Annual Report
Small-Cap
Stock Fund
December 31, 1999
T. Rowe Price
Report Highlights
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Small-Cap Stock Fund
o Growth stocks powered market averages to record highs in 1999, but value
stocks lagged far behind.
o Your fund returned 9.70% and 14.66% for the 6- and 12-month periods ended
December 31, respectively, behind its benchmarks due to our value emphasis.
o Technology and wireless telecom stocks topped our winners list, led by
Applied Micro Circuits, Rural Cellular, and Western Wireless.
o Small-caps outperformed large-caps last year for the first time since 1993,
although the average small-cap stock underperformed.
o We remain confident that small-cap value stocks will finally reassert
themselves, too.
UPDATES AVAILABLE
For updates on T. Rowe Price funds following the end of each calendar quarter,
please see our Web site at www.troweprice.com.
Fellow Shareholders
Wow! What a year! Life was fabulous for growth investors in 1999 yet miserable
for value investors. For us, it felt like manic depression. The hallmark of the
Small-Cap Stock Fund is that we blend growth and value strategies, with an
emphasis on value. As a result, your fund posted solid-but less than
spectacular-performance.
Performance Comparison
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Periods Ended 12/31/99 6 Months 12 Months
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Small-Cap Stock Fund 9.70% 14.66%
Russell 2000 Index 10.96 21.26
Lipper Small-Cap
Core Fund Index 13.88 20.17
S&P 500 Stock Index 7.71 21.04
Russell 2000 Growth Index 26.83 43.09
Russell 2000 Value Index -6.41 -1.49
PERFORMANCE COMPARISON
The fund's return of 9.70% for the six months ended December 31, 1999, was
comparable to that of the unmanaged Russell 2000 Index of smaller
companies, but lagged the Lipper Small-Cap Core Fund Index, as shown in the
table. With this report, we are introducing the fund's new Lipper category.
Previously, Lipper Inc. asigned a fund to a category based on its objective
as outlined in its prospectus. The new categories are based on the major
characteristics of each fund's actual portfolio holdings, such as market
capitalization, price/earning ratios, earnings growth rates, and so on. Our
full-year gain of 14.66% was strong in absolute terms but again behind our
benchmarks. The reason: the unbelievably large gap between the performance
of value and growth stocks. Your fund's value core-long a huge asset to
performance-kept us in check in 1999. During the year the Russell 2000
Growth Index rose over 43% while the Russell 2000 Value Index actually fell
1.49%. A huge late-December surge in Internet and technology stocks
propelled the broad Russell 2000 past the Standard & Poor's 500 Stock Index
for the first time since 1993.
Why the extraordinary spread between growth and value? The market in 1999
was the narrowest I've seen in my 16 years in the business. Technology, the
Internet, telecommunications, and biotech were the sectors to invest in
during the year, but more traditional business models failed to excite
investors. While we were well represented in technology, biotech, and
telecom, we have been underrepresented in the Internet sector. We believe
in the Internet as a transforming force for business and the economy; it is
the great technological innovation of our time. However, as fundamental
investors (as opposed to momentum investors), we find it difficult to throw
valuation to the wind and join such a speculative frenzy. The incremental
buyer of today's Internet stock has little understanding of business
models, financial yardsticks, or valuation techniques. Day traders only
know the stocks are very volatile and have tended to rise during their
brief history. Thus, valuation goes by the wayside. Price/earnings (P/E)
ratios give way to price/revenue ratios or, more often, wildly inflated
price targets. These "new era" manias-witnessed in the past century in
automobile, radio, airplane, television, personal computer, and biotech
stocks-always end badly. This will likely be little different.
YEAR-END DISTRIBUTIONS
Your fund's Board of Directors declared a year-end income distribution of
$0.08 per share and a capital gain distribution of $0.89, of which $0.42
was long term and $0.47 was short term. These distributions were paid on
December 16 to shareholders of record on December 14. You should already
have received your check or statement reflecting them as well as our Form
1099-DIV summarizing this information for 1999 tax purposes.
INVESTMENT REVIEW
The top sectors for the Russell 2000 last year included technology, up
101.63% for the period; producer durables, up nearly 41%; and utilities
(bolstered by the telecom sector), up almost 40%. Leading losers included
consumer staples, down over 20%; financial services, down 4.70%; and REITs,
down 9.02%. Technology, in fact, accounted for two-thirds of the Russell
2000's return (Internet stocks alone accounted for a third of the gain).
