Item 1. Report to Shareholders
DECEMBER 31, 2004
DIVERSIFIED MID-CAP GROWTH FUND
Annual Report
T. ROWE PRICE
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The views and opinions in this report were current as of December 31, 2004. They
are not guarantees of performance or investment results and should not be taken
as investment advice. Investment decisions reflect a variety of factors, and the
managers reserve the right to change their views about individual stocks,
sectors, and the markets at any time. As a result, the views expressed should
not be relied upon as a forecast of the fund's future investment intent. The
report is certified under the Sarbanes-Oxley Act of 2002, which requires mutual
funds and other public companies to affirm that, to the best of their knowledge,
the information in their financial reports is fairly and accurately stated in
all material respects.
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T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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Fellow Shareholders
Mid-cap growth stocks rose in the second half of 2004, as the broader market
completed its second consecutive year of gains. Equities declined through
mid-August as economic growth moderated amid rising short-term interest rates,
surging energy costs, and a heated presidential campaign. Stock prices rose as
oil prices moderated from their late-October peak of $55 per barrel, and gains
accelerated following the reelection of President Bush.
PERFORMANCE COMPARISON
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Periods Ended 12/31/04 6 Months 12 Months
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Diversified Mid-Cap Growth Fund 7.06% 13.70%
Russell Midcap Growth Index 9.01 15.48
Lipper Mid-Cap Growth
Funds Index 8.31 14.03
Your fund returned 7.06% in the second half of 2004 and 13.70% for the entire
year. As shown in the table, the fund lagged its Russell and Lipper benchmarks
in both periods. Our emphasis on better businesses was not rewarded. During the
fourth quarter, investors exhibited risk-seeking behavior, and stocks with
greater volatility had strong relative performance. During 2004, the energy and
materials sectors dominated all others as commodity prices spiked. We are
underweighted in the energy and materials sectors. Moreover, our investments are
in companies that use commodities and add significant value to them. Based on
our emphasis on higher return on invested capital and more differentiated
businesses, we expect to have better relative performance during periods of
market stress.
MARKET ENVIRONMENT
The economy continued to expand in the second half of 2004, overcoming a
mid-year period of softness that was largely attributable to heightened consumer
and business caution amid rising oil prices and a tight presidential election
race. Both of these concerns eased in the fourth quarter, as the price of oil
fell sharply from its recent high and investors welcomed the reelection of
President Bush. The Federal Reserve continued to unwind its highly accommodative
monetary policy in the last six months, though this was not to the detriment of
the equity market. Beginning on June 30, the central bank raised the federal
funds target rate gradually from 1.00% to 2.25% in five quarter-point
increments.
Mid-cap shares outperformed their larger counterparts in 2004. In the last six
months, the S&P MidCap 400 Index and the Russell Midcap Index returned 9.80% and
12.70%, respectively, versus 7.19% for the S&P 500 Index. For the full year, the
S&P MidCap 400 Index and the Russell Midcap Index returned 16.48% and 20.22%,
respectively, versus 10.88% for the S&P 500 Index. As measured by various
Russell indexes, growth stocks lagged value across all market capitalizations,
including the mid-cap space, in both periods. Moreover, growth stocks have
materially lagged for several years. We believe it is reasonable to expect mean
reversion and better relative performance from the growth style in the years
ahead.
MID-CAP STOCK RETURNS
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Periods Ended 12/31/04 6 Months 12 Months
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Russell Midcap Index 12.70% 20.22%
Russell Midcap Growth Index 9.01 15.48
Russell Midcap Value Index 15.43 23.71
Most major mid-cap growth sectors produced gains in the second half of 2004,
adding to favorable performance in the first half of our fiscal year. Consumer
discretionary stocks performed very well, led by shares of hotels, restaurants,
and companies associated with leisure activities. Homebuilders in the household
durables industry also fared well, but retailers and media stocks lagged
somewhat. In the financials sector, asset managers and other companies with
close ties to the capital markets produced brisk gains; insurers and commercial
banks trailed. Information technology stocks generally produced good returns,
but weakness among semiconductor stocks eroded strength in software and IT
services companies. In the health care sector, providers and service companies
greatly surpassed other underlying industries. The industrials and business
services sector rose broadly, except for commercial services and supply
companies.
INVESTMENT STRATEGY
Before discussing the portfolio's performance in detail, we would like to
welcome all new shareholders to the fund--which just completed its first full
year of operations--and review the investment strategy and principles that guide
our management of the portfolio.
o The fund invests in mid-cap stocks of companies whose earnings are expected
to grow at an above-average rate. We define mid-cap companies as those
whose market capitalization falls within the range of either the S&P MidCap
400 Index or the Russell Midcap Growth Index.
o The fund will be fully invested because we believe that successful market
timing is nearly impossible and that the costs associated with frequent
trading reduce the likelihood of outperforming the market. We will not
spend undue time worrying about short-term performance or trying to
forecast the direction of the market. That allows us to focus on finding
mid-cap companies that have the best long-term growth potential.
o Unlike other mid-cap growth portfolios that are highly concentrated, the
Diversified Mid-Cap Growth Fund will typically invest in approximately 300
stocks. This high degree of diversification helps to reduce the downside
risk attributable to any single poorly performing security. It is notable
that we are investing in companies that are early in their life cycles, and
it is inevitable that some will not be as successful as we hope.
Accordingly, we balance risk with potential returns.
o We may purchase some larger and smaller companies that have qualities
consistent with the portfolio's core characteristics, and we will not
automatically sell or cease to purchase a stock of a company that the fund
already owns just because the company's market capitalization exceeds the
mid-cap range.
o Stock selection is based on a combination of fundamental, bottom-up
analysis and top-down quantitative strategies in an effort to identify
companies with superior long-term appreciation prospects. We use a growth
approach, looking for companies with a demonstrated ability to increase
revenues, earnings, and cash flow consistently; capable management;
attractive business niches; and a sustainable competitive advantage. We
favor companies with above-average earnings growth and lower earnings
variability.
o Valuations are also important: we look for the best relative values among
companies with the strongest businesses and managements.
o We use a number of proprietary quantitative models to identify and evaluate
the characteristics of mid-cap growth companies and the entire portfolio.
PORTFOLIO REVIEW
The fund is structured much like the Russell Midcap Growth Index, as indicated
by the Portfolio Characteristics table. The investment-weighted median market
capitalization, average company yield, and projected earnings growth rate of our
holdings are about the same, while the portfolio's forward price/earnings (P/E)
ratio is slightly higher than that of the index. The fund's return on equity
(ROE), which measures how effectively and efficiently a company and its
management are using stockholder investments, is slightly lower than that of the
index but still fairly high. We believe that companies with high and sustainable
profitability are good long-term investments.
