Annual Report
Small-Cap
Stock Fund
December 31, 1998
T. Rowe Price
Report Highlights
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Small-Cap Stock Fund
o Despite significant volatility, large-cap stocks finished with a record
fourth straight year of outstanding gains, while small-caps underperformed
again.
o Fund returns were comparable to the Russell 2000 Index but modestly
behind the growth-oriented Lipper Small Cap Fund Index.
o New purchases included technology stocks Saville Systems, a
telecommunications software firm, and PSINet, one of the only reasonably
valued Internet plays.
o Small-cap stocks are cheap on both an absolute basis and, especially,
relative to large-cap stocks, which remain expensive by traditional
measures. We believe investors will eventually return to fundamentals and
value.
Fellow Shareholders
Wow! For investors, 1998 was one of the most volatile and fascinating years in
recent memory. In a year defined by the rolling international financial
crisis-depression in parts of Asia, default in Russia, disappointing corporate
earnings, and aggressive Federal Reserve intervention-few would have expected
another 20%-plus performance from the S&P 500 Stock Index.
Performance Comparison
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Periods Ended 12/31/98 6 Months 12 Months
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Small-Cap Stock Fund -7.66% -3.46%
Russell 2000 Index -7.12 -2.55
Lipper Small Cap Fund Index -6.86 -0.85
S&P 500 9.22 28.57
Early in the year, few would have surmised that small-caps, with more attractive
valuations and stronger earnings growth, would lag large-caps in such dramatic
fashion. Your fund's performance fully reflects this dichotomy, virtually
unprecedented in magnitude, which is further illustrated in the Comparative
Index Returns table on page 3. Our loss of 7.66% for the six months ended
December 31, 1998, resulted in an overall loss of 3.46% for the year.
Last fall, when pessimism reigned supreme and stock prices (and portfolio
managers) suffered greatly, almost no one foresaw the huge rally from the
market's October 8 lows. The S&P's performance in a year featuring the worst
corporate profit results since 1991 is startling. Remember the high-profile
earnings shortfalls from blue chip favorites 3M, Coke, and Gillette? Still, most
investors (outside of the Internet crowd) preferred liquidity and perceived
safety and restricted their buying to the biggest of the big-caps. The market's
double-digit return, as measured by the major indices, was driven by a handful
of mega-cap stocks. Indeed, 53% of the S&P's return can be traced to the 15
largest stocks in the index. The Nasdaq's stellar return can also be largely
attributed to large-cap technology stocks, i.e., those in the Nasdaq 100 Index
such as Intel and Microsoft. In fact, the median Nasdaq stock declined 20% in
1998!
While the S&P 500 rose 28.57%, the index would have risen a mere 13% if it were
unweighted instead of capitalization-weighted. The 2.55% decline of the
unmanaged Russell 2000 Index reflects the fact that decliners outnumbered
advancers 2,364 to 1,261 in the over-the-counter market. The index's modest
decline for the year masks the vicious small-cap bear market of the spring and
summer. Here again the numbers tell the story, as shown in the peak-to-trough
table below. The nearly 40% decline in small-caps was their worst since the
early '70s bear market. Clearly, small-caps had a full-fledged bear market in
1998 and then recovered partially in the year's closing months. As is typical,
we held up better than the Russell 2000 during the decline and lagged somewhat
during the recovery, leaving us marginally behind the index for the year.
Preparing For The Year 2000
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The Year 2000 draws closer every day, and it holds special meaning beyond the
arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations.
T. Rowe Price has been taking steps to assure that its computer systems and
processes are capable of functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are currently being executed.
OUR PLAN OF ACTION
We began to address these issues several years ago by requiring that all new
systems process and store four-digit years. All critical systems have been
reprogrammed (including business applications required to service our customers
and processing infrastructure necessary to ensure the integrity of customer data
and investments), and they are currently being tested. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be able
to modify their interface files prior to December 31, 1999. In addition, we are
scheduling tests for critical vendors and companies that claim Year 2000
compliance to ensure that time-related data and calculations function properly
as we move into the next century.
SMOOTH TRANSITION PLANNED
We believe our programs and initiatives will provide a smooth transition into
the next millennium. We are assessing all systems providing products or services
to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we have modified them where necessary for the Year 2000.