Without Internet stocks the Russell 2000 rose only 13.61%, roughly in line
with the 12.40 % return of the S&P 600 Index of small-cap stocks. S&P
largely excludes Internet shares from its small-cap indices. We were well
represented in the wireless telecom sector, which enabled our utility
holdings to shine. Fortunately, we were also underweighted in REITs and
financial services.
The bottom line: We were not rewarded for holding shares of companies with
solid revenues and earnings prospects. As the chart on page 3 clearly
shows, investors made money in companies with no earnings and lost money in
companies with earnings. This is most likely an anomaly that will not stand
the test of time.
Earnings Did Not Matter
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Large-Cap Mid-Cap Small-Cap Micro-Cap
Negative EPS
(442 Companies) 56.2 47 -6.2 0.9
Positive EPS
(2,953 companies) -0.8 -9.1 -10 -8.8
Study includes 3,395 stocks with the following characteristics: price
greater than $5 as of 12/31/98; market cap greater than $50 million as of
12/31/98; excludes IPOs and companies taken over in 1999; earnings per
share (EPS) is current fiscal year.
Several of our growth holdings made spectacular moves in 1999. All of our
largest contributors were technology and telecom holdings. The biggest
contributor, Applied Micro Circuits, rose over 600% and added almost $24
million to the fund's net asset value (NAV). The company designs and
manufactures high-performance, high-bandwidth semiconductors for the
communications industry and is therefore in the sweet spot of the bandwidth
build-out for advanced communications and Internet services. We bought
Applied Micro in the fall of 1998 for $6.50 to $12 per share and the stock
closed last year at $127.50.
In early 1997 we made a significant bet on wireless telecom. The market was
anticipating disruption due to competition between wireless analog and
digital personal communications services (PCS) providers. Consequently, the
shares reached attractive levels and we purchased Rural Cellular and
Western Wireless. This bet paid off in 1999. A spate of mergers and
acquisitions in the sector, plus the realization that wireless
communications and Internet services would converge, led to a huge rally in
the shares. Rural Cellular rose 761% and Western Wireless gained 240%.
VoiceStream Wireless, the PCS spin-off from Western Wireless, increased
769%. Combined, this sector added almost $49 million to the fund.
Emmis Communications is the sixth-largest radio operator in the country and
was the third-largest contributor to the fund last year, adding over $19
million to NAV. Emmis derives 65% of its cash flow from radio, 30% from TV
broadcasting, and 5% from publishing. Last July the shares traded at
approximately half the cash flow multiple of the radio broadcast group as
investors were still miffed at the firm's past purchase of TV assets. The
company's asset value was easily north of $80 per share based on an average
multiple for radio broadcasters. In July, the shares were trading in the
$45 range. Great fundamentals and renewed investor attention due to a
secondary offering in late summer pushed Emmis shares above $124 by the end
of the year.
For the second half, Emmis and Rural Cellular were also our top two
contributors. Progress Software was our third-best contributor on the half
year and added almost $16 million to NAV. Progress rose over 100% in the
half on strong fundamentals and investor interest in its technology, which
enables independent software developers to distribute products via the
Internet.
Unfortunately, not all of our ideas were so successful. Our leading losers
were New England Business Services, Consolidated Graphics, and Comfort
Systems. New England Business Services, a leading direct marketer of
supplies to small businesses, fell 25% when the company preannounced an
earnings disappointment. We believe the market overreacted to the
shortfall. Since then, NEBS has met all earnings estimates, has repurchased
almost one million shares, and continues to generate the high margins,
attractive returns, and strong cash flow that attracted us in the first
place.
Sector Diversification
---------------------------------------------------------------------------
Business Services and Transportation 28
Consumer Services, Cyclicals, and Education 16
Consumer Nondurables 14
Financials 10
Capital Equipment, Process Industries,
and Basic Materials 7
Technology 12
Energy and Utilities 5
Reserves 8
Based on net assets as of 12/31/99.
An unexpected slowdown in the graphics industry contributed to Consolidated
Graphics missing earnings expectations in its last two quarters. Wall
Street has been unforgiving, and the stock has fallen from the upper $30s
to the mid-teens. While the stock appears to be cheap given our earnings
per share estimate of over $2 this year, we are monitoring this holding
carefully due to uncertainty about industry growth and questions about
management credibility. Comfort Systems' shares collapsed in October when
management pre-announced disappointing results for the September quarter.