PORTFOLIO CHARACTERISTICS
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Diversified Russell
Mid-Cap Midcap
Growth Growth
As of 12/31/04 Fund Index
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Earnings Growth Rate
Past 5 Years 11.5% 12.5%
Estimated Next 5 Years* 15.5 15.0
Profitability - Return on
Equity Latest 12 Months 17.9 18.7
Average Company Yield 0.5 0.5
P/E Ratio (Based on Next 12
Months' Estimated Earnings)* 21.5X 20.7X
Market Cap (Investment-
Weighted Median) $5.5 billion $5.6 billion
* Source data: IBES. Forecast data are for illustrative purposes only and are
not intended to represent future investment returns.
Our sector allocations are somewhat similar to those of the index. Our largest
investments are in the information technology, consumer discretionary, and
health care sectors. Financials and industrials and business services companies
represent lesser amounts, and we have very little exposure to energy, consumer
staples, materials, and telecommunication services stocks.
In the information technology sector (28.2% of assets as of December 31, 2004),
our focus on better businesses is the primary driver behind our overweights in
semiconductor, software, and IT services companies. Business capital spending is
improving due to the growing economy, and since technology represents a large
portion of capital expenditures, we believe these companies will benefit. We
maintain more of a tilt toward semiconductor companies with quality business
models, and the stocks are reasonably valued. Unfortunately, our bias toward
more differentiated chip stocks, such as Analog Devices and Xilinx, weighed on
the fund's relative performance in the last six months, as more volatile
semiconductor names outperformed during the fourth-quarter tech rally. In 2004,
semiconductors were
among the worst performing industries. We believe that the industry will shortly
resolve its inventory issues and do well in 2005. (Please refer to our portfolio
of investments for a complete listing of fund holdings and the amount each
represents in the portfolio.)
In the consumer discretionary sector (21.7% of assets), media is our largest
overweight. We are broadly diversified into newspaper, radio, and advertising
companies, all of which generate exceptional cash flow and have strong
franchises. Our investment thesis in media is predicated on a recovery in
advertising spending, which has been slower than expected. As a result, our
overweight in names like Cox Radio hindered our performance. We are maintaining
our media positions because the industry is attractively valued, in our opinion,
and marketing spending has good long-term growth prospects.
Our investments in the health care sector (19.0% of assets) are centered on
services companies, medical devices, and a diversified approach to
biotechnology. In our view, the health care providers and services industry
represents the best risk/reward tradeoff within the sector, as valuations are
reasonable, balance sheets are in good shape, and earnings trends are positive.
In the last six months, our positioning in services companies such as
WellChoice, Caremark RX, and WellPoint was the key driver behind our favorable
relative performance in the sector.
SECTOR DIVERSIFICATION
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Percent of Percent of
Net Assets Net Assets
6/30/04 12/31/04
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Information Technology 28.6% 28.2%
Consumer Discretionary 20.8 21.7
Health Care 20.4 19.0
Financials 11.5 13.6
Industrials and Business Services 10.9 10.5
Energy 2.8 3.0
Consumer Staples 1.8 1.7
Materials 1.7 1.5
Telecommunication Services 1.1 0.9
Utilities 0.0 0.0
Other and Reserves 0.4 -0.1
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Total 100.0% 100.0%
Historical weightings reflect current industry/sector classifications.
The financials sector (13.6% of assets) is our largest overweight relative to
the Russell Midcap Growth Index. We favor companies tied to the capital
markets--specifically trust banks and asset managers--because we believe they
offer the best risk/reward tradeoff in the mid-cap growth universe. Trust banks
have a more stable, fee-based revenue model and are more differentiated than
spread-lending focused banks. In the last six months, we continued to add
to our existing overweights in Northern Trust and Mellon Financial and
established a new position in State Street.
An improving economy has benefited fundamentals of companies in the industrials
and business services sector (10.5% of assets). In the last six months, good
relative performance in the sector stemmed from our home building and logistics
holdings combined with an underweight in airlines. We are underweighting
traditional industrials due to expensive valuations. Our business services
holdings are broadly diversified among commercial services, logistics, and
education companies. Logistics companies, such as C.H. Robinson and UTi
Worldwide, are benefiting from the globalization of trade. For-profit educators
exemplify our investment philosophy with sustainable business models, good
management teams, visible revenue and earnings growth, and strong earnings
trends, particularly in the case of Apollo Group.
Other sectors have reduced representation in the mid-cap growth universe, but
they are also an important part of our investment strategy. For example, in the
consumer staples sector (1.7% of assets), we are positioned in high-quality
firms that are able to grow earnings consistently, such as confectionary
companies. The business is highly attractive, in our opinion, but valuations are
fair. We maintain positions in Wrigley and Hershey Foods. In fact, Wrigley was
one of our largest relative contributors during the second half of the year. In
contrast, our lack of exposure to metals and mining companies in the materials
sector (1.5% of assets) weighed on our relative performance. We are focused on
companies that improve upon the underlying commodity, such as paint and coatings
producer Valspar and specialty packing company Sealed Air.
OUTLOOK
The market environment in 2004 was challenging for our investment strategy,
given the leadership by commodity-producing companies in the materials and
energy sectors. Our style, which takes a broadly diversified approach and is
consistent in buying more differentiated businesses, should do well relative to
the benchmark in periods when companies with consistent earnings growth are
rewarded. We believe
that the market is beginning to focus more on such companies. Our fully invested
approach, which balances potential rewards with assumed risk, focuses on strong
businesses and management with a long-term orientation. We believe our sector
and individual stock weightings will help our relative performance as we move
deeper into the economic recovery.
Respectfully submitted,
Donald J. Peters
Chairman of the fund's Investment Advisory Committee
January 21, 2005
The committee chairman has day-to-day responsibility for managing the portfolio
and works with committee members in developing and executing the fund's
investment program.
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RISKS OF INVESTING
As with all equity funds, this fund's share price can fall because of weakness
in the broad market, a particular industry, or specific holdings. The market as
a whole can decline for many reasons, including adverse political or economic
developments here or abroad, changes in investor psychology, or heavy
institutional selling. The prospects for an industry or company may deteriorate
because of a variety of factors, including disappointing earnings or changes in
the competitive environment. In addition, our assessment of companies held in
the fund may prove incorrect, resulting in losses or poor performance even in a
rising market. Finally, the fund's investment approach could fall out of favor
with the investing public, resulting in lagging performance versus other types
of stock funds.
The stocks of mid-cap companies entail greater risk and are usually more
volatile than the shares of large companies. In addition, growth stocks can be
volatile for several reasons. Since they usually reinvest a high proportion of
earnings in their own businesses, they may lack the dividends usually associated
with value stocks that can cushion their decline in a falling market. Also,
since investors buy these stocks because of their expected superior earnings
growth, earnings disappointments often result in sharp price declines.
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GLOSSARY
Fed funds target rate: An overnight lending rate set by the Federal Reserve and
used by banks to meet reserve requirements. Banks also use the fed funds rate as
a benchmark for their prime lending rates.
Lipper indexes: Consist of a small number (10 to 30) of the largest mutual funds
in a particular category as tracked by Lipper Inc.