The Securities Industry Association (SIA) is coordinating Year 2000 testing to
assure that securities markets, clearing corporations, depositories, and third
party service providers can send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta test of Year 2000
readiness. The test was considered successful in terms of transactions completed
and will serve as the basis for the SIA's industry-wide approach. During October
1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA
and is ready for the industry-wide test that is scheduled for March and April
1999.
For a more detailed discussion of our Year 2000 effort, as well as continuing
updates on our progress, please check our Web site (www.troweprice.com).
Comparative Index Returns
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Periods Ended 12/31/98 6 Months 12 Months
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S&P 500 9.22% 28.57%
Nasdaq Composite 15.72 39.63
Nasdaq 100 35.54 82.68
Russell 2000 -7.12 -2.55
Peak to Trough and Back Again
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1998 Peak-to-Trough Trough-to-12/31/98
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Small-Cap Stock Fund -33.20% 29.90%
Russell 2000 Index -36.46 36.27
S&P 500 -19.19 9.05
The late-year rally was very much concentrated in the growth sector of the
small-cap market. Small-cap value, typically the least volatile sector, was the
hardest hit in 1998, as shown in the Small-Cap Performance Comparison table on
page 4. Therefore, our portfolio's small-cap value core, usually its anchor to
windward in a stormy market, pulled down our returns in 1998. Given our blend of
growth and value, our returns were in between each segment's returns and
marginally behind the Russell 2000 index.
YEAR-END DISTRIBUTIONS
Your fund's Board of Directors declared a year-end dividend of $0.10 per share,
a short-term capital gain distribution of $0.07 per share, and a long-term
capital gain distribution of $0.43 per share. These distributions were paid on
December 17 to shareholders of record on December 15. You should already have
received a check or statement reflecting the distributions as well as our Form
1099-DIV reporting them for 1998 tax purposes.
INVESTMENT REVIEW
Our top performers in the past six months were Aliant Communications, U.S.
Foodservice, and Shorewood Packaging. Aliant Communications rose 49% on the
strength of a mid-December takeover bid from ALLTEL. As Aliant was our top
holding in the fourth quarter, its gains added a whopping $9.7 million to the
fund's return in the second half. U.S. Foodservice, again one of our top
holdings entering the fourth quarter, rose 40% as investors recognized the
company's impeccable execution of its large merger with Rykoff Sexton. Indeed,
U.S. Foodservice shares ignored the midyear bear market, and the overall
position added almost $8 million to the portfolio's value. Shorewood Packaging
soared 29% during the second half of the year on news of a favorable acquisition
and an excellent earnings report. Revenue growth in all segments, great cash
flow, an excellent contribution from the recently acquired Queens Group, and
cheap valuation proved the right combination to ignite investor interest.
Shorewood added almost $5 million to the fund in the half.
Small-Cap Performance Comparison
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Periods Ended 12/31/98 6 Months 12 Months
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Russell 2000 -7.12% -2.55%
Russell 2000 Growth -4.01 1.23
Russell 2000 Value -10.43 -6.45
Two of our top three losers illustrate the market's reaction to poor earnings
reports. Sola International and Renaissance Worldwide posted poor quarterly
results and cost the portfolio between $5.5 and $6 million in value. Sola, a
U.S.-based worldwide manufacturer and marketer of eyeglass lenses, suffered from
soft sales in North America and in emerging markets. The stock declined from the
low 30s to the upper teens, costing the fund about $6 million.
We purchased staffing solutions firm Renaissance Worldwide late last spring when
the shares fell due to the firm's inability to smoothly integrate several recent
acquisitions. We attempted to catch the falling spear, but unfortunately it went
right through our hand. While the firm's underlying business remained strong, we
underestimated the challenge of bringing three separate but related businesses
together. The idea of integrating information technology staffing, consulting,
and solutions implementation sounded powerful. Yet Renaissance has fallen far
short of delivering on its promises. The stock cost us about $5.5 million in the
quarter.
