Semiannual Report
Small-Cap
Stock Fund
June 30, 1998
T. Rowe Price
Report Highlights
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Small-Cap Stock Fund
o Large cap stocks continued their rally, as investors proved willing to pay
a high premium for liquidity and overlook multinationals' greater exposure
to Asia.
o Your fund roughly kept pace with the Russell 2000 but trailed its more
emerging-growth-oriented peers.
o Your fund benefited from its investments in consumer nondurables and
consumer services and from merger activity among its holdings.
o Our purchases included two well-managed companies, Comfort Systems USA and
Downey Financial, that have sound fundamentals and are poised to benefit
from consolidation in their industries.
o Small-cap valuations have reached an eight-year low relative to larger
companies, yet small-cap profits are growing more quickly. We see no
catalyst to shift investor enthusiasm, but the change could come when we
least expect it.
Fellow Shareholders
The stock market and your fund continued their advance in the first half of
1998. Though small-cap stocks posted satisfactory returns in an absolute sense,
their performance paled in comparison to large-caps, represented by the S&P 500
Stock Index. Investors placed a premium on the greater liquidity of blue chips
and seemed content to overlook the stronger fundamentals, superior earnings
growth, and very attractive valuations of many small-cap companies.
Performance Comparison
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Periods Ended 6/30/98 6 Months 12 Months
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Small-Cap Stock Fund 4.55% 20.89%
Russell 2000 Index 4.93 16.51
Lipper Small Cap Fund Index 6.45 15.52
S&P 500 17.71 30.16
Your fund's total return of 4.55% roughly kept pace with the unmanaged Russell
2000 Index of small-company stocks but lagged the 6.45% gain of the Lipper Small
Cap Funds Index. The Lipper index is dominated by emerging growth funds, which
have heavier weightings than your fund in sectors that were strong in the first
half, such as technology and consumer nondurables, and lower weightings in
groups that were weak, such as real estate investment trusts (REITs) and
utilities. In general, small-cap growth stocks outperformed value stocks in the
period, though small-cap value stocks declined less in the second quarter, when
both groups fell. Your fund offers a blend of growth and value stocks, a
strategy that has served us well in the past and should continue to do so in the
future.
The blue chips that make up the S&P 500 once again dramatically outperformed
small-caps, posting a blistering six-month gain of nearly 18%. Small-caps posted
much better relative gains in the first quarter, though they still slightly
lagged the S&P 500. Your fund and the small-cap indices then lost nearly half
their gains in the second quarter, particularly in April and May when the
overall market struggled. When the rebound came in June, mainly larger stocks
and some technology names participated.
The ever-rising dollar and the slowdown in Pacific Rim economies, both of which
have begun to crimp earnings at large multinationals, have not yet tarnished
their appeal. Investors have paid no attention to small-caps' relative lack of
exposure to the Asian crisis but were drawn instead to issues they could sell
quickly in a pinch. They want to linger at the party but loiter near the exits.
The continued leadership of large-caps-a four-year trend that accelerated
dramatically late last year-is all the more startling given the valuation
disparity we will examine in greater detail in our Outlook section.
INVESTMENT REVIEW
The three top-performing sectors in the Russell 2000 Index were consumer
nondurables, up 13%, financial services, up 6%, and technology, up 7%. REITS,
down 5%, and energy, down 14%, were the worst performers.
As investors feared an economic slowdown, reliable growth sectors like consumer
nondurables and consumer services continued their winning ways. We were
market-weighted in these sectors and thus participated fully in their rise.
Financials continued their long stretch of torrid performance, driven by ongoing
consolidation in insurance and banking. After two and a half years of
accelerating returns, we began to cut back on the sector late in the period. We
are now underweighted in financials, which we believe to be appropriate this
late in the credit and interest rate cycle. So far it has been the wrong
decision, but we believe it will pay dividends down the road.
Sector Diversification
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Business Cap. Equip./
Services Consumer Process Energy/
And Services Consumer Ind./ Utili-
Transpor- and Non- Finan- Tech- Basic ties/
tation Cyclicals durables Reserves cial nology Mat. Misc.
24% 22% 15% 10% 10% 8% 7% 4%
Based on net assets as of 6/30/98.
Technology also rebounded following its weakness in late 1997 and early this
year. We saw values in the sector and began rebuilding our position there early
in the period, enabling us to begin to profit from the recovery in the group.