Slowing revenues, rising labor costs, higher sales, general and
administrative expenses, selected materials shortages, and a few cost
overruns squeezed margins. Comfort Systems, a heating and cooling services
provider, is experiencing a classic top-of-the-economic-cycle cost squeeze.
Moreover, its recent $7 price discounts a significant slowdown in its
business-and no such slowdown is visible. Comfort Systems and Consolidated
Graphics were also the leading losers in the second half. International
Multifoods was the third-largest loser in the half, declining over 40% and
costing us more than $7 million after also preannouncing disappointing
third quarter earnings. We believe the company continues to work hard at
improving the business' return on capital and are holding the shares.
PORTFOLIO HIGHLIGHTS
Our top purchase in the second half was E.W. Blanch, a leading participant
in the high-return, high-margin insurance brokerage business. If there is
any firmness in property-casualty premium pricing, these shares have
significant upside potential. Blanch doesn't underwrite insurance,
therefore it has no balance sheet risk-a good thing in today's competitive
insurance market. Another large new holding was Chittenden Trust, a Vermont
bank well positioned in the northern New England market. Chittenden had an
$871 million market cap, a 2.86% dividend yield, and traded at 2.5 times
book value when we bought it. The bank would make an attractive acquisition
candidate, though this possibility was not our main focus in buying the
stock. We also made a major new commitment to Arch Chemicals, spun off from
Olin Industries earlier this year. Arch has a presence in electronic and
water treatment chemicals. The stock was trading at about five times cash
flow and 10 times earnings. Given the recovery in the semiconductor
industry, Arch is a very cheap stock.
Largest sales in the second half included ALLTEL, VoiceStream, and
PMC-Sierra. ALLTEL acquired our holding Alliant Telecom last year, and at a
$24 billion market cap is out of our small-cap range. VoiceStream's rapid
rise, noted earlier, pushed the company to an $11 billion market cap (and
an excessive valuation) in a very short time following its spin-off. We
also eliminated PMC-Sierra, a semi-conductor firm, after its huge runup.
The stock is no longer small at $12 billion and no longer cheap at 123
times trailing earnings.
OUTLOOK
Lowest P/E Quitile Was Not the Place to Be in 1999
---------------------------------------------------------------------------
Year to date return
Q1 -10.59
Q2 -8.95
Q3 -7.64
Q4 10.87
Q5 68.03
Nonearnings stories 85.34
Source: Frank Russell Company; Prudential Securities, Inc.
The 40-percentage-point spread between small-cap growth and small-cap value
returns has no historic precedent. The technology sector's unbelievable
returns in 1999 also have no precedent and are even more extraordinary
since they came during a time of relatively poor sales and earnings growth
for the group. Today, however, it seems that only concepts matter.
The accompanying chart further illustrates how horribly out of favor value
investing was in the period. The cheapest stocks in the Russell 2000 Index,
as measured by price/ earnings ratio, had solidly negative returns, while
the most expensive shares rose over 68%. Moreover, as mentioned earlier,
companies with no earnings at all performed best. Is fundamental investing
dead?
Call us old-fashioned, but we still believe in earnings and cash flow.
Historically, the best returns in small-cap investing have come from the
smallest and cheapest stocks. We do not believe "it's different this time,"
and we will continue to remain true to our valuation discipline and look
forward to better times in 2000.
Respectfully submitted,
Greg A. McCrickard
President and Chairman of the Investment Advisory Committee
January 14, 2000
T. Rowe Price Small-Cap Stock Fund
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Change to Prospectus
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The prospectus of the Small-Cap Stock Fund has been amended to reflect the
increasing market capitalization of the companies that compose the
unmanaged Russell 2000 Index of smaller companies. (Market capitalization
equals total number of shares outstanding multiplied by the share price.)
For some time the market cap of the average Russell 2000 company has been
above our traditional small-cap definition of $1 billion or less. We think
this adjustment is in the best interest of our shareholders.
The prospectus previously stated that the fund would invest at least 65% of
total assets in companies with a market cap of less than $1 billion.
The relevant passage in the prospectus now states:
The fund will invest at least 65% of total assets in stocks and
equity-related securities of small companies. A small company is defined as
having a market capitalization that falls within the range of companies in
the Russell 2000 Index, a widely used benchmark for small-cap stock
performance.
This updates the Small-Cap Stock Fund prospectus dated May 1, 1999.
