experienced a slowdown in volume and weaker
earnings, resulting in a 28% decline in its stock price. Nevertheless, we
consider these short-term problems and remain positive on the longer-term
outlook for these companies.
Portfolio Highlights
Our largest purchases during the first half are shown in the table following
this letter. You will notice that two insurance companies, Selective Insurance
and Harleysville Group, head the list. Why is the sector particularly
attractive at the moment? Given investor fears of rising inflation and rising
interest rates, the group has underperformed so far in 1996. Historically,
when we have purchased well-positioned insurance stocks (with returns on
equity between 10% and 15%) at modest premiums to book value, they have
subsequently outperformed.
Take our old friend, Selective Insurance, a major holding since 1993. (Our
largest purchases often take place in stocks we already own.) Since taking
over as chief executive three years ago, Bill Entringer has streamlined
operations, cut expenses, and positioned the company to grow profitably. As a
result, earnings more than doubled from 1993 to 1995, leading to nice
appreciation in the stock.
However, the company is prone to winter storm losses because it writes auto
insurance in New Jersey. When old man winter dropped a record amount of snow
and ice on the Mid-Atlantic region this year, Selective's earnings fell more
than 30% for the first half. Typically, investors overreacted, driving the
stock down to the low-$30 range, making it a great value at 1.1 times book
value and 9 times earnings.
Our second-largest purchase was Harleysville Group, another Mid-Atlantic
insurer. In our view, the stock is a true bargain, recently selling at 1.1
times book value and 9 times trailing earnings with a 2.9% dividend yield. By
comparison, the S&P 500 was twice as expensive, selling at 18.5 times trailing
earnings. Furthermore, Harleysville made a merger that should lead to more
than 25% growth in revenues.
After technology stocks took a beating in recent weeks, we began to see some
bargains. We initiated a position in Leasing Solutions, which leases
information processing and networking equipment mostly to Fortune 100-sized
corporations. The company's earnings are growing at better than 18%, and we
bought it at around 12 times earnings, or two-thirds of its projected growth
rate.
Chart 1 - Sector Diversification
On the sell side, we trimmed several large positions that appeared fully
valued. Orthodontic Centers of America was up more than 40% at one point and
selling at over 40 times projected earnings. While the company has performed
well since its 1994 initial public offering, the valuation seemed a bit rich.
We also pared our holdings in Richfood, as mentioned. Last, the energy group
became ripe for profit-taking after its recent runup. Consequently, we trimmed
Atwood Oceanics and Weatherford Enterra.
We made only minimal changes to sector diversification during the last six
months, although we increased our exposure to consumer services and cyclicals
from 13% to 18% of net assets, reflecting opportunistic purchases in the
sector.
Outlook
As we noted, small-cap stocks retreated from their earlier highs in recent
weeks, including after the close of the reporting period. It remains to be
seen whether this is a temporary stumble, another mid-cycle correction, or the
end of the five-year-old bull market for small-cap stocks. However, the
evidence at hand seems to point to a temporary correction, leaving us
optimistic for the balance of 1996 and 1997.
While there are signs of speculative excess - such as an ebullient IPO market,
strong first half returns, and a flood of new money into small-company mutual
funds - small-cap stocks have not reached extreme valuations, the classic
signal of a market top. Certainly, small-cap P/E ratios have expanded since
1990, but they still remain below the peak levels of past performance cycles.
On the positive side, the economy continues to grow, interest rates (despite
their recent increase) have not risen to disturbing levels, and earnings
fundamentals may well favor smaller, nimbler companies late in this economic
cycle.
Respectfully submitted,
Gregory A. McCrickard
President and Chairman of the Investment Advisory Committee
July 17, 1996
T. Rowe Price OTC Fund
Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/96
Richfood Holdings 2.8%
Selective Insurance 2.4
Harleysville Group 1.9
Analogic 1.6
Analysts International 1.5
JP Foodservice 1.4
Shiva 1.4
Sinclair Broadcast Group 1.4
Electro Rent 1.3
Unitog 1.2
Glacier Bancorp 1.2
Collective Bancorp 1.1
United Insurance 1.1
PartnerRe Holdings 1.0
W. R. Berkley 1.0
SITEL 1.0
AMTROL 1.0
FelCor Suites Hotels 1.0
Woodward Governor 1.0
Culp 1.0
Insituform Technologies 0.9
Home Beneficial 0.9
Renal Care Group 0.9
Petrolite 0.9
Poe & Brown 0.9
_____________________________________________________________________________
Total 31.8%
T. Rowe Price OTC Fund
Portfolio Highlights
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended 6/30/96
Ten Largest Purchases
Selective Insurance
Harleysville Group
Copart *
Scholastic *
Heartland Wireless *
Renal Care Group *
Leasing Solutions *
TBC *
Rutherford-Moran Oil *
Cadmus Communications
Ten Largest Sales
Orthodontic Centers of America
Atwood Oceanics
Greenstone Resource **
Cityscape Financial **
WestPoint Stevens
Bell Bancorp **
Richfood Holdings
Inter-Tel
Weatherford Enterra
PanAmSat
* Position added
** Position eliminated
T. Rowe Price OTC Fund
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 2 - OTC Fund
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.