We are underweighted now in both REITs and energy stocks, though we are
intrigued with the valuations in both sectors. REITs currently have excellent
fundamentals and very attractive valuations. Where else can you find companies
offering several years of projected double-digit earnings and dividend growth
combined with a 6% yield? Consequently, and because REITs make up 8% of the
Russell 2000 Index, we have begun selective additions.
Energy slumped on the back of plummeting prices and slowing demand from Asia,
plus fears of Iraq's return to the market. The group underperformed
dramatically, and we were helped by our significant underweighting (less than
2%) in the sector, compared with its 5% weighting in the index.
We are underweighted in REITs and energy stocks, though we are intrigued with
the valuations . . .
Our top performers in the half were Young Broadcasting, A.O. Smith, and
Proffitt's. Young Broadcasting rose sharply in late June as the firm hired
Lazard Freres to review strategic alternatives for the company. Investors are
betting on a speedy sale of the business, and the shares have risen 67%
year-to-date, adding $4.8 million in value to our portfolio.
We profiled A.O. Smith in last year's annual letter. At the time, we highlighted
our favorable view of the firm's strategy to exit the low-multiple automotive
business and reinvest proceeds in its electric-equipment segment. The firm has
executed its strategy well and recently announced what we believe will be an
earnings-boosting acquisition of GE's compressor business. Investor recognition
of the value being realized at A.O. Smith drove the shares more than 20% higher
in the first half, adding more than $3.7 million to your fund.
Proffitt's was added to the fund early this year after it merged with Carson
Pirie Scott, one of our long-held positions. Proffitt's has a
multibillion-dollar market cap, and after rising more than 50% this year, the
shares no longer appear to be a bargain. While the stock added $3.7 million in
value to the fund in the first half, we have begun exiting the position because
of its large capitalization and full valuation.
Our biggest losers in the half were SmarTalk TeleServices, Waterlink, and
Alternative Resources. SmarTalk was a major new purchase in the period, the
timing of which was clearly a mistake. The firm failed to meet its earnings
projections and the shares fell 38%, costing us over $4 million. We plan to
rinse the egg off our faces and hold the shares. At 14 times next year's
earnings, the stock seems to be amply discounting the company's recent troubles.
We believe SmarTalk will get back on track later this year.
Our second problem child was Waterlink, which declined 47% in the first half as
it missed its earnings estimates after customers deferred several large
water-treatment projects. Waterlink is an international provider of integrated
water purification and waste-water treatment solutions for industrial and
municipal customers. Waterlink's early April earnings warning caused a
significant reduction in full-year earnings estimates, and several Wall Street
firms downgraded the shares. Today's market punishes disappointments, and
Waterlink suffered accordingly. The investment cost us more than $3.6 million in
the half. However, Waterlink has strong products, a promising new chief
executive, and bright prospects.
Finally, our third-largest loser, Alternative Resources, ran into trouble with
an acquisition that diluted earnings. The company provides technical staffing
solutions for information services operations. Late in 1997, it bought CGI
Systems, its first-ever acquisition. CGI Systems, a subsidiary of IBM, provided
contract computer programming services to Alternative Resources' customer base.
The fit seemed perfect. Unfortunately, to date, the acquisition has torpedoed
Alternative Resources' earnings. Acquisitions are never easy to integrate for
small firms, and this one has so far proved too complex for this company.
Estimates are now 25% lower for 1998, and it appears Alternative Resources' core
business has suffered as management's attention focused on the acquisition. We
are evaluating our options at this writing. Alternative Resources cost us $3
million in the half.
PORTFOLIO HIGHLIGHTS
Our top purchase, Comfort Systems USA, is a national provider of heating,
ventilation, and air conditioning (HVAC) installation, maintenance, and services
to commercial and industrial markets. The company is aggressively acquiring
smaller competitors in this $35 billion market. Strong internal growth and
synergies from management's successful acquisition strategy are currently
generating earnings growth in excess of 25%. A recent secondary stock offering,
priced at 15 times next year's earnings, seemed an ideal opportunity to bolster
our existing position.
We believe Comfort Systems' management, led by Fred Ferreira, is extremely
capable and well motivated to drive shareholder value. Management currently owns
more than 20% of the company. Since the commercial HVAC market is made up of
more than 35,000 firms, Comfort Systems should have a fertile environment for
acquisitions that can boost earnings further.