Portfolio Highlights
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MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended 12/31/99
Ten Largest Purchases
---------------------------------------------------------------------------
E. W. Blanch *
Chittenden *
Arch Chemicals *
Consolidated Graphics *
International Multifoods
Progress Software
F. Y. I. *
United Stationers *
Midwest Express Holdings
SCP Pool
Ten Largest Sales
---------------------------------------------------------------------------
ALLTEL **
Coach USA **
VoiceStream Wireless **
PMC-Sierra **
Holophane **
Richfood Holdings **
SteriGenics International **
ditech Communications
Rural Cellular
Maxim Integrated Products **
* Position added
** Position eliminated
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
12/31/99
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Progress Software 2.0%
Emmis Broadcasting 1.5
Shorewood Packaging 1.5
Methode Electronics 1.5
Technitrol 1.4
---------------------------------------------------------------------------
Matthews International 1.3
A.O. Smith 1.3
Eagle USA Air Freight 1.2
New England Business Service 1.2
Mentor 1.2
---------------------------------------------------------------------------
US Can 1.2
Cleco 1.2
Parkway Properties 1.2
Inhale Therapeutic Systems 1.1
E. W. Blanch 1.1
---------------------------------------------------------------------------
Brown and Brown 1.0
Insituform Technologies 1.0
Applied Micro Circuits 1.0
Downey Financial 1.0
Chittenden 0.9
---------------------------------------------------------------------------
Arch Chemicals 0.9
Littelfuse 0.9
Casey's General Stores 0.9
Burr Brown 0.9
F. Y. I. 0.8
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Total 29.2%
Note: Table excludes reserves.
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 benchmarks, which may include
a broad-based market index and a peer group average or index. Market
indexes do not include expenses, which are deducted from fund returns as
well as mutual fund averages and indexes.
SMALL-CAP STOCK FUND
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Russell 2000 Small-Cap
Index Stock Fund
12/89 10,000 10,000
12/90 8,052 7,953
12/91 11,760 11,023
12/92 13,925 12,555
12/93 16,554 14,866
12/94 16,252 14,878
12/95 20,876 19,914
12/96 24,319 24,107
12/97 29,757 31,052
12/98 29,000 29,980
12/99 35,164 34,375
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 12/31/99 1 Year 3 Years 5 Years 10 Years
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Small-Cap Stock Fund 14.66% 12.56% 18.23% 13.14%
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
- --------------------------------------------------------------------------------
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
Year
Ended
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
NET ASSET VALUE
Beginning of period $ 20.79 $ 22.20 $ 18.07 $ 16.32 $ 13.80
Investment activities
Net investment income
(loss) 0.09 0.08 0.05 0.09 0.12
Net realized and
unrealized gain (loss) 2.89 (0.89) 5.13 3.33 4.53
Total from
investment activities 2.98 (0.81) 5.18 3.42 4.65
Distributions
Net investment income (0.08) (0.10) (0.04) (0.09) (0.12)
Net realized gain (0.89) (0.50) (1.01) (1.58) (2.01)
Total distributions (0.97) (0.60) (1.05) (1.67) (2.13)
NET ASSET VALUE
End of period $ 22.80 $ 20.79 $ 22.20 $ 18.07 $ 16.32
Ratios/Supplemental Data
Total return (diamond) 14.66% (3.46)% 28.81% 21.05% 33.85%
Ratio of total expenses
to average net assets 0.96% 1.01% 1.02% 1.07% 1.11%
Ratio of net investment
income (loss) to average
net assets 0.47% 0.46% 0.33% 0.56% 0.74%
Portfolio turnover rate 42.3% 25.9% 22.9% 31.1% 57.8%
Net assets,
end of period
(in millions) $ 1,740 $ 1,153 $ 816 $ 416 $ 279
(diamond) 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, 1999
Portfolio of Investments Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 92.4%
FINANCIAL 10.0%
Bank and Trust 4.9%
Charter One Financial 238,140 $ 4,554
Chittenden 550,000 16,294
Citizens Banking 545,000 12,092