Periods Ended 6/30/96 1 Year 3 Years 5 Years 10 Years
OTC Fund 32.93% 19.41% 18.85% 10.07%
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.
T. Rowe Price OTC Fund
Unaudited
Financial Highlights For a share outstanding throughout each period
6 Months Year
Ended Ended
6/30/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
NET ASSET VALUE
Beginning of
period $ 16.32 $ 13.80 $ 15.39 $ 14.37 $ 16.86 $ 12.72
Investment activities
Net invest-
ment income 0.04 0.12 0.04 - 0.02 0.07
Net realized
and unrealized
gain (loss) 2.22 4.53 (0.04) 2.60 2.20 4.84
Total from
investment
activities 2.26 4.65 - 2.60 2.22 4.91
Distributions
Net invest-
ment income - (0.12) (0.03) - (0.07) (0.09)
Net realized
gain - (2.01) (1.56) (1.58) (4.64) (0.68)
Total dis-
tributions - (2.13) (1.59) (1.58) (4.71) (0.77)
NET ASSET VALUE
End of
period $ 18.58 $ 16.32 $ 13.80 $ 15.39 $ 14.37 $ 16.86
Ratios/Supplemental Data
Total
return 13.85% 33.85% 0.08% 18.40% 13.91% 38.60%
Ratio of expenses
to average
net
assets 1.08%! 1.11% 1.11% 1.20% 1.32% 1.34%
Ratio of net
investment
income to
average net
assets 0.53%! 0.74% 0.24% (0.01)% 0.03% 0.48%
Portfolio
turnover
rate 35.3%! 57.8% 41.9% 40.8% 30.7% 31.2%
Average
commission
rate paid $0.1613 - - - - -
Net assets,
end of
period (in
thousands) $343,313 $278,613 $ 196,726 $ 204,609 $ 186,838 $266,584
! Annualized.
The accompanying notes are an integral part of these financial statements.
T.Rowe Price OTC Fund
Unaudited June 30, 1996
Statement of Net Assets Shares/Par Value
In thousands
Common Stocks 90.5%
FINANCIAL 15.4%
Bank and Trust 5.2%
Albank Financial 36,000 $ 952
Collective Bancorp 160,000 3,810
First Bell Bancorp 100,000 1,375
First Security 75,000 1,809
Frankfort First 112,000 1,337
Glacier Bancorp ! 193,600 4,162
Marshall & Ilsley 30,000 834
Mercantile Bancorporation 61,500 2,737
ValliCorp Holdings 52,500 886
_____________________________________________________________________________
17,902
Insurance 9.9%
Foremost 35,000 1,986
Harleysville Group 225,000 6,525
Home Beneficial (Class B) 125,000 3,219
PartnerRe Holdings ADR 120,000 3,593
Poe & Brown 125,000 3,070
Selective Insurance 250,000 8,187
United Insurance * 160,000 3,630
W. R. Berkley 85,000 3,581
_____________________________________________________________________________
33,791
Financial Services 0.3%
Imperial Thrift * 70,000 1,024
_____________________________________________________________________________
1,024
_____________________________________________________________________________
Total Financial 52,717
UTILITIES 0.4%
Electric Utilities 0.4%
Public Service of New Mexico 75,000 1,538
_____________________________________________________________________________
Total Utilities 1,538
CONSUMER NONDURABLES 16.8%
Food Processing 1.3%
Lone Star Steakhouse & Saloon * 20,000 $ 754
Makepeace 164 1,452
Seneca Foods (Class A) * 65,200 1,100
Seneca Foods (Class B) * 65,200 1,092
_____________________________________________________________________________
4,398
Hospital Supplies/Hospital Management 4.2%
Allied Healthcare Products 137,500 1,220
OccuSystems * 80,000 2,975
Patterson Dental * 40,000 1,440
Quorum Health Group * 110,000 2,901
Renal Care Group * 100,000 3,219
St. Jude Medical * 52,500 1,752
Tecnol Medical Products * 41,000 782
_____________________________________________________________________________
14,289
Pharmaceuticals 1.2%
Biogen * 40,000 2,187
Perrigo * 175,000 1,980
_____________________________________________________________________________
4,167
Biotechnology 0.3%
Cell Genesys * 150,000 1,125
_____________________________________________________________________________
1,125
Health Care Services 4.0%
Apria Healthcare * 50,000 1,569
EmCare Holdings * 60,000 1,770
Inphynet Medical Management * 135,000 2,565
NeoPath * 50,000 1,256
Northfield Laboratories * 100,000 1,456
Orthodontic Centers of America * 80,000 2,100
Raytel Medical * 225,000 2,953
_____________________________________________________________________________
13,669
Miscellaneous Consumer Products 5.8%
Boston Acoustics 120,000 2,700
Crown City Plating *! 34,500 349
Culp 250,000 3,438
DiMon 55,000 1,018
Richfood Holdings 296,800 $ 9,627
TSC * 65,000 1,503
WestPoint Stevens * 57,300 1,375
_____________________________________________________________________________
20,010
_____________________________________________________________________________
Total Consumer Nondurables 57,658
CONSUMER SERVICES 14.0%
General Merchandisers 1.1%
Carson Pirie Scott * 75,000 2,006