Another of our top purchases was Mentor. You may remember we first bought this
$600 million market-cap medical device company, based in Santa Barbara,
California, last year when its shares fell on unwarranted concern over a
slowdown in its breast-implant business. The stock rose 70% in six months, and
we took our gains. Early this year, the stock sagged as a fire damaged one
manufacturing facility, and sales of its ultrasonic liposuction machine were
disappointing. We purchased the shares again at 14 times next year's
earnings-not bad for a company growing at 20% a year.
One of the maxims in small-company investing is, "Remember when to sell."
A third stock we would like to highlight is Downey Financial, a $900 million
market-cap thrift based in Newport Beach, California. Downey posts an attractive
16% return on equity. The firm is lean with an expense ratio of 50%, compared
with 60% of revenue for the average bank. Insiders own 24% of the shares, and
the stock is cheap at two times book value. The average California thrift trades
at 2.6 times book value. Downey's share of deposits ranks in the top 10 in the
state, and we believe it may be an attractive consolidation candidate.
Once again, consolidation and merger-and-acquisition activity played a large
role in portfolio activity. Our largest sale was Tracor, the defense electronics
company acquired in June by GEC of Great Britain. Tracor added over $2 million
in value to the portfolio as GEC launched an all-cash tender offer for the
shares. Finally, we wrote last year of our good fortune in McClatchy's
attractive bid for Cowles Media. The deal has now been consummated, and we
received cash and a modest amount of McClatchy stock, which we sold.
One of the maxims in small-company investing is, "Remember when to sell." If the
valuation looks full or if fundamentals turn down, it is usually a good time to
take money off the table. Our fifth-largest sale during the past six months was
Coinmach Laundry, which provides laundry equipment services for multifamily
properties. The firm is well managed, and we admire Steve Kerrigan, the firm's
capable CEO. This spring, when the shares hit our target based on discounted
cash flow because of investor enthusiasm for the company's Macke Laundry deal,
we felt it prudent to significantly reduce our holdings. The shares were
subsequently the target of some ill-founded short-selling rumors, and the stock
dropped more than 30%. Fortunately, our selling cushioned the impact on the
fund, and we are now considering repurchasing the shares.
OUTLOOK
As we noted, large-cap stocks outperformed small-caps by 13 percentage points in
the first half. This level of underperformance is astounding given small-caps'
superior fundamentals and valuation. Since the second quarter of 1997, corporate
earnings have grown substantially faster for smaller companies than for S&P 500
companies.
. . . liquidity is the order of the day, and investors are willing to pay dearly
for it.
Second, small-cap valuations based on price/earnings ratios are approaching
10-year lows relative to large companies-levels not seen since late 1990, the
previous trough for small-cap performance. Yet liquidity is the order of the
day, and investors are willing to pay dearly for it.
One case in point is the disparity in relative valuations today between
large-and small-cap shares in comparable businesses. GE is undoubtedly one of my
favorite large-cap stocks. Though it will never be one of your fund's holdings
because of its $300 billion market cap, I have continued to watch the company
closely since my days as T. Rowe Price's electric equipment analyst. GE has
great management and grows earnings at 12% to 15% year in, year out. Investors
now pay more than 30 times 1998 earnings for the company, or about twice its
growth rate.
Contrast this with Holophane, which has a strong business model in the electric
equipment industry. It is also very well managed. This $300 million market-cap
stock has grown earnings at a 21% annual rate over the past four years. Yet it
sells for just 15 times this year's earnings and is up a mere 9% this year, as
of this writing. Is liquidity really worth a 200% premium on earnings?
We see no catalyst at the moment to end investors' love affair with large-cap
shares-yet the change could come when we least expect it. From current valuation
levels, we expect strong relative long-term gains from small-caps.
Keep the faith, and thanks for your continued support.