Downey Financial 820,000 16,554
First Bell Bancorp 100,000 1,506
First Mariner Bancorp 47,500 377
First Security 168,750 4,308
Frankfort First Bancorp! 75,000 1,139
Glacier Bancorp 472,900 7,685
Marshall & Ilsley 30,000 1,884
Summit Bancorp 214,800 6,578
UST 300,000 9,516
WestAmerica 133,100 3,723
86,210
Insurance 4.4%
Brown and Brown 447,700 17,153
E.W. Blanch 300,000 18,375
Harleysville Group 218,100 3,081
London Pacific Group ADR 202,500 7,290
Medical Assurance * 375,000 7,945
PartnerRe Holdings 433,200 14,052
Selective Insurance 155,000 2,664
W. R. Berkley 298,100 6,260
76,820
Financial Services 0.7%
Delta Financial * 300,000 1,238
Financial Federal * 350,000 7,984
ITLA Capital * 179,900 2,243
11,465
Total Financial 174,495
UTILITIES 2.9%
Electric Utilities 1.2%
Cleco 635,000 $ 20,360
20,360
Water Utilities 0.2%
United Water Resources 110,600 3,781
3,781
Telephone 1.5%
Commnet Cellular * 119,550 3,837
Rural Cellular (Class A) * 123,300 11,174
Western Wireless (Class A) * 165,000 11,003
26,014
Total Utilities 50,155
CONSUMER NONDURABLES 14.0%
Food Processing 1.8%
American Italian Pasta (Class A) * 334,100 10,274
International Multifoods ! 1,050,000 13,912
Makepeace 164 2,214
Seneca Foods (Class A) * 174,900 2,039
Seneca Foods (Class B) * 74,700 875
United Natural Foods * 175,400 2,121
31,435
Hospital Supplies/Hospital Management 2.8%
Cephalon * 100,000 3,469
Mentor 801,600 20,791
Molecular Devices * 75,100 3,915
Quorum Health Group * 360,000 3,364
Renal Care Group * 474,250 11,130
Steris * 525,600 5,420
48,089
Pharmaceuticals 1.4%
Aurora Biosciences * 130,000 3,429
Boron Lepore & Associates * 112,000 742
Collagenex Pharmaceuticals * 24,000 593
Emisphere Technologies * 39,000 1,171
Imclone Systems * 75,000 2,967
Incyte Pharmaceuticals * 80,000 $ 4,732
Liposome * 93,300 1,134
Noven Pharmaceuticals * 100,000 1,819
NPS Pharmaceuticals * 167,000 2,093
Triangle Pharmaceuticals * 445,000 5,688
24,368
Biotechnology 3.6%
Abegenix * 41,200 5,377
Alkermes * 215,000 10,548
Anesta * 230,000 3,939
COR Therapeutics * 100,000 2,694
Coulter Pharmaceutical * 200,000 4,550
Cubist Pharmaceuticals * 100,000 1,937
Gilead Sciences * 50,000 2,703
Inhale Therapeutic Systems * 459,400 19,568
Millennium Pharmaceuticals * 15,000 1,829
Neurocrine Biosciences * 106,300 2,618
Northfield Laboratories * 220,000 2,399
PathoGenesis * 12,900 275
Serologicals * 420,000 2,559
Viropharma * 64,600 2,402
63,398
Health Care Services 0.7%
AmeriPath * 675,000 5,548
Orthodontic Centers of America * 300,000 3,581
US Oncology * 568,500 2,771
11,900
Miscellaneous Consumer Products 3.3%
Coinmach Laundry * 280,700 2,965
Cone Mills * 574,400 2,585
Culp 275,300 1,738
Dan River (Class A) * 1,010,000 5,176
Reebok * 289,500 2,370
Sola * 609,200 8,453
Stride Rite 900,000 5,850
Unifi * 482,700 5,943
US Can * ! 1,035,000 20,571
WestPoint Stevens 150,000 2,625
58,276
Cosmetics 0.4%
Chattem * 342,400 $ 6,441
6,441
Total Consumer Nondurables 243,907
CONSUMER SERVICES 7.3%
Restaurants 0.5%
Buca * 400,000 4,025
PJ America * ! 290,600 4,595
8,620
General Merchandisers 1.6%
Bon-Ton Stores * ! 740,700 2,801
Casey's General Stores 1,456,100 15,243
Columbia Sportswear * 487,500 10,512
28,556
Specialty Merchandisers 1.2%
CompuCom Systems * 1,261,200 5,281
Goody's Family Clothing * 342,000 1,833
O'Charley's * 635,700 8,264
Urban Outfitters * 202,300 5,905
21,283
Entertainment and Leisure 0.1%
Sonic * 32,900 928
928
Media and Communications 3.9%
American Tower Systems (Class A) * 60,000 1,834
Classic Communications (Class A) * 293,000 10,749
Emmis Broadcasting (Class A) * 215,000 26,801
Pegasus Communications (Class A) * 89,400 8,661
Sinclair Broadcast Group (Class A) * 586,400 7,165
Young Broadcasting (Class A) * 259,400 13,221
68,431
Total Consumer Services 127,818
CONSUMER CYCLICALS 8.5%
Automobiles and Related 2.9%
A.O. Smith (Class B) 1,055,000 23,078
Adrian Steel ! 13,000 $ 4,973
Keystone Automotive * 259,100 1,518
Littelfuse * 630,000 15,297
Strattec Security * 165,800 5,409
50,275