Price/earnings (P/E) ratio: A ratio shows the "multiple" of earnings at which a
stock is selling. It is calculated by dividing a stock's current price by its
current earnings per share. For example, if a stock's price is $60 per share and
the issuing company earns $2 per share, the P/E ratio is $60/$2, or 30.
Russell Midcap Index: Measures the performance of the 800 smallest companies in
the Russell 1000 Index.
Russell Midcap Growth Index: Measures the performance of those Russell Midcap
companies with higher price-to-book ratios and higher forecasted growth values.
The stocks are also members of the Russell 1000 Growth Index.
Russell Midcap Value Index: Measures the performance of those Russell Midcap
companies with lower price-to-book ratios and lower forecasted growth values.
The stocks are also members of the Russell 1000 Value Index.
S&P 500 Stock Index: Tracks the stocks of 500 primarily large U.S. companies.
S&P Midcap 400 Index: An unmanaged index that tracks the stocks of 400 U.S.
mid-cap companies.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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PORTFOLIO HIGHLIGHTS
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/04
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Marriott 1.0%
Lexmark International 1.0
State Street 1.0
Franklin Resources 1.0
Adobe Systems 1.0
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Station Casinos 0.9
Northern Trust 0.9
Analog Devices 0.9
Maxim Integrated Products 0.9
Moody's 0.9
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Linear Technology 0.8
Cognizant Technology Solutions 0.8
Willis Group Holdings 0.8
Altera 0.8
Xilinx 0.7
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Mellon Financial 0.7
Apollo Group 0.7
Univision Communications 0.7
Microchip Technology 0.7
TJX 0.7
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Family Dollar Stores 0.7
Tiffany 0.7
Juniper Networks 0.7
WellChoice 0.7
Baker Hughes 0.7
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Total 20.4%
Note: Table excludes securities lending collateral.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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PORTFOLIO HIGHLIGHTS
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INDUSTRY DIVERSIFICATION
Twenty-Five Largest Industries
Percent of Percent of
Net Assets Net Assets
6/30/04 12/31/04
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Semiconductors and Semiconductor Equipment 7.8% 8.7%
Capital Markets 5.9 7.5
Health Care Providers and Services 7.8 7.4
Media 6.5 7.0
Software 8.0 6.9
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Health Care Equipment and Supplies 6.6 6.1
Commercial Services and Supplies 6.4 5.9
Hotels, Restaurants, and Leisure 4.1 4.8
Biotechnology 4.8 4.1
Specialty Retail 4.5 3.9
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IT Services 3.9 3.9
Insurance 2.6 2.9
Electronic Equipment and Instruments 2.2 2.5
Energy Equipment and Services 1.9 2.4
Communications Equipment 3.5 2.3
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Household Durables 1.9 2.0
Multiline Retail 2.1 2.0
Computers and Peripherals 1.4 1.8
Internet Software and Services 1.5 1.7
Commercial Banks 1.6 1.5
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Pharmaceuticals 1.2 1.4
Air Freight and Logistics 1.2 1.3
Food Products 1.0 1.2
Machinery 1.5 1.2
Chemicals 1.3 1.2
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Total 91.2 91.6%
Historical weightings reflect current industry/sector classifications.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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GROWTH OF $10,000
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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.
[GRAPHIC OMITTED]
DIVERSIFIED MID-CAP GROWTH FUND
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As of 12/31/04
Lipper Mid-Cap Growth Funds Index $11,403
Diversified Mid-Cap Growth Fund $11,370
Russell Midcap Growth Index $11,548
Lipper Mid-Cap Diversified
Growth Funds Mid-Cap Russell Midcap
Index Growth Fund Growth Index
12/31/03 $10,000 $10,000 $10,000
12/31/04 11,403 11,370 11,548
AVERAGE ANNUAL COMPOUND TOTAL RETURN
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This table shows how the fund and its benchmarks would have performed if their
actual (or cumulative) returns for the periods shown had been earned at a
constant rate.
Period Ended 12/31/04 1 Year
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Diversified Mid-Cap Growth Fund 13.70%
Russell Midcap Growth Index 15.48
Lipper Mid-Cap Growth Funds Index 14.03
Current performance may be higher or lower than the quoted past performance,
which cannot guarantee future results. Share price, principal value, and return
will vary, and you may have a gain or loss when you sell your shares. For the
most recent month-end performance information, please visit our Web site
(troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132.
Average annual total return figures include changes in principal value,
reinvested dividends, and capital gain distributions. Returns do not reflect
taxes that the shareholder may pay on fund distributions or the redemption of
fund shares. When assessing performance, investors should consider both short-
and long-term returns.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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FUND EXPENSE EXAMPLE
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As a mutual fund shareholder, you may incur two types of costs: (1) transaction
costs such as redemption fees or sales loads and (2) ongoing costs, including
management fees, distribution and service (12b-1) fees, and other fund expenses.
The following example is intended to help you understand your ongoing costs (in
dollars) of investing in the fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The example is based on an investment
of $1,000 invested at the beginning of the most recent six-month period and held
for the entire period.
Actual Expenses
The first line of the following table ("Actual") provides information about
actual account values and actual expenses. You may use the information in this
line, together with your account balance, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information on the second line of the table ("Hypothetical") is based on
hypothetical account values and expenses derived from the fund's actual expense
ratio and an assumed 5% per year rate of return before expenses (not the fund's
actual return). You may compare the ongoing costs of investing in the fund with
other funds by contrasting this 5% hypothetical example and the 5% hypothetical
examples that appear in the shareholder reports of the other funds. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period.
Note: T. Rowe Price charges an annual small-account maintenance fee of $10,
generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is
waived for any investor whose T. Rowe Price mutual fund accounts total $25,000
or more, accounts employing automatic investing, and IRAs and other retirement
plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although
a separate custodial or administrative fee may apply to such accounts). This fee
is not included in the accompanying table. If you are subject to the fee, keep
it in mind when you are estimating the ongoing expenses of investing in the fund
and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only
your ongoing costs and do not reflect any transaction costs, such as redemption
fees or sales loads. Therefore, the second line of the table is useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. To the extent a fund charges transaction costs,
however, the total cost of owning that fund is higher.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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Expenses Paid
Beginning Ending During Period*
Account Value Account Value 7/1/04 to
7/1/04 12/31/04 12/31/04
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Actual $ 1,000.00 $ 1,070.60 $ 6.51
Hypothetical (assumes 5%
return before expenses) 1,000.00 1,018.85 6.34
* Expenses are equal to the fund's annualized expense ratio for the six-month
period (1.25%), multiplied by the average account value over the period,
multiplied by the number of days in the most recent fiscal half year (184)
divided by the days in the year (366) to reflect the half-year period.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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FINANCIAL HIGHLIGHTS For a share outstanding throughout the period
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Year
Ended
12/31/04
NET ASSET VALUE
Beginning of period $ 10.00
Investment activities
Net investment income (loss) (0.06)*
Net realized and
unrealized gain (loss) 1.43
Total from
investment activities 1.37
NET ASSET VALUE
End of period $ 11.37
-------------------
Ratios/Supplemental Data
Total return^ 13.70%*
Ratio of total expenses to
average net assets 1.25%*
Ratio of net investment
income (loss) to average
net assets (0.71)%*
Portfolio turnover rate 13.3%
Net assets, end of period
(in thousands) $ 40,848
* Excludes expenses in excess of a 1.25% contractual expense limitation in
effect through 4/30/06.