Our final big loser, A.O. Smith, declined from the mid-30s to the mid-20s on no
fundamental news. The firm has proceeded to use its cash hoard and strong
balance sheet to acquire attractive electric equipment businesses. A.O. Smith
purchased GE's compressor business last year in a deal that likely added a few
cents to its earnings per share. While a slowing economy and weaker energy
prices may cause a modest 5% to 7% reduction in the company's 1999 earnings
estimates, the firm is executing well and it's a mystery why this very cheap
stock got cheaper. A.O. Smith is priced at about 12 times next year's earnings
and remains at a material discount to other electric equipment firms on a
price/cash flow basis. The 30% decline cost the fund $6.2 million during the
second half.
SECTOR DIVERSIFICATION
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(pie chart)
Capital Equipment
Business Services Process Industries, Consumer Services
and Transportation Basic Materials Technology and Cyclicals
28 7 7 18
Energy, Utilities, Consumer
Financial Miscellaneous Nondurables Reserves
10 5 16 9
Based on net assets as of 12/31/98.
PORTFOLIO HIGHLIGHTS
Our largest purchase in the past six months was Saville Systems, which should
benefit from the continued rapid growth of billing software and information
technology services to the global telecommunications industry. This growth is
being spurred by deregulation and privatization, which are pushing carriers to
compete more effectively through new services and advanced pricing plans.
Saville offers its customers an industry-leading product that allows multiple
services to appear on one consolidated bill and offers investors robust growth
opportunities, high profit margins, and an excellent balance sheet-all at a
cheap valuation. In fact, during last fall's panic sell-off, we purchased some
shares as low as $8, or at just seven times earnings. By year-end, the stock had
rebounded to $19, still only 15 times earnings, or half Saville's 30% growth
rate.
Another major purchase in the second half was Central Louisiana Electric, which
we picked up as a defensive holding during the correction. CNL is well
positioned competitively and sports a 5% dividend yield. We put about $7 million
into the stock before the market's cascade turned up better values-like Saville.
The final new idea we'd like to highlight is PSINet, our sole recent foray into
the white-hot Internet space. PSINet is a turnkey Internet and intranet access
provider for businesses worldwide. This Northern Virginia company appears to be
one of the great values among Internet stocks. PSINet owns its own fiber network
and sells space to consumer providers like Earthlink and Mindspring, which trade
at 11 times and 16 times revenues, respectively. Given its position as the
world's largest independent provider of Internet access, we found the shares a
great bargain at a mere two times cash balances and a paltry-by Internet
standards-four times revenues.
Our largest sale during the past six months was U.S. Foodservice, which we
highlighted earlier. We had owned the company since its IPO and hated to sell
it. Unfortunately, U.S. Foodservice is no longer a small-cap, nor is it as good
a value as it was; it sells at a 25% premium to its growth rate versus a 12%
discount at the beginning of the year. Therefore, we have begun to reduce our
holdings. We also eliminated Concord Communications and VERITAS Software last
fall. While both were terrific companies, we found the stocks pricey at 111 and
75 times earnings, respectively. Concord supplies network performance
measurement software, and VERITAS offers enterprise storage management software.
VERITAS faced a difficult product transition in the near future; fortunately, we
sold our shares before their large decline last fall.
OUTLOOK
Last year marked the fifth straight year of small-cap underperformance versus
the S&P 500. Given small-caps' strong earnings outlook and attractive valuations
entering 1998, we remain surprised that the S&P 500 beat the Russell 2000 by
over 30 percentage points. Small-cap valuations reached historic lows relative
to large caps last October, and the sector remains a compelling value.
The market is enthralled with large-caps and highly speculative Internet plays.
Late in 1998 and so far in 1999, any company with ".com" in its name has surged
to ridiculous levels, even if the company has no earnings, little or no revenue,
and a highly questionable business model. We may have the makings of a modern
day "tulip mania" as day-traders seem to be playing the greater fool game in
cyberspace.
Large-cap stocks--particularly the blue chips--remain at historically high
valuations based on price/earnings and price/book value ratios. We often hear
investors dismiss traditional valuation parameters and urge a focus solely on
global franchise values. That's easy to say but difficult to quantify.
Large-caps are expensive on both an absolute and a relative basis. Small-caps
are inexpensive by both measures. Indeed, it is these extraordinarily low
valuations that might sow the seeds of better performance in 1999.