Building and Real Estate 4.3%
Apartment Investment & Management, REIT 149,400 5,948
Arden Realty, REIT 325,000 6,520
EastGroup Properties, REIT 608,500 11,257
First Washington Realty Trust, REIT 325,000 6,073
Glenborough Realty Trust, REIT 423,000 5,658
JP Realty, REIT 414,300 6,474
Parkway Properties, REIT ! 702,700 20,247
Reckson Associates Realty (Class B), REIT 228,150 5,190
Woodhead Industries ! 600,000 7,163
74,530
Miscellaneous Consumer Durables 1.3%
CompX (Class A) ! 485,000 8,912
Harman International 245,800 13,795
22,707
Total Consumer Cyclicals 147,512
TECHNOLOGY 11.7%
Electronic Components 5.1%
American Superconductor * 167,400 4,682
Analogic 419,600 13,768
Benchmark Electronics * 429,200 9,845
Burr Brown * 412,500 14,876
Exar * 100,000 5,894
Methode Electronics (Class A) 799,400 25,631
Planar Systems * 227,400 1,492
QuickLogic * 177,000 2,948
SIPEX * 350,000 8,586
87,722
Electronic Systems 2.0%
Applied Micro Circuits * 130,000 16,559
Armor Holdings * 553,100 7,260
EMS Technologies * 119,500 1,374
Lifeline Systems * ! 350,000 $ 5,217
Lo-Jack * 631,100 4,299
34,709
Telecommunications 1.4%
Aether Systems * 19,000 1,364
Airgate PCS * 80,300 4,246
Airnet Commerce * 23,000 838
Avant * 343,500 5,163
ditech Communications * 60,000 5,603
West TeleServices * 299,800 7,355
24,569
Aerospace and Defense 0.3%
DONCASTERS ADR * 100,000 900
Woodward Governor 160,000 4,400
5,300
Information Processing 1.4%
F. Y. I. * 425,000 14,463
Source Information Management * 565,000 9,393
23,856
Specialized Computer 0.1%
Virata * 79,000 2,355
2,355
Office Automation 1.4%
Technitrol 556,000 24,742
24,742
Total Technology 203,253
CAPITAL EQUIPMENT 1.9%
Electrical Equipment 1.0%
hi/fn * 165,000 6,389
LSI Industries 455,900 9,773
16,162
Machinery 0.9%
Kennametal 400,000 13,450
NN Ball & Roller 350,000 2,406
Toolex Alpha * 9,300 154
16,010
Total Capital Equipment 32,172
BUSINESS SERVICES AND
TRANSPORTATION 28.3%
Computer Service and Software 10.3%
Analysts International 480,000 $ 6,000
BISYS Group * 90,000 5,867
Cambridge Technology Partners * 200,000 5,256
Concord Communications * 180,000 8,038
Digital Impact * 22,800 1,146
Electronic Arts * 50,000 4,203
Great Plains Software * 140,000 10,469
Jack Henry & Associates 100,000 5,272
Loislaw * 100,000 3,956
Mastech * 400,000 9,912
MMC Networks * 80,000 2,753
NetIQ * 200,000 10,562
Netsolve * 54,000 1,698
Ondisplay * 15,000 1,356
Peerless Systems * 398,000 3,147
PeopleSoft * 61,875 1,317
Phoenix Technologies * 119,600 1,884
Progress Software * 600,000 33,975
PSINet * 110,000 6,803
Quest Software * 29,000 2,924
SalesLoggix * 215,600 8,853
SPSS * 260,000 6,663
SunGard Data Systems * 38,400 912
Synopsys * 30,000 1,998
Viasoft * ! 968,000 5,460
Visio * 163,800 7,780
WebTrends * 133,800 10,804
Wind River Systems * 113,100 4,146
Zebra Technologies (Class A) * 105,700 6,134
179,288
Distribution Services 3.9%
Aviation Sales * 243,300 4,014
MSC (Class A) * 421,800 5,589
Performance Food Group * 182,400 4,435
Primesource 289,000 1,458
SCP Pool * 555,000 $ 14,413
SunSource 215,000 914
U.S. Foodservice * 835,600 13,996
United Stationers * 500,000 14,328
Watsco 505,699 5,847
Wilmar Industries * 232,700 4,029
69,023
Environmental 0.7%
CUNO * 378,300 7,838
IT Group * 298,100 2,739
Waterlink * 467,000 1,167
11,744
Transportation Services 3.4%
C.H. Robinson Worldwide 350,000 13,923
Comfort Systems USA * 775,000 5,716
Eagle USA Air Freight * 492,800 21,298
Expeditors International of Washington 291,300 12,708
Frozen Food Express 88,700 352
Heartland Express * 80,827 1,293
Hub Group (Class A) * 98,000 1,985
International Shipholding 141,562 1,646
58,921
Miscellaneous Business Services 9.3%
Consolidated Graphics * 545,000 8,141
CORT Business Services * 430,400 7,505
Ebenx * 15,000 680
Electro Rent * 575,000 6,684
G & K Services (Class A) 68,100 2,185
Insituform Technologies (Class A) * 609,300 17,098
Iron Mountain * 275,250 10,821
Ivex Packaging * 849,900 8,499
Maximus * 405,000 13,745
McGrath Rent 304,000 5,434