^ Total return reflects the rate that an investor would have earned on an
investment in the fund during the period, assuming reinvestment of all
distributions.
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
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December 31, 2004
PORTFOLIO OF INVESTMENTS (1) Shares Value
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(Cost and value in $ 000s)
COMMON STOCKS 100.1%
CONSUMER DISCRETIONARY 21.7%
Auto Components 0.2%
Gentex (ss.) 1,900 70
70
Automobiles 0.6%
Harley-Davidson 1,300 79
Thor Industries 2,400 89
Winnebago (ss.) 2,100 82
250
Hotels, Restaurants & Leisure 4.8%
Hilton 4,000 91
International Game Technology 6,600 227
Las Vegas Sands * 400 19
Marriott, Class A 6,700 422
Multimedia Games *(ss.) 3,800 60
Outback Steakhouse 1,500 69
Royal Caribbean Cruises (ss.) 2,900 158
Ruby Tuesday 1,600 42
Shuffle Master *(ss.) 3,399 160
Station Casinos 6,900 377
The Cheesecake Factory *(ss.) 2,400 78
WMS Industries *(ss.) 1,800 60
Wynn Resorts *(ss.) 2,900 194
1,957
Household Durables 2.0%
Centex 2,800 167
KB Home 900 94
Lennar, Class A 3,800 215
Pulte 2,000 128
Toll Brothers * 3,000 206
810
Internet & Catalog Retail 0.4%
Amazon.com * 4,200 186
186
Leisure Equipment & Products 0.6%
Alliance Gaming *(ss.) 3,700 51
Brunswick 2,300 114
Mattel 4,800 93
258
Media 6.9%
Citadel Broadcasting * 3,000 49
Cox Radio, Class A * 6,800 112
Cumulus Media, Class A *(ss.) 3,300 50
Dow Jones (ss.) 1,700 73
DreamWorks Animation SKG, Class A * 1,300 49
Entercom Communications * 2,400 86
Getty Images * 3,800 262
Harte-Hanks 2,600 68
Lamar Advertising * 1,800 77
McGraw-Hill 1,000 92
Meredith 3,700 200
New York Times, Class A 3,700 151
Omnicom 2,600 219
Radio One, Class D * 6,600 106
Regent Communications *(ss.) 10,600 56
Rogers Communications, Class B 3,500 91
Salem Communications, Class A * 4,200 105
Scripps, Class A 2,600 125
Spanish Broadcasting, Class A * 9,200 97
Univision Communications, Class A * 10,100 296
Washington Post, Class B 200 197
Westwood One * 2,900 78
WPP Group ADR (ss.) 3,600 197
2,836
Multiline Retail 2.0%
99 Cents Only Stores *(ss.) 3,100 50
Dollar General 12,700 264
Dollar Tree Stores * 5,500 158
Family Dollar Stores 9,200 287
Fred's (ss.) 3,100 54
813
Specialty Retail 3.9%
Bed Bath & Beyond * 3,800 151
Men's Wearhouse * 1,800 58
O'Reilly Automotive *(ss.) 1,600 72
PETsMART 5,600 199
Ross Stores 7,600 219
Staples 5,000 169
Tiffany 8,700 278
TJX Companies 11,500 289
Williams-Sonoma * 4,800 168
1,603
Textiles, Apparel, & Luxury Goods 0.3%
Coach * 1,900 107
107
Total Consumer Discretionary 8,890
CONSUMER STAPLES 1.7%
Beverages 0.1%
Cott *(ss.) 1,800 44
44
Food & Staples Retailing 0.1%
CVS 1,000 45
45
Food Products 1.2%
Delta & Pine Land 1,800 49
Hershey Foods 2,800 156
McCormick (ss.) 1,600 62
Tootsie Roll Industries 3,418 118
Wrigley 1,200 83
468
Household Products 0.1%
Clorox 900 53
53
Personal Products 0.2%
Estee Lauder, Class A 2,000 92
92
Total Consumer Staples 702
ENERGY 3.0%
Energy Equipment & Services 2.4%
Baker Hughes 6,300 269
BJ Services 4,600 214
Cooper Cameron * 2,100 113
Smith International * 4,400 240
Weatherford International * 2,600 133
969
Oil & Gas 0.6%
Murphy Oil 1,000 80
XTO Energy 5,050 179
259
Total Energy 1,228
FINANCIALS 13.6%
Capital Markets 7.5%
A.G. Edwards 1,600 69
AmeriTrade * 11,700 166
AMVESCAP ADR 4,000 50
Charles Schwab 14,700 176
Eaton Vance 4,700 245
Federated Investors, Class B 3,700 113
Franklin Resources 5,800 404
Investors Financial Services 4,600 230
Janus Capital Group 3,500 59
LaBranche & Co. *(ss.) 4,800 43
Legg Mason 2,250 165
Mellon Financial 9,800 305
Northern Trust 7,700 374
Raymond James Financial 2,400 74
SEI Investments 2,400 101
State Street 8,300 408
Waddell & Reed Financial, Class A 3,900 93
3,075
Commercial Banks 1.5%
Boston Private Financial (ss.) 1,800 51
City National 900 64
East West Bancorp 2,000 84
First Horizon National 1,200 52
North Fork Bancorporation 3,450 99
Silicon Valley Bancshares *(ss.) 1,800 81
Synovus Financial 3,900 111
UCBH Holdings 1,600 73
615
Consumer Finance 0.3%
Moneygram International 5,300 112
112
Diversified Financial Services 0.9%
Moody's 4,000 347
347
Insurance 2.9%
Ambac Financial Group 1,100 90
Arch Capital Group * 1,600 62
Arthur J. Gallagher 2,800 91
Axis Capital Holdings 2,200 60
Brown & Brown 2,000 87
Markel * 200 73
Marsh & McLennan 6,600 217
MBIA 1,700 108
RenaissanceRe Holdings 1,600 83
Willis Group Holdings 7,700 317
1,188
Thrifts & Mortgage Finance 0.5%
MGIC Investment 1,300 90
Radian 1,400 75
Triad Guaranty * 900 54
219
Total Financials 5,556
HEALTH CARE 19.0%
Biotechnology 4.1%
Abgenix *(ss.) 4,100 42
Amylin Pharmaceuticals *(ss.) 2,300 54
Applera 4,000 84
Celgene *(ss.) 5,200 138
Cephalon *(ss.) 1,600 81
Charles River Laboratories International * 1,600 74
Chiron * 1,500 50
deCode Genetics *(ss.) 7,200 56
Diversa * 6,600 58
Gen-Probe * 1,300 59
Genzyme * 1,700 99
Gilead Sciences * 4,000 140
Human Genome Sciences * 3,900 47
Martek Biosciences *(ss.) 2,800 143
MedImmune * 3,400 92
Millennium Pharmaceuticals * 3,400 41
Neurocrine Biosciences * 1,400 69
Protein Design Labs * 3,200 66
Qiagen NV *(ss.) 10,400 114
Techne * 2,900 113
Vertex Pharmaceuticals *(ss.) 6,200 65
1,685
Health Care Equipment & Supplies 6.1%
ArthroCare *(ss.) 1,800 58
Bausch & Lomb 1,400 90
Beckman Coulter 2,000 134
Becton, Dickinson 2,100 119
Biomet 3,700 160
C R Bard (ss.) 3,700 237
Cooper Companies 1,300 92
Dentsply International 2,400 135
Edwards Lifesciences * 1,900 78
INAMED * 1,000 63
Integra LifeSciences * 1,700 63
Invitrogen * 2,200 148
Kyphon *(ss.) 2,700 69
Millipore * 1,700 85
ResMed *(ss.) 1,600 82
Respironics * 900 49
Smith & Nephew ADR 1,700 88
St. Jude Medical * 3,600 151
Sybron Dental Specialties * 1,600 57
Varian Medical Systems * 4,200 182
Waters Corporation * 3,600 168
Wright Medical Group * 1,600 46
Zimmer Holdings * 1,700 136
2,490
Health Care Providers & Services 7.4%
Caremark RX * 6,000 237
Coventry Health Care * 4,100 218
Davita * 4,149 164
Express Scripts * 3,100 237
Health Management, Class A (ss.) 5,300 120
Henry Schein * 2,200 153