Respectfully submitted,
Greg A. McCrickard
President and Chairman of the Investment Advisory Committee
July 24, 1998
T. Rowe Price Small-Cap Stock Fund
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Portfolio Highlights
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/98
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U.S. Foodservice 2.1%
A.O. Smith 2.0
Aliant Communications 1.7
PartnerRe Holdings 1.4
Analogic 1.4
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New England Business Service 1.4
Young Broadcasting 1.2
Casey's General Stores 1.1
Romac International 1.1
Outback Steakhouse 1.1
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Comfort Systems USA 1.1
Matthews International 1.0
Parkway Properties 1.0
Shorewood Packaging 1.0
Watsco 1.0
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Electro Rent 1.0
Glacier Bancorp 1.0
Holophane 0.9
Summit Bancorp 0.9
Sola 0.9
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EastGroup Properties 0.9
JLG Industries 0.9
Tetra Tech 0.9
Quorum Health Group 0.9
Poe & Brown 0.9
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Total 28.8%
T. Rowe Price Small-Cap Stock Fund
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Portfolio Highlights
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MAJOR PORTFOLIO CHANGES
(Listed in descending order of size)
6 Months Ended 6/30/98
Ten Largest Purchases
- ------------------------------------
Comfort Systems USA*
Mentor*
Bon-Ton Stores*
Woodhead Industries*
Downey Financial*
SmarTalk TeleServices*
JLG Industries*
U.S. Foodservice
New England Business Service
Tower Realty Trust
Ten Largest Sales
- ------------------------------------
Tracor***
Proffitt's
Cowles Media***
North Face**
Coinmach Laundry
Wild Oats Markets**
Coach USA
American Radio Systems***
Starwood Hotels & Resorts
Commnet Cellular
* Position added
** Position eliminated
*** Acquired by another company
T. Rowe Price Small-Cap Stock Fund
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Performance Comparison
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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.
Small-Cap Stock Fund
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As of 6/30/98
Russell 2000 Lipper Small Cap Small-Cap
Index Fund Index Stock Fund
6/30/88 100.00 100.00 100.00
6/89 112.81 112.53 117.75
6/90 116.15 123.05 119.23
6/91 117.69 125.16 115.55
6/92 134.8 140.86 130.63
6/93 169.86 176.29 160.95
6/94 177.23 180.27 172.56
6/95 212.87 227.09 206.16
6/96 263.72 295.34 274.04
6/97 306.78 313.94 324.6
6/98 357.42 362.66 392.41
Average Annual Compound Total Return
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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 6/30/98 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Small-Cap Stock Fund 20.89% 23.93% 19.51% 14.65%
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Performance prior to 8/31/92 reflects investment managers other than T. Rowe
Price.
T. Rowe Price Small-Cap Stock Fund
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Unaudited
For a share outstanding throughout each period
Financial Highlights
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6 Months Year
Ended Ended
6/30/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
NET ASSET VALUE
Beginning
of period $ 22.20 $ 18.07 $ 16.32 $ 13.80 $ 15.39 $ 14.37
Investment activities
Net investment
income 0.04 0.05 0.09 0.12 0.04 --
Net realized
and unrealized
gain (loss) 0.97 5.13 3.33 4.53 2.60
Total from
investment
activities 1.01 5.18 3.42 4.65 0.00 2.60
Distributions
Net investment
income -- (0.04) (0.09) (0.12) (0.03) --
Net realized
gain -- (1.01) (1.58) (2.01) (1.56) (1.58)
Total
distributions -- (1.05) (1.67) (2.13) (1.59) (1.58)
NET ASSET VALUE
End of period $ 23.21 $ 22.20 $ 18.07 $ 16.32 $ 13.80 $ 15.39
---------------------------------------------------------
Ratios/Supplemental Data
Total return(C) 4.55% 28.81% 21.05% 33.85% 0.08% 18.40%
Ratio of
expenses to
average
net assets 1.01%! 1.02% 1.07% 1.11% 1.11% 1.20%
Ratio of
net investment
income to average
net assets 0.38%! 0.33% 0.56% 0.74% 0.24% (0.01)%
Portfolio
turnover rate 13.5% 22.9% 31.1% 57.8% 41.9% 40.8%
Net assets,
end of period
(in millions $ 1,111 $ 816 $ 416 $ 279 $ 197 $ 205
(C) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
! Annualized