Metamor Worldwide * 180,000 5,254
MPW Industrial Services Group * ! 575,000 4,492
New England Business Service ! 871,000 21,285
Romac International * 403,868 5,440
Shorewood Packaging *! 1,399,900 26,511
Strayer Education 391,400 7,828
Tetra Tech * 704,750 $ 10,879
162,481
Airlines 0.7%
Midwest Express Holdings * 364,500 11,618
11,618
Total Business Services and Transportation 493,075
ENERGY 1.9%
Energy Services 0.9%
Cooper Cameron * 93,100 4,556
Smith International * 100,000 4,969
Weatherford International * 137,850 5,505
15,030
Exploration and Production 1.0%
Chieftain International * 436,400 7,528
Key Energy * 1,100,000 5,706
National Oilwell * 331,300 5,198
18,432
Total Energy 33,462
PROCESS INDUSTRIES 2.8%
Specialty Chemicals 0.2%
A. Schulman 202,900 3,304
Hauser * 90,000 278
3,582
Paper and Paper Products 0.3%
Smurfit-Stone Container * 200,000 4,894
4,894
Building and Construction 1.4%
Layne Christensen * 360,000 2,565
Simpson Manufacturing * 137,300 6,007
Trex * 397,100 10,622
U.S. Aggregates 385,300 4,624
23,818
Diversified Chemicals 0.9%
Arch Chemicals 768,000 16,080
16,080
Total Process Industries 48,374
BASIC MATERIALS 2.4%
Metals 2.0%
Gibraltar Steel 198,800 $ 4,622
Material Sciences * 725,300 7,389
Matthews International (Class A) ! 860,800 23,296
35,307
Mining 0.4%
Battle Mountain Gold * 2,285,700 4,714
Coal Creek ! 9,295 795
Lihir Gold * 1,930,000 1,406
6,915
Total Basic Materials 42,222
EDUCATION 0.2%
Education 0.2%
ITT Educational Service * 200,000 3,088
Total Education 3,088
Miscellaneous Common Stocks 0.5% 8,400
Total Common Stocks (Cost $1,392,478) 1,607,933
Convertible Bonds 0.1%
Vantive, 4.75%, 9/1/02 $3,000,000 2,595
Total Convertible Bonds (Cost $2,295) 2,595
Short-Term Investments 7.3%
Money Market Funds 7.3%
Reserve Investment Fund, 6.16% # 126,694,882 126,695
Total Short-Term Investments (Cost $126,695) 126,695
Total Investments in Securities
99.8% of Net Assets (Cost $1,521,468) $1,737,223
Other Assets Less Liabilities 3,103
NET ASSETS $1,740,326
----------
# Seven-day yield
! Affiliated company
* Non-income producing
ADR American Depository Receipt
REIT Real Estate Investment Trust
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
December 31, 1999
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
In thousands
Assets
Investments in securities, at value
Affiliated companies (cost $181,201) $ 171,369
Other companies (cost $1,340,267) 1,565,854
Total investments in securities 1,737,223
Other assets 13,031
Total assets 1,750,254
Liabilities
Total liabilities 9,928
NET ASSETS $1,740,326
----------
Net Assets Consist of:
Accumulated net investment income
- - net of distributions $ 310
Accumulated net realized gain/loss
- - net of distributions 74,029
Net unrealized gain (loss) 215,755
Paid-in-capital applicable to 76,318,530
shares of $0.50 par value capital stock
outstanding; 200,000,000 shares authorized 1,450,232
NET ASSETS $1,740,326
----------
NET ASSET VALUE PER SHARE $ 22.80
----------
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
12/31/99
Investment Income (Loss)
Income
Dividend (includes $2,773
from affiliated companies) $ 12,347
Interest 6,740
Total income 19,087
Expenses
Investment management 10,276
Shareholder servicing 1,995
Prospectus and shareholder reports 181
Custody and accounting 174
Registration 127
Legal and audit 15
Directors 9
Miscellaneous 9
Total expenses 12,786
Expenses paid indirectly (36)
Net expenses 12,750
Net investment income (loss) 6,337
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 131,903
Foreign currency transactions 2
Net realized gain (loss) 131,905
Change in net unrealized gain
or loss on securities 77,185
Net realized and unrealized gain (loss) 209,090
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 215,427
----------
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
12/31/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 6,337 $ 4,641
Net realized gain (loss) 131,905 26,975
Change in net unrealized gain or loss 77,185 (67,486)
Increase (decrease) in