IMS Health 5,800 135
Laboratory Corporation of America * 3,300 164
Lincare Holdings * 2,500 107
Manor Care 3,100 110
Medco * 6,300 262
Omnicare 3,200 111
Patterson Companies * 3,600 156
Quest Diagnostics 2,300 220
Renal Care Group * 2,400 86
WellChoice * 5,100 272
WellPoint * 2,300 264
3,016
Pharmaceuticals 1.4%
Allergan 1,500 122
Atherogenics *(ss.) 4,400 104
IVAX * 4,500 71
Medicines Company * 2,100 60
Medicis Pharmaceutical, Class A (ss.) 2,000 70
Nektar Therapeutics * 3,400 69
Sepracor *(ss.) 1,300 77
573
Total Health Care 7,764
INDUSTRIALS & BUSINESS SERVICES 10.5%
Aerospace & Defense 0.9%
Embraer Aircraft ADR 3,300 110
Mercury Computer Systems * 2,100 62
Rockwell Collins 4,700 186
358
Air Freight & Logistics 1.3%
C.H. Robinson Worldwide 3,700 205
Expeditors International of Washington 3,700 207
UTi Worldwide (ss.) 1,600 109
521
Airlines 0.4%
SkyWest 3,900 78
Southwest Airlines 5,000 82
160
Building Products 0.2%
Trex *(ss.) 1,600 84
84
Commercial Services & Supplies 5.9%
Apollo Group, Class A * 3,757 303
ARAMARK, Class B 2,600 69
Avery Dennison 1,700 102
Career Education * 3,100 124
ChoicePoint * 3,400 156
Cintas 4,100 180
Corporate Executive Board 2,700 181
Devry * 2,600 45
Dun & Bradstreet * 1,900 113
Education Management * 7,600 251
Equifax 2,900 81
H&R Block 1,200 59
HNI Corporation 1,700 73
ITT Educational Services *(ss.) 1,900 90
LECG * 3,800 71
Manpower 2,400 116
Robert Half International 4,300 127
Stericycle * 2,500 115
Universal Technical Institute *(ss.) 2,700 103
Watson Wyatt 1,800 49
2,408
Industrial Conglomerates 0.2%
Roper Industries 1,700 103
103
Machinery 1.2%
Cuno * 900 54
Danaher 1,000 57
Dover 1,500 63
IDEX 1,350 55
ITT Industries 1,400 118
Kaydon 2,100 69
Pall 2,900 84
500
Road & Rail 0.4%
Landstar Systems * 2,000 147
147
Total Industrials & Business Services 4,281
INFORMATION TECHNOLOGY 28.2%
Communications Equipment 2.3%
ADTRAN 2,600 50
Corning * 15,300 180
F5 Networks *(ss.) 3,200 156
JDS Uniphase * 42,300 134
Juniper Networks * 10,200 277
Plantronics 1,600 67
Research In Motion * 900 74
938
Computers & Peripherals 1.8%
Diebold 1,200 67
Lexmark International, Class A * 4,800 408
Network Appliance * 4,800 159
QLogic * 2,500 92
726
Electronic Equipment & Instruments 2.5%
CDW 3,800 252
FLIR Systems * 2,600 166
Jabil Circuit * 4,800 123
Littelfuse * 1,700 58
Mettler-Toledo International * 1,700 87
Molex, Class A 5,400 144
National Instruments (ss.) 2,350 64
Symbol Technologies 7,000 121
1,015
Internet Software & Services 1.7%
MatrixOne *(ss.) 7,300 48
Monster Worldwide * 6,500 219
Sina *(ss.) 5,400 173
VeriSign * 6,100 204
Websense * 1,200 61
705
IT Services 3.9%
Affiliated Computer Services, Class A * 2,400 145
Certegy 4,100 146
Cognizant Technology Solutions * 7,800 330
DST Systems *(ss.) 3,400 177
Fiserv * 6,000 241
Global Payments (ss.) 1,100 64
Iron Mountain * 6,200 189
Paychex 5,800 198
Sabre Holdings, Class A 1,800 40
SunGard Data Systems * 2,900 82
1,612
Office Electronics 0.4%
Zebra Technologies * 2,650 149
149
Semiconductor & Semiconductor Equipment 8.7%
Altera * 14,900 308
AMIS Holdings * 4,700 78
Analog Devices 10,100 373
ASML Holding ADS * 2,700 43
Broadcom, Class A * 8,100 262
Cymer * 1,900 56
Integrated Circuit Systems * 2,700 57
Intersil Holding, Class A 5,700 95
KLA-Tencor * 2,500 116
Lam Research * 3,400 98
Linear Technology 8,900 345
Marvell Technology Group * 2,800 99
Maxim Integrated Products 8,600 365
Microchip Technology 11,000 293
National Semiconductor 14,600 262
Novellus Systems * 5,000 140
Power Integrations * 2,600 51
Semtech * 5,200 114
Silicon Laboratories *(ss.) 3,000 106
Xilinx 10,300 305
3,566
Software 6.9%
Adobe Systems 6,400 401
BMC Software * 5,900 110
Cadence Design Systems * 9,100 126
Check Point Software Technologies * 2,300 57
Citrix Systems * 5,600 137
Cognos * 4,700 207
Electronic Arts * 3,000 185
FactSet Research Systems 1,900 111
Fair Isaac (ss.) 2,500 92
FileNet * 2,000 51
Hyperion Solutions * 2,500 117
Internet Security Systems * 3,900 91
Intuit * 4,400 194
Jack Henry & Associates 4,000 80
Kronos * 900 46
McAfee * 6,800 197
Mercury Interactive * 2,800 127
Red Hat *(ss.) 11,800 157
Synopsys * 4,200 82
VERITAS Software * 8,100 231
2,799
Total Information Technology 11,510
MATERIALS 1.5%
Chemicals 1.2%
Ecolab 4,300 151
Engelhard 1,600 49
Praxair 2,300 102
Sigma Aldrich 900 54
Symyx Technologies *(ss.) 1,700 51
Valspar 1,700 85
492
Containers & Packaging 0.3%
Sealed Air * 2,300 123
123
Total Materials 615
TELECOMMUNICATION SERVICES 0.9%
Wireless Telecommunication Services 0.9%
American Tower Systems, Class A *(ss.) 5,100 94
Crown Castle International * 4,600 76
Nextel Partners, Class A *(ss.) 7,000 137
Western Wireless, Class A * 1,700 50
Total Telecommunication Services 357
Total Common Stocks (Cost $37,041) 40,903
SHORT-TERM INVESTMENTS 0.0%
Money Market Fund 0.0%
T. Rowe Price Reserve Investment
Fund, 2.28% #+ 1,000 1
Total Short-Term Investments (Cost $1) 1
SECURITIES LENDING COLLATERAL 9.4%
Money Market Trust 9.4%
State Street Bank and Trust Company of
New Hampshire N.A. Securities Lending
Quality Trust units, 2.276% # 3,819,100 3,819
Total Securities Lending Collateral
(Cost $3,819) 3,819
Total Investments in Securities
109.5% of Net Assets (Cost $40,861) $44,723
-------
(1) Denominated in U.S. dollars unless otherwise noted
# Seven-day yield
* Non-income producing
(ss.) All or a portion of this security is on loan at December 31, 2004 - See
Note 2
+ Affiliated company - See Note 4
ADR American Depository Receipts
ADS American Depository Shares
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
- --------------------------------------------------------------------------------
December 31, 2004
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
(In thousands except shares and per share amounts)
Assets
Investments in securities, at value
Affiliated companies (cost $1) $ 1
Other companies (cost $40,860) 44,722
Total investments in securities 44,723
Other assets 125
Total assets 44,848
Liabilities
Obligation to return securities lending collateral 3,819
Other liabilities 181
Total liabilities 4,000