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
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Unaudited June 30, 1998
Statement of Net Assets
Shares/Par Value
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in thousands
Common Stocks and Warrants 89.9%
FINANCIAL 10.5%
Bank and Trust 5.5%
Albank Financial 100,000 $ 7,059
Citizens Banking 185,000 6,180
Downey Financial 268,600 8,780
First Bell Bancorp 100,000 1,931
First Mariner Bancorp * 148,000 2,303
First Security 168,750 3,612
Frankfort First Bancorp 75,000 1,153
Glacier Bancorp ! 390,000 10,555
Marshall & Ilsley 30,000 1,534
Mercantile Bancorporation 92,250 4,647
Summit Bancorp 214,800 10,203
Westamerica 90,000 2,903
60,860
Insurance 4.4%
Harleysville Group 350,000 7,306
PartnerRe Holdings 310,000 15,810
Poe & Brown 255,000 9,483
Selective Insurance 155,000 3,473
UICI * 198,500 5,409
W. R. Berkley 185,000 7,417
48,898
Financial Services 0.6%
Delta Financial * 300,000 5,513
ITLA Capital * 70,000 1,439
6,952
Total Financial 116,710
UTILITIES 2.6%
Telephone Services 2.6%
Aliant Communications 675,000 18,499
Commnet Cellular * 119,550 1,756
Rural Cellular (Class A) * 271,700 $ 4,212
Western Wireless * 200,000 3,981
Total Utilities 28,448
CONSUMER NONDURABLES 15.2%
Food Processing 1.2%
American Italian Pasta * 102,200 3,807
CTB International * 380,000 5,177
Makepeace * 164 2,030
Seneca Foods (Class A) * 91,700 1,284
Seneca Foods (Class B) * 74,700 1,092
13,390
Hospital Supplies/Hospital Management 3.4%
Allied Healthcare Products * 89,900 444
American Oncology Resources * 459,600 5,616
Mentor 375,000 9,070
Pediatrix Medical Group * 125,000 4,648
Quorum Health Group * 360,000 9,529
Renal Care Group * 187,500 8,274
37,581
Pharmaceuticals 1.5%
Alkermes * 150,000 2,695
COR Therapeutics * 100,000 1,394
Coulter Pharmaceutical * 130,000 3,941
Millennium Pharmaceuticals * 211,900 3,006
Neurocrine Biosciences * 100,000 781
Perrigo * 200,000 2,006
Pharmaprint * 300,000 3,066
16,889
Biotechnology 0.4%
Cell Genesys * 250,000 2,133
Zonagen * 100,000 2,190
4,323
Health Care Services 4.0%
Ameripath * 500,000 5,891
Apria Healthcare * 90,000 602
Coast Dental Services * 57,900 814
Concentra Managed Care * 355,000 $ 9,219
Inhale Therapeutic Systems * 122,800 3,055
Monarch Dental * 95,000 1,496
NeoPath * 125,000 902
Northfield Laboratories * 220,000 3,272
Orthodontic Centers of America * 250,000 5,234
ProMedCo * 300,000 3,038
Raytel Medical * 360,000 1,958
SteriGenics International * 350,000 9,056
44,537
Miscellaneous Consumer Products 4.7%
Coinmach Laundry * 200,300 4,744
Cone Mills * 625,000 5,391
Crown City Plating *! 34,500 386
Culp 100,000 1,294
Dan River * 470,000 7,990
Equity Corp. International * 295,000 7,080
QuikSilver * 80,000 1,595
Sola * 310,000 10,133
US Can * 225,000 3,305
Wesley Jessen VisionCare * 150,000 3,464
WestPoint Stevens * 190,000 6,282
51,664
Total Consumer Nondurables 168,384
CONSUMER SERVICES 10.9%
Restaurants 1.3%
Logan's Roadhouse * 89,400 1,869
Outback Steakhouse * 300,000 11,690
PJ America * 71,900 1,308
14,867
General Merchandisers 2.5%
Bon Ton Stores * 560,000 8,977
Casey's General Stores 764,900 12,693
Columbia Sportswear * 115,000 2,181
Proffitt's * 100,000 4,038
27,889
Specialty Merchandisers 2.7%
CompuCom Systems * 850,000 $ 5,578
CSS Industries * 88,200 2,889
Gadzooks * 65,000 1,802
Ingles Markets (Class A) 300,000 4,331
Performance Food Group * 262,500 5,209
St. John Knits 165,000 6,373
Urban Outfitters * 192,300 3,521
29,703
Entertainment and Leisure 0.2%
Seattle Filmworks * 250,000 1,934
1,934
Media and Communications 4.2%
American Tower Systems * 60,000 1,496
Centennial Cellular (Class A) * 125,000 4,668
Central European
Media Enterprises (Class A) * 300,000 6,478
CMP Media * 125,000 2,164
Emmis Broadcasting (Class A) * 90,000 4,317
Jacor Communications * 90,000 5,316
Pegasus Communications * 89,400 1,889
Sinclair Broadcast Group (Class A) 220,000 6,311
Vanguard Cellular (Class A) * 85,000 1,604
Young Broadcasting (Class A) * 200,000 13,013
47,256
Total Consumer Services 121,649
CONSUMER CYCLICALS 9.7%
Automobiles and Related 2.8%
A.O. Smith (Class B) 420,000 21,709
Adrian Steel 7,756 2,831
Littelfuse * 200,000 5,088
TBC * 255,000 1,681
31,309
Building and Real Estate 5.6%
Apartment Investment & Management, REIT 149,400 5,901
Arden Realty, REIT 325,000 8,409
Eastgroup Properties, REIT 500,000 10,031