Caseys General Stores 90,000 1,778
_____________________________________________________________________________
3,784
Specialty Merchandisers 2.7%
CSS Industries * 88,000 2,068
Egghead * 50,000 550
GT Bicycles * 175,000 2,865
Norton McNaughton * 20,000 140
Pacific Sunwear * 100,000 2,375
Performance Food Group * 53,000 1,358
_____________________________________________________________________________
9,356
Entertainment and Leisure 1.8%
FelCor Suites Hotels 115,000 3,508
Heartland Wireless * 100,000 2,400
Noble Roman's * 50,000 156
_____________________________________________________________________________
6,064
Media and Communications 8.4%
American Radio Systems (Class A) * 54,000 2,336
Cadmus Communications 125,000 1,914
Centennial Cellular (Class A) * 71,300 1,194
Chancellor * 50,000 1,572
Comnet Cellular * 72,398 2,186
Cowles Media 50,978 1,249
Jacor Communications * 55,000 1,708
Mobile Telecommunication Technologies * 15,000 218
Scholastic * 40,000 2,490
Shiva * 60,000 4,800
Sinclair Broadcast Group (Class A) * 110,000 4,744
Vanguard Cellular * 75,000 1,645
Wireless One * 150,000 $ 2,644
_____________________________________________________________________________
28,700
_____________________________________________________________________________
Total Consumer Services 47,904
CONSUMER CYCLICALS 3.8%
Automobiles and Related 1.5%
Adrian Steel 7,756 1,260
Littelfuse * 45,000 1,699
TBC * 255,000 2,215
_____________________________________________________________________________
5,174
Building and Real Estate 1.3%
Prime Retail, REIT ! 150,000 1,715
Starwood Lodging, REIT 50,000 1,819
Storage Trust Realty, REIT 50,000 1,025
_____________________________________________________________________________
4,559
Miscellaneous Consumer Durables 1.0%
Craftmatic Contour, warrants, 12/31/02 * 20,970 0
Ellett Brothers 200,000 1,237
Juno Lighting 55,000 932
Vallen * 20,000 358
York Group 38,100 648
_____________________________________________________________________________
3,175
_____________________________________________________________________________
Total Consumer Cyclicals 12,908
TECHNOLOGY 6.9%
Electronic Components 2.4%
American Superconductor * 25,000 353
Analogic 200,000 5,325
Linear Technology 35,000 1,048
Maxim Integrated Products * 60,000 1,639
_____________________________________________________________________________
8,365
Electronic Systems 1.1%
ITI Technologies * 70,000 2,306
Lifeline Systems * 100,000 1,325
_____________________________________________________________________________
3,631
Information Processing 0.1%
DH Technology * 20,000 465
_____________________________________________________________________________
465
Telecommunications Equipment 2.3%
Cellular Communications of Puerto Rico * 55,000 $ 1,784
Inter-Tel * 20,000 525
PanAmSat * 60,000 1,733
SITEL * 85,000 3,549
TriQuint Semiconductor * 15,000 309
_____________________________________________________________________________
7,900
Aerospace and Defense 1.0%
Woodward Governor 37,900 3,458
_____________________________________________________________________________
3,458
_____________________________________________________________________________
Total Technology 23,819
CAPITAL EQUIPMENT 3.9%
Electrical Equipment 1.5%
Advanced Lighting * 135,000 2,329
Holophane * 190,000 2,992
_____________________________________________________________________________
5,321
Machinery 2.4%
AMTROL 161,000 3,522
Greenfield Industries 17,800 592
Laser Alignment 16,450 236
Sudbury * 276,000 2,484
Toolex Alpha * 55,000 1,341
_____________________________________________________________________________
8,175
_____________________________________________________________________________
Total Capital Equipment 13,496
BUSINESS SERVICES AND TRANSPORTATION 17.9%
Computer Service and Software 4.5%
Adobe Systems 30,000 1,071
Analysts International 125,000 5,172
Electronic Arts * 50,000 1,331
Expert Software * 45,000 351
PLATINUM technology * 50,000 753
Premenos Technology * 30,000 540
Secure Computing * 35,000 779
SunGard Data Systems * 30,000 1,202
Synopsys * 50,000 $ 1,994
Verity * 46,100 1,308
Visio * 30,000 1,087
_____________________________________________________________________________
15,588
Distribution Services 1.9%
JP Foodservice * 200,000 4,925
Primesource 225,000 1,603
_____________________________________________________________________________
6,528
Environmental 1.1%
Continental Waste Industries * 100,000 2,237
EMCON * 90,000 366
TRC * 200,000 1,175