NET ASSETS $ 40,848
--------------------
Net Assets Consist of:
Undistributed net realized gain (loss) $ 61
Net unrealized gain (loss) 3,862
Paid-in-capital applicable to 3,592,579 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares authorized 36,925
NET ASSETS $ 40,848
--------------------
NET ASSET VALUE PER SHARE $ 11.37
--------------------
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04
Investment Income (Loss)
Income
Dividend $ 155
Securities lending 6
Total income 161
Expenses
Investment management 199
Custody and accounting 108
Shareholder servicing 80
Registration 66
Prospectus and shareholder reports 23
Legal and audit 20
Directors 5
Organizational expense 1
Miscellaneous 2
Reductions/repayments of fees and expenses
Investment management fees (waived) repaid (128)
Total expenses 376
Net investment income (loss) (215)
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 274
Change in net unrealized gain (loss) on securities 3,862
Net realized and unrealized gain (loss) 4,136
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 3,921
--------------------
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ (215)
Net realized gain (loss) 274
Change in net unrealized gain (loss) 3,862
Increase (decrease) in net assets from operations 3,921
Capital share transactions *
Shares sold 44,317
Shares redeemed (7,490)
Increase (decrease) in net assets from capital
share transactions 36,827
Net Assets
Increase (decrease) during period 40,748
Beginning of period 100
End of period $ 40,848
(Including undistributed net investment income of
$0 at 12/31/04)
*Share information
Shares sold 4,309
Shares redeemed (726)
Increase (decrease) in shares outstanding 3,583
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
- --------------------------------------------------------------------------------
December 31, 2004
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Diversified Mid-Cap Growth Fund, Inc. (the fund) is registered
under the Investment Company Act of 1940 (the 1940 Act) as a diversified,
open-end management investment company. The fund commenced operations on
December 31, 2003. The fund seeks long-term growth of capital by investing
primarily in common stocks of medium-sized growth companies.
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates made by fund management.
Valuation
The fund values its investments and computes its net asset value per share at
the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day
that the NYSE is open for business. Equity securities listed or regularly traded
on a securities exchange or in the over-the-counter market are valued at the
last quoted sale price or, for certain markets, the official closing price at
the time the valuations are made, except for OTC Bulletin Board securities,
which are valued at the mean of the latest bid and asked prices. A security that
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 are valued at the mean of the latest
bid and asked prices for domestic securities and the last quoted sale price for
international securities.
Investments in mutual funds are valued at the mutual fund's closing net asset
value per share on the day of valuation.
Other investments, including restricted securities, and those 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 the T. Rowe Price
Valuation Committee, established by the fund's Board of Directors.
Rebates and Credits
Subject to best execution, the fund may direct certain security trades to
brokers who have agreed to rebate a portion of the related brokerage commission
to the fund in cash. Commission rebates are included in realized gain on
securities in the accompanying financial statements. Additionally, the fund
earns credits on temporarily uninvested cash balances at the custodian that
reduce the fund's custody charges. Custody expense in the accompanying financial
statements is presented before reduction for credits.
Investment Transactions, Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Dividends received from
mutual fund investments are reflected as dividend income; capital gain
distributions are reflected as realized gain/loss. Dividend income and capital
gain distributions are recorded on the ex-dividend date. Investment transactions
are accounted for on the trade date. Realized gains and losses are reported on
the identified cost basis. Distributions to shareholders are recorded on the
ex-dividend date. Income distributions are declared and paid on an annual basis.
Capital gain distributions, if any, are declared and paid by the fund, typically
on an annual basis.
Other
In the normal course of business, the fund enters into contracts that provide
general indemnifications. The fund's maximum exposure under these arrangements
is dependent on claims that may be made against the fund in the future and,
therefore, cannot be estimated; however, based on experience, the risk of
material loss from such claims is considered remote.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Securities Lending
The fund lends its securities to approved brokers to earn additional income. It
receives as collateral cash and U.S. government securities valued at 102% to
105% of the value of the securities on loan. Cash collateral is invested in a
money market pooled trust managed by the fund's lending agent in accordance with
investment guidelines approved by fund management. Collateral is maintained over
the life of the loan in an amount not less than the value of loaned securities,
as determined at the close of fund business each day; any additional collateral
required due to changes in security values is delivered to the fund the next
business day. Although risk is mitigated by the collateral, the fund could
experience a delay in recovering its securities and a possible loss of income or
value if the borrower fails to return the securities. Securities lending revenue
recognized by the fund consists of earnings on invested collateral and borrowing
fees, net of any rebates to the borrower and compensation to the lending agent.