First Washington Realty Trust, REIT 175,000 $ 4,069
Glenborough Realty Trust, REIT 125,000 3,297
Parkway Properties, REIT 380,000 11,210
Starwood Hotels & Resorts, REIT 35,000 1,691
Tower Realty Trust, REIT 405,000 9,062
Woodhead Industries ! 535,000 8,393
62,063
Miscellaneous Consumer Durables 1.3%
CompX International * 262,600 5,679
Craftmatic Contour, Warrants, 12/31/02 * 20,970 0
Ellett Brothers 200,000 969
Harman International 58,000 2,233
York Group 280,200 5,332
14,213
Total Consumer Cyclicals 107,585
TECHNOLOGY 8.1%
Electronic Components 4.5%
American Superconductor * 25,000 298
Analogic 350,000 15,662
Burr Brown * 170,000 3,597
Electronics for Imaging * 100,000 2,106
Exar * 100,000 2,094
Linear Technology 35,000 2,111
Maxim Integrated Products * 120,000 3,806
Methode Electronics (Class A) 306,400 4,730
Optek Technology * 324,500 6,125
Planar Systems * 260,000 2,771
PMC-Sierra * 45,000 2,107
Trident International * ! 344,500 5,146
50,553
Electronic Systems 1.3%
Electromagnetic Sciences * 365,000 6,867
Lifeline Systems * 186,400 3,495
Lo Jack * 325,000 4,052
14,414
Telecommunications Equipment 1.9%
California Microwave * 225,000 $ 3,909
Excel Switching * 180,000 4,489
Glenayre Technologies * 250,000 2,703
Natural Microsystems * 80,000 1,288
Premisys Communications * 50,000 1,247
SITEL * 250,000 1,656
SmarTalk TeleServices * 285,000 4,043
West TeleServices * 109,500 1,341
20,676
Aerospace and Defense 0.4%
Woodward Governor 160,000 4,950
4,950
Total Technology 90,593
EDUCATION 0.7%
Education 0.7%
ITT Educational Service * 200,000 6,450
Learning Tree International * 82,800 1,669
Total Education 8,119
CAPITAL EQUIPMENT 2.6%
Electrical Equipment 0.9%
Holophane * 400,000 10,250
10,250
Capital Equipment 0.1%
Omniquip International 64,200 1,189
1,189
Machinery 1.6%
JLG Industries 490,000 9,923
Laser Alignment * 16,450 99
NN Ball & Roller 200,000 2,381
Toolex Alpha * 275,000 5,070
17,473
Total Capital Equipment 28,912
BUSINESS SERVICES
AND TRANSPORTATION 24.0%
Computer Service and Software 4.5%
Analysts International 150,000 $ 4,266
BISYS Group * 100,000 4,103
Concord Communications * 160,000 4,115
Electronic Arts * 50,000 2,703
Great Plains Software * 75,000 2,536
HCIA * 330,000 4,269
Medirisk * 215,700 4,327
Peerless Systems * 55,100 1,150
Sportsline USA * 120,000 4,384
Summit Design * 200,000 2,956
SunGard Data Systems * 60,000 2,303
Synopsys * 50,000 2,289
Vantive * 75,000 1,545
VERITAS Software * 99,495 4,113
Visio * 100,000 4,788
49,847
Distribution Services 5.1%
MSC * 230,000 6,555
Primesource 189,000 1,748
Richfood Holdings 345,000 7,137
Southern Electronics * 350,000 2,877
SunSource 195,000 4,241
U.S. Foodservice * 665,000 23,316
Watsco (Class A) 315,500 11,102
56,976
Environmental 0.6%
CUNO * 100,000 2,175
TRC * 200,000 900
Waterlink * 467,000 3,970
7,045
Transportation Services 2.9%
Coach USA * 175,000 7,984
Comfort Systems USA * 500,000 11,688
Expeditors International of Washington 120,000 5,265
Frozen Food Express 150,000 $ 1,472
Heartland Express * 80,827 1,634
International Shipholding 141,562 2,274
Midwest Express Holdings * 45,000 1,628
31,945
Miscellaneous Business Services 10.9%
Alternative Resources * 300,000 3,722
Billing Information Concepts * 250,000 3,828
Caribiner International * 40,000 700
Electro Rent * 480,000 10,740
Insituform Technologies (Class A) * 500,000 6,922
Iron Mountain * 69,900 3,102
Maximus * 25,000 719
McGrath RentCorp 300,000 6,469
Metamor Worldwide * 120,000 4,226
MPW Industrial Services Group * 66,200 890
New England Business Service 469,500 15,141
Paging Network * 225,000 3,143
Paxar * 240,000 2,760
Renaissance Worldwide * 298,800 6,508
Romac International * 403,868 12,318
Shorewood Packaging * 700,000 11,112
Strayer Education 247,600 8,937
Superior Consultant Holdings * 2,400 103
Tetra Tech * 400,000 9,800
The Peterson Companies (Class A) * 177,400 4,546
Unitog 210,000 4,640
120,326
Total Business Services and Transportation 266,139
ENERGY 1.3%
Energy Services 1.0%
Carbo Ceramics 117,000 4,015
Cooper Cameron * 50,000 2,550
EVI Weatherford * 94,050 3,492
Smith International * 20,000 696
10,753
Exploration and Production 0.3%
Rutherford-Moran Oil * 194,500 $ 3,902
3,902
Total Energy 14,655
PROCESS INDUSTRIES 1.8%
Specialty Chemicals 0.9%
A. Schulman 110,000 2,145
CFC International * ! 210,000 2,323