_____________________________________________________________________________
3,778
Transportation Services 2.1%
Expeditors International of Washington 60,000 1,845
Heartland Express * 53,885 1,462
International Shipholding 101,562 1,790
M.S. Carriers * 70,000 1,452
Midwest Express Holdings * 20,000 643
_____________________________________________________________________________
7,192
Miscellaneous Business Services 8.1%
Copart * 135,000 2,227
COREStaff * 35,000 1,558
Electro Rent * 180,000 4,365
Insituform Technologies (Class A) * 414,200 3,236
International Imaging Materials * 60,000 1,410
Leasing Solutions * 160,000 2,480
McGrath RentCorp 120,000 2,685
Nobel Education Dynamics 140,000 1,978
Shorewood Packaging * 186,000 2,848
Unitog 150,000 4,162
Walsh International * 80,000 735
_____________________________________________________________________________
27,684
Railroads 0.2%
North Carolina Railroad * 27,400 668
_____________________________________________________________________________
668
_____________________________________________________________________________
Total Business Services and Transportation 61,438
ENERGY 4.2%
Energy Services 2.7%
Atwood Oceanics * 7,500 $ 333
Carbo Ceramics * 45,000 1,007
Cooper Cameron * 50,000 2,188
Geophysique (FRF) * 5,500 327
Maverick Tube * 40,000 478
Oceaneering International * 134,500 2,034
Petroleum Helicopters 61,500 984
Petroleum Helicopters (non-voting) 33,500 517
Smith International * 50,000 1,506
_____________________________________________________________________________
9,374
Exploration and Production 1.5%
Rutherford-Moran Oil * 86,000 2,096
Weatherford Enterra * 100,000 3,000
_____________________________________________________________________________
5,096
_____________________________________________________________________________
Total Energy 14,470
PROCESS INDUSTRIES 3.2%
Specialty Chemicals 2.6%
A. Schulman 55,000 1,341
Furon 27,300 676
Hauser Chemical Research * 360,000 2,475
Petrolite 100,000 3,175
Sybron Chemical * 100,000 1,412
_____________________________________________________________________________
9,079
Paper and Paper Products 0.6%
Jefferson Smurfit * 175,000 1,925
_____________________________________________________________________________
1,925
_____________________________________________________________________________
Total Process Industries 11,004
BASIC MATERIALS 2.8%
Metals 1.8%
Free State Consolidated Gold Mines ADR 100,000 931
Gibraltar Steel * 110,000 2,200
Matthews International 103,800 2,816
_____________________________________________________________________________
5,947
Mining 1.0%
Coal Creek ! 9,295 $ 1,013
Golden Shamrock Mines (AUD) * 200,000 179
Pittston Minerals 50,000 656
Rochester & Pittsburgh 15,728 504
TVX Gold * 164,000 1,189
_____________________________________________________________________________
3,541
_____________________________________________________________________________
Total Basic Materials 9,488
Miscellaneous Common Stocks 1.2% 4,337
_____________________________________________________________________________
Total Common Stocks (Cost $223,080) 310,777
_____________________________________________________________________________
Preferred Stocks 0.2%
Prime Retail, REIT, Cum., 10.50%, Series A ! 30,000 728
_____________________________________________________________________________
Total Preferred Stocks (Cost $570) 728
Convertible Preferred Stocks 0.5%
ICO, $25.00 51,000 1,122
Prime Retail, REIT, 8.50%, Series B ! 25,000 462
_____________________________________________________________________________
Total Convertible Preferred Stocks (Cost $1,504) 1,584
Convertible Bonds 0.3%
Arch Communications (144a), 6.75%, 12/1/03 $1,000,000 1,207
_____________________________________________________________________________
Total Convertible Bonds (Cost $1,150) 1,207
Short-Term Investments 8.2%
Commercial Paper 7.6%
American Home Products 4(2), 5.35%, 7/30/96 2,000,000 1,991
Bex America Finance, 5.32%, 7/9/96 3,000,000 2,997
BHF Finance (Delaware), 5.35%, 7/10/96 4,000,000 3,995
BNP Canada, 5.40%, 7/25/96 2,000,000 1,993
Ciba-Geigy, 5.35%, 7/8/96 3,000,000 2,997
International Lease Finance, 5.33%, 7/24/96 2,000,000 1,993
Investments in Commercial Paper through a
joint account 5.49-5.68%, 7/1/96 1,299,277 1,299
Southern 4(2), 5.40%, 7/1/96 $3,000,000 $ 3,000
Tasmanian Public Finance, 5.10%, 7/15/96 2,000,000 1,996
Western Australian Treasury, 5.38%, 8/1/96 3,845,000 3,827
_____________________________________________________________________________
26,088