At December 31, 2004, the value of loaned securities was $3,714,000; aggregate
collateral consisted of $3,819,000 in the money market pooled trust.
Other
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $39,215,000 and $3,883,000, respectively, for the year ended December
31, 2004.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and distribute to shareholders all of its taxable income and gains.
Federal income tax regulations differ from generally accepted accounting
principles; therefore, distributions determined in accordance with tax
regulations may differ significantly in amount or character from net investment
income and realized gains for financial reporting purposes. Financial reporting
records are adjusted for permanent book/tax differences to reflect tax
character. Financial records are not adjusted for temporary differences.
There were no distributions in the year ended December 31, 2004. At December 31,
2004, the tax-basis components of net assets were as follows:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 5,173,000
Unrealized depreciation (1,311,000)
Net unrealized appreciation (depreciation) 3,862,000
Undistributed ordinary income 61,000
Paid-in capital 36,925,000
Net assets $ 40,848,000
--------------------
For the year ended December 31, 2004, the fund recorded the following permanent
reclassifications to reflect tax character. Reclassifications to paid-in capital
relate primarily to nondeductible organizational expenses. Reclassifications
between income and gain relate primarily to the offset of the current net
operating loss against realized gains. Results of operations and net assets were
not affected by these reclassifications.
- --------------------------------------------------------------------------------
Undistributed net investment income $ 215,000
Undistributed net realized gain (213,000)
Paid-in capital (2,000)
At December 31, 2004, the cost of investments for federal income tax purposes
was $40,861,000.
NOTE 4 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price
Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The
investment management agreement between the fund and the manager provides for an
annual investment management fee, which is computed daily and paid monthly. The
fee consists of an individual fund fee, equal to 0.35% of the fund's average
daily net assets, and the fund's pro-rata share of a group fee. The group fee is
calculated based on the combined net assets of certain mutual funds sponsored by
Price Associates (the group) applied to a graduated fee schedule, with rates
ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in
excess of $120 billion. The fund's portion of the group fee is determined by the
ratio of its average daily net assets to those of the group. At December 31,
2004, the effective annual group fee rate was 0.31%, and investment management
fee payable totaled $15,000.
The fund is also subject to a contractual expense limitation through April 30,
2006. During the limitation period, the manager is required to waive its
management fee and reimburse the fund for any expenses, excluding interest,
taxes, brokerage commissions, and extraordinary expenses, that would otherwise
cause the fund's ratio of total expenses to average net assets (expense ratio)
to exceed its expense limitation of 1.25%. For a period of three years after the
date of any reimbursement or waiver, the fund is required to repay the manager
for expenses previously reimbursed and management fees waived to the extent its
net assets have grown or expenses have declined sufficiently to allow repayment
without causing the fund's expense ratio to exceed its expense limitation.
Pursuant to this agreement, at December 31, 2004, management fees waived in the
amount of $129,000 remain subject to repayment by the fund.
In addition, the fund has entered into service agreements with Price Associates
and two wholly owned subsidiaries of Price Associates (collectively, Price).
Price Associates computes the daily share price and maintains the financial
records of the fund. T. Rowe Price Services, Inc., provides shareholder and
administrative services in its capacity as the fund's transfer and dividend
disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides
subaccounting and recordkeeping services for certain retirement accounts
invested in the fund. For the year ended December 31, 2004, expenses incurred
pursuant to these service agreements were $64,000 for Price Associates, $60,000
for T. Rowe Price Services, Inc., and $0 for T.Rowe Price Retirement Plan
Services, Inc. At period-end, a total of $12,000 of these expenses was payable.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe
Price Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by Price Associates and
affiliates of the fund. The Reserve Funds are offered as cash management options
to mutual funds, trusts, and other accounts managed by Price Associates and/or
its affiliates, and are not available for direct purchase by members of the
public. The Reserve Funds pay no investment management fees. During the year
ended December 31, 2004, dividend income from the Reserve Funds totaled $4,000,
and the value of shares of the Reserve Funds held at December 31, 2004, was
$1,000.
As of December 31, 2004, T. Rowe Price Group, Inc. and/or its wholly owned
subsidiaries owned 150,000 shares of the fund, representing 4% of the fund's net
assets.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Diversified Mid-Cap Growth 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 Diversified Mid-Cap
Growth Fund, Inc. (the "Fund") at December 31, 2004, and the results of its
operations, the changes in its net assets and the financial highlights for the
fiscal period presented, in conformity with accounting principles generally
accepted in the United States of America. 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 the auditing standards
of the Public Company Accounting Oversight Board (United States). Those
standards 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, 2004 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 11, 2005
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/04
- --------------------------------------------------------------------------------
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.
For taxable non-corporate shareholders, $61,000 of the fund's income represents
qualified dividend income subject to the 15% rate category.
For corporate shareholders, $61,000 of the fund's income qualifies for the
dividends-received deduction.
INFORMATION ON PROXY VOTING POLICIES, PROCEDURES, AND RECORDS
- --------------------------------------------------------------------------------
A description of the policies and procedures used by T. Rowe Price funds and
portfolios to determine how to vote proxies relating to portfolio securities is
available in each fund's Statement of Additional Information, which you may
request by calling 1-800-225-5132 or by accessing the SEC's Web site,
www.sec.gov. The description of our proxy voting policies and procedures is also
available on our Web site, www.troweprice.com. To access it, click on the words
"Company Info" at the top of our homepage for individual investors. Then, in the
window that appears, click on the "Proxy Voting Policy" navigation button in the
top left corner.
Each fund's most recent annual proxy voting record is available on our Web site
and through the SEC's Web site. To access it through our Web site, follow the
directions above, then click on the words "Proxy Voting Record" at the bottom of
the Proxy Voting Policy page.
HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS
- --------------------------------------------------------------------------------
The fund files a complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year on Form
N-Q. The fund's Form N-Q is available electronically on the SEC's Web site
(www.sec.gov); hard copies may be reviewed and copied at the SEC's Public
Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information
on the Public Reference Room, call 1-800-SEC-0330.
T. ROWE PRICE DIVERSIFIED MID-CAP GROWTH FUND
- --------------------------------------------------------------------------------
ABOUT THE FUND'S DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Your fund is governed by a Board of Directors that meets regularly to review
investments, performance, compliance matters, advisory fees, expenses, and other
business affairs, and is responsible for protecting the interests of
shareholders. The majority of the fund's directors are independent of T. Rowe
Price Associates, Inc. (T. Rowe Price); "inside" directors are officers of T.
Rowe Price. The Board of Directors elects the fund's officers, who are listed in
the final table. The business address of each director and officer is 100 East
Pratt Street, Baltimore, MD 21202. The Statement of Additional Information
includes additional information about the fund directors and is available
without charge by calling a T. Rowe Price representative at 1-800-225-5132.