Furon 54,600 989
Hauser * 360,000 2,115
Sybron Chemical * 70,000 2,240
9,812
Paper and Paper Products 0.3%
Jefferson Smurfit * 200,000 3,144
3,144
Building and Construction 0.6%
Layne Christensen * 360,000 4,444
Simpson Manufacturing * 59,500 2,298
6,742
Total Process Industries 19,698
BASIC MATERIALS 2.1%
Metals 1.6%
AngloGold ADR 81,130 1,602
Cambior 500,000 2,938
Gibraltar Steel * 110,000 2,289
Matthews International (Class A) 470,000 11,471
18,300
Mining 0.5%
Canyon Resources * 400,000 300
Coal Creek ! 9,295 1,181
Prime Resources Group 250,000 1,735
Rochester & Pittsburgh 15,228 628
TVX Gold * 550,000 1,684
5,528
Total Basic Materials 23,828
MISCELLANEOUS COMMON STOCKS 0.4%
Western Water * 40,000 $ 403
Other Miscellaneous Common Stocks 3,805
Total Miscellaneous Common Stocks 4,208
Total Common Stocks and Warrants (Cost $801,758) 998,928
Preferred Stocks 0.1%
Prime Retail, Cum., 10.50%, (Series A) 30,000 806
Total Preferred Stocks (Cost $570) 806
Convertible Preferred Stocks 0.0%
Prime Retail, 8.50%, (Series B) 25,000 513
Total Convertible Preferred Stocks (Cost $471) 513
Convertible Bonds 0.3%
Arch Communications, (144a), 6.75%, 12/1/03 $1,000,000 670
Offshore Logistics, Sub. Notes,
(144a), 6.00%, 12/15/03 2,000,000 2,094
Total Convertible Bonds (Cost $3,100) 2,764
Short-Term Investments 9.9%
Money Market Funds 9.9%
Reserve Investment Fund, 5.69% 109,867,164 109,867
Total Short-Term Investments (Cost $109,867) 109,867
Total Investments in Securities
100.2% of Net Assets (Cost $915,766) $1,112,878
Other Assets Less Liabilities (2,293)
NET ASSETS $1,110,585
----------
Net Assets Consist of:
Accumulated net investment income
- - net of distributions $ 2,431
Accumulated net realized gain/loss
- - net of distributions 53,694
Net unrealized gain (loss) 197,112
Paid-in-capital applicable to
47,842,516 shares of $0.50 par
value capital stock outstanding;
200,000,000 shares authorized 857,348
NET ASSETS $1,110,585
----------
NET ASSET VALUE PER SHARE $ 23.21
----------
! Affiliated company
* Non-income producing
# Seven-day yield
ADR American Depository Receipt
REIT Real Estate Investment Trust
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
0.25% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
6/30/98
Investment Income
Income
Dividend $ 3,773
Interest 3,136
Total income 6,909
Expenses
Investment management 3,809
Shareholder servicing 936
Registration 120
Custody and accounting 70
Prospectus and shareholder reports 58
Legal and audit 7
Directors 4
Miscellaneous 10
Total expenses 5,014
Net investment income 1,895
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 46,732
Change in net unrealized
gain or loss on securities (8,944)
Net realized and unrealized gain (loss) 37,788
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 39,683
---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
6/30/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,895 $ 1,901
Net realized gain (loss) 46,732 32,376
Change in net unrealized gain or loss (8,944) 111,242
Increase (decrease) in net
assets from operations 39,683 145,519
Distributions to shareholders
Net investment income -- (1,388)
Net realized gain -- (35,062)
Decrease in net assets
from distributions -- (36,450)
Capital share transactions*
Shares sold 444,747 491,109
Distributions reinvested -- 34,624
Shares redeemed (190,219) (234,032)
Increase (decrease)
in net assets from capital
share transactions 254,528 291,701
Net Assets
Increase (decrease)
during period 294,211 400,770
Beginning of period 816,374 415,604
End of period $ 1,110,585 $ 816,374
---------------------------------
*Share information
Shares sold 19,366 23,580
Distributions reinvested -- 1,598
Shares redeemed (8,295) (11,410)
Increase (decrease)
in shares outstanding 11,071 13,768
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Unaudited June 30, 1998
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Small-Cap Stock 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.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles for the investment company industry; these
principles may require the use of estimates by fund management.
Valuation Equity securities listed or regularly traded on a securities exchange
are valued at the last quoted sales price on the day the valuations are made. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security.