Medium-Term Notes 0.6%
Morgan Stanley Group, VR, 5.613%, 1/31/97 2,000,000 2,000
_____________________________________________________________________________
2,000
_____________________________________________________________________________
Total Short-Term Investments (Cost $28,088) 28,088
_____________________________________________________________________________
Total Investments in Securities
99.7% of Net Assets (Cost $254,392) $ 342,384
Other Assets Less Liabilities 929
_____________________________________________________________________________
NET ASSETS $ 343,313
_____________________________________________________________________________
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 839
Accumulated net realized gain/loss - net of distributions 26,933
Net unrealized gain (loss) 87,992
Paid-in-capital applicable to 18,474,103 shares of
$0.50 par value capital stock outstanding;
200,000,000 shares authorized 227,549
_____________________________________________________________________________
NET ASSETS $ 343,313
_____________________________________________________________________________
NET ASSET VALUE PER SHARE $ 18.58
_____________________________________________________________________________
! Affiliated company
* Non-income producing
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
period-end amounts to 0.35% of net assets.
AUD Australian dollar
FRF French franc
The accompanying notes are an integral part of these financial statements.
T. Rowe Price OTC Fund
Unaudited
Statement of Operations
In thousands
6 Months
Ended
6/30/96
Investment Income
Income
Dividend $ 1,625
Interest 783
_____________________________________________________________________________
Total income 2,408
_____________________________________________________________________________
Expenses
Investment management 1,172
Shareholder servicing 310
Custody and accounting 72
Prospectus and shareholder reports 22
Registration 21
Legal and audit 9
Directors 6
Miscellaneous 7
_____________________________________________________________________________
Total expenses 1,619
_____________________________________________________________________________
Net investment income 789
_____________________________________________________________________________
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 21,116
Change in net unrealized gain or loss on securities 16,773
_____________________________________________________________________________
Net realized and unrealized gain (loss) 37,889
_____________________________________________________________________________
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 38,678
_____________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price OTC Fund
Unaudited
Statement of Changes in Net Assets
In thousands
6 Months Year
Ended Ended
6/30/96 12/31/95
Increase (Decrease) in Net Assets
Operations
Net investment income $ 789 $ 1,774
Net realized gain (loss) 21,116 30,377
Change in net unrealized gain or loss 16,773 37,772
_____________________________________________________________________________
Increase (decrease) in net assets
from operations 38,678 69,923
_____________________________________________________________________________
Distributions to shareholders
Net investment income - (1,809)
Net realized gain - (30,304)
_____________________________________________________________________________
Decrease in net assets from distributions - (32,113)
_____________________________________________________________________________
Capital share transactions*
Shares sold 60,179 69,748
Distributions reinvested - 30,002
Shares redeemed (34,157) (55,673)
_____________________________________________________________________________
Increase (decrease) in net assets from
capital share transactions 26,022 44,077
_____________________________________________________________________________
Net Assets
Increase (decrease) during period 64,700 81,887
Beginning of period 278,613 196,726
_____________________________________________________________________________
End of period $ 343,313 $ 278,613
_____________________________________________________________________________
*Share information
Shares sold 3,369 4,412
Distributions reinvested - 1,857
Shares redeemed (1,970) (3,448)
_____________________________________________________________________________
Increase (decrease) in shares outstanding 1,399 2,821
The accompanying notes are an integral part of these financial statements.