Independent Directors
Name
(Year of Birth)
Year Elected*
Principal Occupation(s) During Past 5 Years
and Directorships of Other Public Companies
Anthony W. Deering
(1945)
2003
Director, Chairman of the Board, President, and Chief Executive Officer, The
Rouse Company, real estate developers; Director, Mercantile Bank (4/03 to
present)
Donald W. Dick, Jr.
(1943)
2003
Principal, EuroCapital Advisors, LLC, an acquisition and management advisory
firm
David K. Fagin
(1938)
2003
Director, Golden Star Resources Ltd., Canyon Resources Corp. (5/00 to present),
and Pacific Rim Mining Corp. (2/02 to present); Chairman and President, Nye
Corp.
Karen N. Horn
(1943)
2003
Managing Director and President, Global Private Client Services, Marsh Inc.
(1999-2003); Managing Director and Head of International Private Banking,
Bankers Trust (1996-1999); Director, Eli Lilly and Company and Georgia Pacific
(5/04 to present)
F. Pierce Linaweaver
(1934)
2003
President, F. Pierce Linaweaver & Associates, Inc., consulting environmental and
civil engineers
John G. Schreiber
(1946)
2003
Owner/President, Centaur Capital Partners, Inc., a real estate investment
company; Partner, Blackstone Real Estate Advisors, L.P.; Director, AMLI
Residential Properties Trust and The Rouse Company, real estate developers
* Each independent director oversees 112 T. Rowe Price portfolios and serves
until retirement, resignation, or election of a successor.
Inside Directors
Name
(Year of Birth)
Year Elected*
[Number of T. Rowe
Price Portfolios Overseen]
Principal Occupation(s) During Past 5 Years
and Directorships of Other Public Companies
James A.C. Kennedy, CFA
(1953)
2003
[43]
Director and Vice President, T. Rowe Price and T. Rowe Price Group, Inc.;
Director, T. Rowe Price Global Investment Services Limited and T. Rowe Price
International, Inc.
James S. Riepe
(1943)
2003
[112]
Director and Vice President, T. Rowe Price; Vice Chairman of the Board,
Director, and Vice President, T. Rowe Price Group, Inc.; Chairman of the Board
and Director, T. Rowe Price Global Asset Management Limited, T. Rowe Price
Global Investment Services Limited, T. Rowe Price Investment Services, Inc., T.
Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Services, Inc.;
Chairman of the Board, Director, President, and Trust Officer, T. Rowe Price
Trust Company; Director, T. Rowe Price International, Inc.; Chairman of the
Board, Diversified Mid-Cap Growth Fund
* Each inside director serves until retirement, resignation, or election of
a successor.
Officers
Name (Year of Birth)
Title and Fund(s) Served
Principal Occupation(s)
Stephen V. Booth, CPA (1961)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price
Trust Company
Joseph A. Carrier (1960)
Treasurer, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price
Investment Services, Inc., and T. Rowe Price Trust Company
Donald J. Easley, CFA (1971)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Roger L. Fiery III, CPA (1959)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price
International, Inc., and T. Rowe Price Trust Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
John R. Gilner (1961)
Chief Compliance Officer, Diversified Mid-Cap Growth Fund
Chief Compliance Officer and Vice President, T. Rowe Price; Vice President, T.
Rowe Price Investment Services, Inc., and T. Rowe Price Group, Inc.
Gregory S. Golczewski (1966)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price and T. Rowe Price Trust Company
Henry H. Hopkins (1942)
Vice President, Diversified Mid-Cap Growth Fund
Director and Vice President, T. Rowe Price Investment Services, Inc., T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company; Vice President, T. Rowe
Price, T. Rowe Price Group, Inc., T. Rowe Price International, Inc., and T. Rowe
Price Retirement Plan Services, Inc.
Patricia B. Lippert (1953)
Secretary, Diversified Mid-Cap Growth Fund
Assistant Vice President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
Sudhir Nanda, Ph.D., CFA (1959)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Philip A. Nestico (1976)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price
Donald J. Peters (1959)
President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
John F. Wakeman (1962)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price and T. Rowe Price Group, Inc.
Julie L. Waples (1970)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price
Mark R. Weigman, CFA, CIC (1962)
Vice President, Diversified Mid-Cap Growth Fund
Vice President, T. Rowe Price, T. Rowe Price Group, and T. Rowe Price Trust
Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Item 2. Code of Ethics.
The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR,
applicable to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. A copy of this code of ethics is filed as an exhibit to this Form
N-CSR. No substantive amendments were approved or waivers were granted to this
code of ethics during the period covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Directors/Trustees has determined that Mr. David K.
Fagin qualifies as an audit committee financial expert, as defined in Item 3 of
Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form
N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal years
for professional services rendered by the registrant's principal accountant were
as follows:
2004 2003
Audit Fees $11,778 $ -
Audit-Related Fees 725 -
Tax Fees 3,194 -
All Other Fees - -
Audit fees include amounts related to the audit of the registrant's annual
financial statements and services normally provided by the accountant in
connection with statutory and regulatory filings. Audit-related fees include
amounts reasonably related to the performance of the audit of the registrant's
financial statements, specifically the issuance of a report on internal
controls. Tax fees include amounts related to tax compliance, tax planning, and
tax advice. Other fees include the registrant's pro-rata share of amounts for
agreed-upon procedures in conjunction with service contract approvals by the
registrant's Board of Directors/Trustees.
(e)(1) The registrant's audit committee has adopted a policy whereby audit and
non-audit services performed by the registrant's principal accountant for the
registrant, its investment adviser, and any entity controlling, controlled by,
or under common control with the investment adviser that provides ongoing
services to the registrant require pre-approval in advance at regularly
scheduled audit committee meetings. If such a service is required between
regularly scheduled audit committee meetings, pre-approval may be authorized by
one audit committee member with ratification at the next scheduled audit
committee meeting. Waiver of pre-approval for audit or non-audit services
requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) - (d) above were approved pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50 percent of the hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees.
(g) The aggregate fees billed for the most recent fiscal year and the preceding
fiscal year by the registrant's principal accountant for non-audit services
rendered to the registrant, its investment adviser, and any entity controlling,
controlled by, or under common control with the investment adviser that provides
ongoing services to the registrant were $903,000 and $821,000, respectively, and
were less than the aggregate fees billed for those same periods by the
registrant's principal accountant for audit services rendered to the T. Rowe
Price Funds.
(h) All non-audit services rendered in (g) above were pre-approved by the
registrant's audit committee. Accordingly, these services were considered by the
registrant's audit committee in maintaining the principal accountant's
independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of
this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have evaluated the registrant's disclosure controls and procedures within 90
days of this filing and have concluded that the registrant's disclosure controls
and procedures were effective, as of that date, in ensuring that information
required to be disclosed by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) The registrant's principal executive officer and principal financial officer
are aware of no change in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal quarter covered by
this report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is
attached.
(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end
companies: not applicable.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940,
is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price Diversified Mid-Cap Growth Fund, Inc.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
By /s/ Joseph A. Carrier
-----------------------------------
Joseph A. Carrier
Principal Financial Officer
Date February 18, 2005