Listed securities not traded on a particular day and securities regularly traded
in the over-the-counter market are valued at the mean of the latest bid and
asked prices. Other equity securities are valued at a price within the limits of
the latest bid and asked prices deemed by the Board of Directors, or by persons
delegated by the Board, best to reflect fair value.
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.
Investments in mutual funds are valued at the closing net asset value per share
of the mutual fund on the day of valuation.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Affiliated Companies As defined by the Investment Company Act of 1940, an
affiliated company is one in which the fund owns at least 5% of the outstanding
voting securities.
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.
Premiums and Discounts Premiums and discounts on debt securities are amortized
for both financial reporting and tax purposes.
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
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $350,705,000 and $120,849,000, respectively, for the six months ended
June 30, 1998.
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, 1998, the aggregate cost of investments for federal income tax and
financial reporting purposes was $915,766,000, and net unrealized gain
aggregated $197,112,000, of which $251,757,000 related to appreciated
investments and $54,645,000 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 $686,000 was payable at June 30, 1998. 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 0.30% for assets in excess of $80 billion. At June
30, 1998, and for the six months then ended, the effective annual group fee rate
was 0.32%. The fund pays a pro-rata share of the group fee based on the ratio of
its net assets to those of the group.
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 $796,000 for the six months
ended June 30, 1998, of which $150,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the six months ended June 30, 1998, totaled
$3,051,000 and are reflected as interest income in the accompanying Statement of
Operations.
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
Investment Services And Information
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone Shareholder service representatives are available from 8 a.m. to 10
p.m. ET Monday through Friday and from 8:30 a.m. to 5 p.m. ET on weekends. 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 at these
centers.
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, fund prices, and yields. Additionally, you have the ability to request
prospectuses, statements, and account and tax forms; to reorder checks; and to
initiate purchase, redemption, and exchange orders for identically registered
accounts.
Internet. T. Rowe Price Web site: www.troweprice.com All the information and
services available on Tele*Access are available on our Web site, including
transactions in your fund and Discount Brokerage accounts (with preauthorized
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 set up systematic investments from one fund account into
another, such as from a money fund into a stock fund. A $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,
mutual funds, and other securities at a savings over regular commission rates.
To Open an Account Call a shareholder service representative for more
information.
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. Detail pages itemize
account transactions.
Shareholder Reports Portfolio managers review the performance of the funds in
plain language and discuss T. Rowe Price's economic outlook.
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 every 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, Diversifying Overseas: A Guide to International Investing,
Retirees Financial Guide, and Retirement Planning Kit (also available on disk or
CD-ROM for PC use) can help you determine and reach your investment goals.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction, current balance, or to conduct transactions,
24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Small-Cap Stock Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
"T. Rowe Price, Invest with Confidence" (registered trademark)
T. Rowe Price Investment Services, Inc., Distributor. F65-051 6/30/98