Since our last report, merger activity has been announced in eight of our
holdings. This level of activity has picked up dramatically, as four holdings
have received bids since December 1. We see this activity across all sectors.
Small-caps are cheap: Large-cap corporate managers recognize this, and we could
see a huge wave of consolidation in 1999. It is winter now, and as the old
dictum goes, "straw hats" (read: small-caps) are on sale. Just as summer will
inevitably return, so investors will once again focus on fundamentals and value.
We remain confident that our strategy of buying good companies with strong
management at reasonable prices will continue to add significant value for our
shareholders.
Thank you for your continued support.
Respectfully submitted,
Greg A. McCrickard
President and Chairman of the Investment Advisory Committee
January 19, 1999
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
12/31/98
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Aliant Communications 2.6%
New England Business Service 1.9
A.O. Smith 1.8
Shorewood Packaging 1.8
Coach USA 1.5
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Mentor 1.4
PartnerRe Holdings 1.4
Matthews International 1.3
U.S. Foodservice 1.3
Richfood Holdings 1.2
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Parkway Properties 1.2
Tetra Tech 1.2
Analogic 1.1
Comfort Systems USA 1.0
Strayer Education 1.0
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SteriGenics International 1.0
Downey Financial 1.0
CompX International 0.9
Holophane 0.9
Saville Systems 0.9
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Citizens Banking 0.9
Casey's General Stores 0.9
EastGroup Properties 0.8
Glacier Bancorp 0.8
Summit Bancorp 0.8
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Total 30.6%
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 12/31/98
Ten Largest Purchases Ten Largest Sales
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Saville Systems* U.S. Foodservice
Cleco* Concord Communications**
Coach USA Outback Steakhouse
United Natural Foods* VERITAS Software**
A.O. Smith Centennial Cellular**
Richfood Holdings Ingles Markets**
Applied Micro Circuits* York Group**
Financial Federal* Excel Switching**
Unifi* Pediatrix Medical Group
Mentor Wesley Jessen VisionCare**
* Position added
** Position eliminated
T. Rowe Price Small-Cap Stock Fund
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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.
SMALL-CAP STOCK FUND
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As of 12/31/98
Lipper Small Small-Cap
Cap Fund Russell 2000 Stock Fund
12/88 10,000 10,000 10,000
12/89 12,106 11,626 11,913
12/90 10,438 9,362 9,474
12/91 15,504 13,672 13,132
12/92 17,238 16,189 14,958
12/93 20,155 19,246 17,710
12/94 20,058 18,895 17,725
12/95 26,400 24,271 23,724
12/96 30,193 28,274 28,71
12/97 34,727 34,597 36,993
12/98 34,430 33,716 35,715
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 12/31/98 1 Year 3 Years 5 Years 10 Years
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Small-Cap Stock Fund -3.46% 14.61% 15.06% 13.58%
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 Small-Cap Stock Fund
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Financial Highlights For a share outstanding throughout each period
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Year
Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of period $ 22.20 $ 18.07 $ 16.32 $ 13.80 $ 15.39
Investment activities
Net investment income 0.08 0.05 0.09 0.12 0.04
Net realized and
unrealized gain (loss) (0.89) 5.13 3.33 4.53 (0.04)
Total from
investment activities (0.81) 5.18 3.42 4.65 0.00
Distributions
Net investment income (0.10) (0.04) (0.09) (0.12) (0.03)
Net realized gain (0.50) (1.01) (1.58) (2.01) (1.56)
Total distributions (0.60) (1.05) (1.67) (2.13) (1.59)