T. Rowe Price OTC Fund
Unaudited June 30, 1996
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price OTC 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 1, 1956.
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.
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.
Currency Translation Assets and liabilities are translated into U.S. dollars
at the prevailing exchange rate at the end of the reporting period. Purchases
and sales of securities and income and expenses are translated into U.S.
dollars at the prevailing exchange rate on the dates of such transactions.
The effect of changes in foreign exchange rates on realized and unrealized
security gains and losses is reflected as a component of such gains and
losses.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and distributions
to shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income
tax regulations and may differ from those determined in accordance with
generally accepted accounting principles.
Note 2 - Investment Transactions
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.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $71,639,000 and $48,865,000, respectively, for the six
months ended June 30, 1996.
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.
At June 30, 1996, the aggregate cost of investments for federal income tax and
financial reporting purposes was $254,392,000, and net unrealized gain
aggregated $87,992,000, of which $97,790,000 related to appreciated
investments and $9,798,000 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 $218,000 was payable at June 30, 1996. 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 0.305% for assets in excess of $50
billion. At June 30, 1996, and for the six months then ended, the effective
annual group fee rate was 0.33% and 0.34%, respectively. 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 $293,000 for the six months
ended June 30, 1996, of which $56,000 was payable at period-end.
T. Rowe Price 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 Monday through
Friday from 8 a.m. to 10 p.m. ET 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. You can also
drop off applications or obtain prospectuses and other literature.
Automated 24-Hour Services
Tele*Access(registered trademark) Call 1-800-638-2587 to obtain information
such as account balance, date and amount of your last transaction, latest
dividend payment, and fund prices and yields. Additionally, you can request
prospectuses, statements, new account and tax forms; reorder checks; and
initiate purchase, redemption, and exchange orders for identically registered
accounts.
T. Rowe Price OnLine Through a personal computer via dial-up modem, you can
replicate all the services available on Tele*Access.
Account Services
Checking Write checks for $500 or more on any money market and most bond fund
accounts (except the High Yield and Emerging Markets Bond Funds).
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 move investments systematically from one
fund account to another, such as from a money fund to 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.
Discount Brokerage*
Investments Available You can trade stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
To Open an Account Call a shareholder service representative at
1-800-225-5132.
Investment Information
Combined Statement A comprehensive overview of your T. Rowe Price accounts is
provided. The summary page gives you 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 This is a quarterly newsletter with relevant
articles on market trends, personal financial planning, and T. Rowe Price's
economic perspective.
Performance Update This quarterly report reviews recent market developments
and provides comprehensive performance information for each T. Rowe Price
fund.
Insights This library of information includes reports on mutual fund tax
issues, investment strategies, and financial markets.
Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet, College
Planning Kit, Personal Strategy Planner, Retirees Financial Guide, and
Retirement Planning Kit (also available on disk for PC use) help you determine
and reach your investment goals.
*T. Rowe Price Discount Brokerage is a division of T. Rowe Price Investment
Services, Inc. Member NASD/SIPC.
T. Rowe Price Mutual Funds
Stock Funds
Domestic
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
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 Insured 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 Insured
Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Government Bond
International Bond
Short-Term Global Income
Money Market
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
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
T. Rowe Price No-Load Variable Annuity
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
*Closed to new investors.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call: 1-800-638-2587 toll free
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.
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor RPRTOTC 6/30/96
Chart 1 - Sector Diversification - Pie chart of sector diversification as of
6/30/96.
Chart 2 - OTC Fund - A line chart showing the cumulative growth of $10,000
invested in the OTC Fund over the past 10 years compared with $10,000 invested
in a broad-based index or average over the same period.