net assets from operations 215,427 (35,870)
Distributions to shareholders
Net investment income (5,845) (5,359)
Net realized gain (65,022) (26,791)
Decrease in net assets
from distributions (70,867) (32,150)
Capital share transactions*
Shares sold 918,700 789,814
Distributions reinvested 66,463 28,541
Shares redeemed (541,991) (414,115)
Increase (decrease) in
net assets from capital
share transactions 443,172 404,240
Net Assets
Increase (decrease) during period 587,732 336,220
Beginning of period 1,152,594 816,374
End of period $1,740,326 $1,152,594
*Share information
Shares sold 44,046 36,695
Distributions reinvested 3,120 1,472
Shares redeemed (26,285) (19,500)
Increase (decrease) in
shares outstanding 20,881 18,667
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
December 31, 1999
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. Expenses paid
indirectly reflect credits earned on daily uninvested cash balances at the
custodian and are used to reduce the fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $871,242,000 and $518,707,000, respectively, for the
year ended December 31, 1999.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
At December 31, 1999, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$1,521,468,000. Net unrealized gain aggregated $215,755,000 at period-end,
of which $423,496,000 related to appreciated investments and $207,741,000
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 $1,075,000 was payable at December 31, 1999. The fee is
computed daily and paid monthly, and consists of an individual fund fee
equal to 0.45% 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 0.295% for
assets in excess of $120 billion. At December 31, 1999, and for the year
then ended, the effective annual group fee rate was 0.32%. The fund pays a
pro-rata share of the group fee based on the ratio of its net assets to
those of the group.
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 $1,582,000 for the year ended December 31, 1999, of which
$139,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended
December 31, 1999, totaled $6,378,000 and are reflected as interest income
in the accompanying Statement of Operations.
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 assets and liabilities,
including the portfolio of investments, 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, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1999 by correspondence with
custodians, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 20, 2000
T. Rowe Price Small-Cap Stock Fund
- --------------------------------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 12/31/99
- --------------------------------------------------------------------------------
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 $34,337,000 from short-term capital gains,
o $30,685,000 from long-term capital gains, subject to the 20% rate gains
category.
For corporate shareholders, $6,735,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
For fund and account information or to conduct transactions, 24 hours, 7 days a
week By touch-tone telephone Tele*Access 1-800-638-2587 By Account Access on the
Internet www.troweprice.com/access
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132
To open a brokerage account or obtain information, call:
1-800-638-5660
Internet address:
www.troweprice.com
Plan Account Lines for retirement
plan participants:
The appropriate 800 number appears
on your retirement account statement.
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
Walk-In Investor Centers:
For directions, call 1-800-225-5132
or visit our Web site
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
Boston Area
386 Washington Street
Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills
Tampa
4200 West Cypress Street
10th Floor
Washington, D.C.
900 17th Street N.W.
Farragut Square
T. Rowe Price, Invest with confidence (registered trademark)
T. Rowe Price Investment Services, Inc., Distributor. F65-050 12/31/99