NET ASSET VALUE
End of period $ 20.79 $ 22.20 $ 18.07 $ 16.32 $ 13.80
----------------------------------------------------
Ratios/Supplemental Data
Total return* (3.46)% 28.81% 21.05% 33.85% 0.08%
Ratio of expenses to
average net assets 1.01% 1.02% 1.07% 1.11% 1.11%
Ratio of net investment
income to average
net assets 0.46% 0.33% 0.56% 0.74% 0.24%
Portfolio turnover rate 25.9% 22.9% 31.1% 57.8% 41.9%
Net assets, end of period
(in millions) $ 1,153 $ 816 $ 416 $ 279 $ 197
* 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.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
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December 31, 1998
Statement of Net Assets Shares/Par Value
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In thousands
Common Stocks and Warrants 90.5%
FINANCIAL 9.9%
Bank and Trust 5.5%
Charter One Financial 226,800 $ 6,287
Citizens Banking 300,000 10,088
Downey Financial 440,000 11,193
First Bell Bancorp 100,000 1,556
First Mariner Bancorp* 125,000 1,656
First Security 168,750 3,939
Frankfort First Bancorp 75,000 1,148
Glacier Bancorp! 429,000 9,519
Marshall & Ilsley 30,000 1,737
Mercantile Bancorporation 92,250 4,255
Summit Bancorp 214,800 9,384
WestAmerica 90,000 3,310
64,072
Insurance 3.7%
Harleysville Group 325,000 8,338
PartnerRe Holdings 360,000 16,470
Poe & Brown 230,000 8,035
Selective Insurance 155,000 3,168
W. R. Berkley 185,000 6,244
42,255
Financial Services 0.7%
Delta Financial* 300,000 1,781
Financial Federal* 200,000 4,950
ITLA Capital* 70,000 1,057
7,788
Total Financial 114,115
UTILITIES 4.0%
Electric Utilities 0.6%
Cleco 200,000 6,862
6,862
Telephone 3.4%
Aliant Communications 725,000 29,567
Commnet Cellular* 119,550 1,472
Rural Cellular (Class A)* 331,700 $ 3,441
Western Wireless* 200,000 4,394
38,874
Total Utilities 45,736
CONSUMER NONDURABLES 16.0%
Food Processing 1.6%
American Italian Pasta* 102,200 2,696
Imperial Holly 619,900 5,037
Makepeace* 164 2,259
P F Chang's China Bistro* 20,900 469
Seneca Foods (Class A)* 91,700 1,123
Seneca Foods (Class B)* 74,700 952
United Natural Foods* 255,000 6,104
18,640
Hospital Supplies/Hospital Management 3.6%
American Oncology Resources* 600,000 8,775
Mentor 704,900 16,499
Pediatrix Medical Group* 60,000 3,596
Quorum Health Group* 360,000 4,646
Renal Care Group* 281,250 8,157
41,673
Pharmaceuticals 2.4%
Alkermes* 250,000 5,531
Aviron* 58,300 1,512
COR Therapeutics* 102,476 1,367
Coulter Pharmaceutical* 65,000 1,936
Gilead Sciences* 70,000 2,872
Millennium Pharmaceuticals* 260,938 6,736
Neurocrine Biosciences* 100,000 669
PathoGenesis* 30,000 1,723
PharmaPrint* 400,000 5,263
27,609
Biotechnology 0.3%
Cell Genesys* 250,000 1,508
Zonagen* 100,000 1,893
3,401
Health Care Services 3.6%
AmeriPath* 675,000 $ 6,086
Concentra Managed Care* 571,600 6,055
Inhale Therapeutic Systems* 185,000 6,099
Monarch Dental* 314,300 1,277
Northfield Laboratories* 220,000 2,764
Orthodontic Centers of America* 250,000 4,859
ProMedCo* 400,000 2,413
SteriGenics International*! 475,000 11,875
41,428
Miscellaneous Consumer Products 4.5%
Coinmach Laundry* 200,300 2,591
Cone Mills* 574,400 3,231
CSS Industries* 88,200 2,674
Culp 100,000 788
Dan River* 600,000 7,050
Equity Corp. International* 295,000 7,836
Quicksilver* 80,000 2,400
Sola* 510,000 8,797
Unifi 325,000 6,358
US Can* 300,000 5,362
WestPoint Stevens* 150,000 4,730
51,817
Total Consumer Nondurables 184,568
CONSUMER SERVICES 7.8%
Restaurants 1.3%
Logan's Roadhouse* 300,000 7,022
Outback Steakhouse* 158,588 6,314
PJ America* 71,900 1,298
14,634
General Merchandisers 2.0%
Bon-Ton Stores*! 740,700 5,648
Casey's General Stores 764,900 9,968
Columbia Sportswear* 287,700 4,837
Saks* 100,000 3,156
23,609
Specialty Merchandisers 1.8%
CompuCom Systems* 850,000 $ 3,002
Goody's Family Clothing* 145,500 1,459
Performance Food Group* 262,500 7,334
St. John Knits 210,000 5,460
Urban Outfitters* 192,300 3,347
20,602
Entertainment and Leisure 0.1%
Seattle Filmworks* 239,400 1,122
1,122
Media and Communications 2.6%
American Tower Systems
(Class A)* 60,000 1,774
Emmis Broadcasting (Class A)* 160,000 6,940
Jacor Communications* 30,000 1,940
Pegasus Communications* 89,400 2,238
Sinclair Broadcast Group
(Class A)* 280,000 5,539
Vanguard Cellular (Class A)* 85,000 2,191
Young Broadcasting (Class A)* 220,000 9,192
29,814
Total Consumer Services 89,781
CONSUMER CYCLICALS 9.9%
Automobiles and Related 3.0%
A.O. Smith (Class B) 865,000 21,246
Adrian Steel! 13,000 6,175
Keystone Automotive* 140,000 2,949
Littelfuse* 225,000 4,275
34,645
Building and Real Estate 5.8%
Apartment Investment
& Management, REIT 149,400 5,556
Arden Realty, REIT 325,000 7,536
EastGroup Properties, REIT 530,000 9,772
First Washington Realty
Trust, REIT 325,000 7,698
Glenborough Realty Trust, REIT 125,000 2,547
JP Realty, REIT 200,000 3,925
Parkway Properties, REIT 435,000 13,594
Starwood Hotels &
Resorts, REIT 35,000 794
Tower Realty Trust, REIT 405,000 $ 8,151
Western Water* 40,000 203
Woodhead Industries! 600,000 7,612
67,388
Miscellaneous Consumer Durables 1.1%
CompX* 410,000 10,814
Craftmatic Contour, Warrants,
12/31/02* 20,970 0
Harman International 50,000 1,906
12,720
Total Consumer Cyclicals 114,753
TECHNOLOGY 7.3%
Electronic Components 4.4%
American Superconductor* 50,000 513
Analogic 350,000 13,169
Burr Brown* 275,000 6,428
Exar* 100,000 1,612
Maxim Integrated Products* 120,000 5,239
Methode Electronics (Class A) 427,400 6,718
Optek Technology* 350,000 6,497
Planar Systems* 350,000 2,406
PMC-Sierra* 75,000 4,727
Trident International*! 370,000 3,411
50,720
Electronic Systems 2.0%
Applied Micro Circuits* 235,000 7,990
Electromagnetic Sciences* 380,600 5,352
Lifeline Systems* 200,000 5,050
Lo-Jack* 375,000 4,477
22,869
Telecommunications 0.6%
Avant* 250,000 3,984
Premisys Communications* 150,000 1,364
West TeleServices* 109,500 1,116
6,464
Aerospace and Defense 0.3%
Woodward Governor 160,000 3,480
3,480
Total Technology 83,533
EDUCATION 0.6%
Education 0.6%
ITT Educational Service* 200,000 $ 6,800
Total Education 6,800
CAPITAL EQUIPMENT 2.6%
Electrical Equipment 0.9%
Holophane* 400,000 10,275
10,275
Capital Equipment 0.6%
Omniquip International 450,000 6,778
6,778
Machinery 1.1%
JLG Industries 490,000 7,656
Laser Alignment* 16,450 99
NN Ball & Roller 350,000 2,122
Toolex Alpha* 270,400 3,143
13,020
Total Capital Equipment 30,073
BUSINESS SERVICES AND
TRANSPORTATION 27.9%
Computer Service and Software 5.1%
Analysts International 230,000 4,442
BISYS Group* 100,000 5,156
Concur Technologies* 52,800 1,596
Electronic Arts* 50,000 2,803
Great Plains Software* 140,000 6,764
HCIA* 330,000 1,423
Peerless Systems* 400,000 3,375
Phoenix Technologies* 150,000 1,298
PSINet* 150,000 3,150
Saville Systems ADR* 532,300 10,097
Summit Design* 300,000 2,766
SunGard Data Systems* 38,400 1,524
Synopsys* 30,000 1,626
Vantive* 75,000 602
Viasoft* 550,000 $ 3,884
Visio* 245,000 8,889
59,395
Distribution Services 4.5%
MSC* 321,800 7,281
Primesource 189,000 1,240
Richfood Holdings 676,300 14,033
SED International Holdings* 350,000 1,531
SunSource 215,000 4,045
U.S. Foodservice* 298,800 14,641
Watsco (Class A) 523,250 8,765
51,536
Environmental 0.6%
CUNO* 285,000 4,524
IT Group* 100,000 1,112
Waterlink* 467,000 1,693
7,329
Transportation Services 4.7%
C.H. Robinson Worldwide 215,400 5,580
Coach USA* 495,000 17,170
Comfort Systems USA* 675,000 12,066
Eagle USA Air Freight* 355,000 8,698
Expeditors International
of Washington 120,000 5,055
Frozen Food Express 150,000 1,181
Heartland Express* 80,827 1,399
Hub Group (Class A)* 26,900 528
International Shipholding 141,562 2,221
53,898
Miscellaneous Business Services 12.9%
Alternative Resources* 300,000 3,234
Billing Information Concepts* 454,400 5,013
CORT Business Services* 258,300 6,264
Electro Rent* 480,000 7,710
Insituform Technologies
(Class A)* 500,000 7,234
Iron Mountain* 159,950 5,738
Maximus* 25,000 925
McGrath RentCorp 300,000 6,525
Metamor Worldwide* 202,500 5,025
MPW Industrial Services Group* 119,900 $ 1,394
New England Business Service 557,000 21,793
Paging Network* 87,800 409
Paxar* 240,000 2,145
Renaissance Worldwide* 587,600 3,636
Romac International* 403,868 8,961
Shorewood Packaging* 1,000,000 20,500
Strayer Education 340,000 11,953
Superior Services* 97,000 1,946
Tetra Tech* 499,000 13,457
The Peterson Companies (Class A)* 177,400 6,009
The Vincam Group* 142,400 2,496
Unitog 210,000 6,051
148,418
Airlines 0.1%
Midwest Express Holdings* 45,000 1,184
1,184
Total Business Services and Transportation 321,760
ENERGY 0.6%
Energy Services 0.5%
Carbo Ceramics 20,000 343
Cooper Cameron* 50,000 1,225
Smith International* 100,000 2,519
Weatherford International* 94,050 1,822
5,909
Exploration and Production 0.1%
Rutherford-Moran Oil* 194,500 565
565
Total Energy 6,474
PROCESS INDUSTRIES 1.2%
Specialty Chemicals 0.4%
A. Schulman 110,000 2,485
Furon* 54,600 932
Hauser* 360,000 1,586
5,003
Paper and Paper Products 0.3%
Jefferson Smurfit* 200,000 $ 3,156
3,156
Building and Construction 0.5%
Layne Christensen* 360,000 2,700
Simpson Manufacturing* 84,500 3,164
5,864
Total Process Industries 14,023
BASIC MATERIALS 2.7%
Metals 2.1%
AngloGold ADR 81,130 1,587
Cambior 900,000 4,444
Gibraltar Steel* 110,000 2,502
Matthews International (Class A) 500,000 15,500
24,033
Mining 0.3%
Coal Creek ! 9,295 967
Homestake Mining 185,000 1,700
TVX Gold* 650,000 1,178
3,845
Miscellaneous Materials 0.3%
Synthetic Industries* 200,000 3,425
3,425
Total Basic Materials 31,303
Total Miscellaneous Common Stocks 0.0% 580
Total Common Stocks and Warrants (Cost $904,796) 1,043,499
Preferred Stocks 0.2%
Prime Retail, Cum., 10.50%,
(Series A) 30,000 759
Seneca Foods* 83,200 1,019
Total Preferred Stocks (Cost $1,568) 1,778
Convertible Preferred Stocks 0.0%
Prime Retail, 8.50%, (Series B) 25,000 416
Total Convertible Preferred Stocks (Cost $471) 416
Convertible Bonds 0.3%
Offshore Logistics, Sub. Notes,
(144a) 6.00%, 12/15/03 $2,000,000 $ 1,736
Vantive, 4.75%, 9/1/02 3,000,000 2,072
Total Convertible Bonds (Cost $4,094) 3,808
Short-Term Investments 9.1%
Money Market Funds 9.1%
Reserve Investment Fund, 5.42%# 104,166,423 104,166
Total Short-Term Investments (Cost $104,166) 104,166
Total Investments in Securities
100.1% of Net Assets (Cost $1,015,097) $1,153,667
Other Assets Less Liabilities (1,073)
NET ASSETS $1,152,594
----------
Net Assets Consist of:
Accumulated net investment income -
a net of distributions $ (182)
Accumulated net realized gain/loss -
net of distributions 7,146
Net unrealized gain (loss) 138,570
Paid-in-capital applicable to 55,438,449 shares
of $0.50 par value capital stock outstanding;
200,000,000 shares authorized 1,007,060
NET ASSETS $1,152,594
----------
NET ASSET VALUE PER SHARE $ 20.79
----------
# Seven-day yield
! Affiliated company
* Non-income producing
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 .15% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/98
Investment Income
Income
Dividend $ 8,638
Interest 6,230
Total income 14,868
Expenses
Investment management 7,791
Shareholder servicing 1,881
Registration 243
Custody and accounting 146
Prospectus and shareholder reports 131
Legal and audit 14
Directors 9
Miscellaneous 12
Total expenses 10,227
Net investment income 4,641
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 26,975
Change in net unrealized gain
or loss on securities (67,486)
Net realized and unrealized gain (loss) (40,511)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $(35,870)
--------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 4,641 $ 1,901
Net realized gain (loss) 26,975 32,376
Change in net unrealized gain or loss (67,486) 111,242
Increase (decrease) in net
assets from operations (35,870) 145,519
Distributions to shareholders
Net investment income (5,359) (1,388)
Net realized gain (26,791) (35,062)
Decrease in net assets
from distributions (32,150) (36,450)
Capital share transactions*
Shares sold 789,814 491,109
Distributions reinvested 28,541 34,624
Shares redeemed (414,115) (234,032)
Increase (decrease) in net
assets from capital
share transactions 404,240 291,701
Net Assets
Increase (decrease) during period 336,220 400,770
Beginning of period 816,374 415,604
End of period $ 1,152,594 $ 816,374
---------------------------------
*Share information
Shares sold 36,695 23,580
Distributions reinvested 1,472 1,598
Shares redeemed (19,500) (11,410)
Increase (decrease) in
shares outstanding 18,667 13,768
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
December 31, 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. Prior to May
1, 1997, the name of the fund was T. Rowe Price OTC Fund, Inc.
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.
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.
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 $589,277,000 and $234,485,000, respectively, for the
year ended December 31, 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 December 31, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$1,015,097,000. Net unrealized gain aggregated $138,570,000 at period end,
of which $255,257,000 related to appreciated investments and $116,687,000
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 $714,000 was payable at December 31, 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 December 31, 1998, and for the year
then ended, the effective annual group fee rate was 0.32%. The fund pays a
pro-rata share of the group fee based on the ratio of its net assets to
those of the group.
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 $1,571,000 for the year ended December 31, 1998, of which
$160,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended
December 31, 1998, totaled $6,020,000 and are reflected as interest income
in the accompanying Statement of Operations.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Small-Cap Stock Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of T. Rowe Price Small-Cap Stock Fund, Inc. (the "Fund") at December 31,
1998, and the results of its operations, the changes in its net assets and
the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1998, by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 21, 1999
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 12/31/98
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements. The fund's
distributions to shareholders included:
o $3,751,000 from short-term capital gains,
o $23,040,000 from long-term capital gains, subject to the 20% rate
gains category.
For corporate shareholders, $4,426,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
- --------------------------------------------------------------------------------
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
Investment Services And Information
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
the T. Rowe Price Web site on the Internet. Address: www.troweprice.com
BROKERAGE SERVICES*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over full-service commission rates.
INVESTMENT INFORMATION
Combined Statement Overview of all your accounts with T. Rowe Price.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial
markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
* T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services,
Inc., Member NASD/SIPC.
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 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
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor. F65-050 12/31/98
