Fellow Shareholders
The year 1993 was straight out of the economics textbooks. Low inflation
and modest growth enabled fiscal and monetary authorities to do what they
enjoy most _ spend money (fiscal) and provide liquidity (monetary). The
Federal Reserve kept short-term interest rates low, and fading inflation
fears enabled long-term rates to fall as well. Seeking higher returns,
investors poured money into equities, frequently through mutual funds. In
response to this demand, investment bankers marketed a record volume of new
stock offerings.
All financial markets generated strong returns in this favorable
environment. U.S. stocks rose on a broad front, with small-cap issues again
outperforming large, and bond returns were boosted sharply by rising prices
as interest rates fell. Overseas markets also provided excellent returns
for both stocks and bonds.
The Capital Appreciation Fund benefited from all these trends,
providing solid performance, gaining a substantial number of new
shareholders, and profiting from some of the new issues. The year's final
quarter was particularly good, as your Fund outperformed both the broad
market and an average of similar funds. In short, both for the market and
your Fund _ it seldom gets much better than this!
Performance Comparison
Periods Ended 12/31/93
3 months 12 months
Capital Appreciation Fund 5.0% 15.7%
S&P 500<F1> 2.3 10.1
Lipper Capital Appreciation
Fund Average 1.9 15.2
<F1>Unmanaged
Year-End Distribution
On December 21, the Fund's Board of Trustees declared a year-end income
dividend of $0.18 per share, along with a $0.19 per-share long-term capital
gain and a $0.14 per-share short-term capital gain. All were paid December
31 to shareholders of record on December 21. You should have received your
check or statement reflecting these distributions and also Form 1099-DIV
reporting them for tax purposes.
Portfolio Highlights
The Fund's basic asset allocation, shown in the chart, remained largely
unchanged throughout the year. This consistency masked substantial trading,
reflecting the large increase in assets, and, of more tactical
significance, the half dozen convertible bond issues that were "called" by
issuing companies. Many consider calls to be negative because they
eliminate the investor's protection from a possible future drop in share
price, and they may terminate an attractive source of current income. While
not happy about calls, we see them as validating our reason for buying the
security in the first place. Think of it this way: if the underlying common
stock does not rise in price, convertibles are seldom called _ hardly the
outcome we hope for.
Chart Number 1: Security Diversification (see Appendix)
The Fund's large cash position was a drag on our strong 1993
performance, but deserves two positive comments. First, other than with
hindsight, it is difficult to predict stock market performance, and some
day our cash will dampen the impact of a market decline. When that day
comes, we will be grateful for the wherewithal to purchase bargains. Second
and more important, the cash position reflects our strict quality standards
regarding potential holdings, the benefits of which are vividly illustrated
in the Contributions to Fund Performance table following this report. There
were few poor holdings in 1993. As a measure of this success, we note that
the positive contribution of the sixty-fifth best individual holding offset
the negative contribution of the fifth worst holding. We think it is better
to hold cash than to force-feed it into equity holdings that fall short of
our standards.
For most of 1993, the value style we have always employed in our stock
selection was not as rewarding as the growth approach. The value approach
often leads us to companies suffering from disappointments (self-inflicted
or otherwise), and good performance comes when problems are corrected. Past
shareholder reports highlighted our decisions to buy such stocks as Tandy,
Reebok, Philip Morris, and Monsanto, which had one or more value
characteristics like low price/earnings or price/book-value ratios or high
dividend yields. Happily, other investors were attracted to these stocks as
their outlooks improved, and they contributed significantly to recent Fund
performance.
In addition to stressing value stocks, we have other guidelines in
managing the Fund. In brief:
- - We will make short-term, opportunistic investments as well as more
typical long-term ones.
- - No type of investment is off-limits (bonds, stocks, convertibles,
etc.) if the risk/reward characteristics are attractive.
- - Our decisions reflect case-by-case investment judgment; we have no
all-encompassing formula.
- - In general, we favor large-company stocks over small, because we
usually take big positions to make the most of our intensive analysis of
individual securities.
- - Our asset allocation results from individual security decisions, not
vice versa.
Outlook
Bull markets usually need some combination of the following: a favorable
economic outlook, sufficient liquidity to fuel demand, or reasonable
valuations. The first of these should remain positive in 1994, as we expect
moderate growth. Corporate earnings are improving steadily, employment is
rising, and consumer confidence has strengthened markedly.
We have less confidence in the durability of the liqudity boom. If
interest rates remain low, investors may well continue seeking potentially
more rewarding investments, particularly common stocks. But if the pace of
either growth or inflation accelerates, interest rates will undoubtedly
rise, and investor interest in stocks could slacken. In addition, the
overall level of consumer cash balances has already dropped as a percent of
their total assets, potentially reducing stock demand.
The third supporting leg, stock valuations, is the weakest one in our
opinion. The broad market as measured by the S&P 500 sells at an
historically low dividend yield; historically high price/earnings and
price/book ratios are equally unappealing.
On balance, we believe the engines of this great bull market will
eventually reverse, but we don't know when. Frankly, we are amazed that so
few people seem to have any fear of losing money. We have gone 39 months
without a 10% peak-to-trough decline, and 1993 was the least volatile year
in modern stock market history (as measured by low-to-high price). Perhaps
the speculative new companies now going public will grow enough to justify
their rich valuations. Perhaps the hot mutual funds deserve their repu-
tations. Perhaps your Fund should be more aggressive in pursuit of perform
ance, but we think not.
If the past is any guide, stock prices can go down as well as up. Rest
assured that the Fund will continue, as it has from inception, to be
managed with equal emphasis on both maximizing reward and minimizing risk.
As always, we appreciate the confidence you have displayed in us by the
commitment of your money.
Respectfully submitted,
(signature)
Richard P. Howard
President and Chairman of the Investment Advisory Committee
January 24, 1994
Twenty-Five Largest Holdings
T. Rowe Price Capital Appreciation Fund / December 31, 1993
Percent of
Company Net Assets
U.S. Treasury Notes<F1> 4.7 %
Manville 3.3
Petrie Stores 3.2
Philip Morris 3.1
Rockefeller Center 3.0
Entergy 2.7
Loews 2.3
Washington Post 2.1
Eli Lilly 2.1
Kemper 2.0
Overseas Shipholding Group 1.9
Eastman Kodak 1.8
Telefonica de Espana 1.8
Texaco 1.7
Reebok 1.7
Newmont Mining 1.4
Monsanto 1.4
Ceridian 1.3
Weyerhaeuser 1.3
Polaroid 1.3
Public Service of New Mexico 1.3
Unitrin 1.2
Champion International 1.2
Pennzoil 1.2
Price Company 1.1
Total 50.1%
<F1> 50% of these notes mature in less than 12 months
Performance Contributions
Twelve Months Ended December 31, 1993
Cents-
Percent of Per-Share Sector
Net Assets Contribution
Basic Materials 3 % 20 CENTS
Business Services & Transportation 4 12
Consumer Cyclicals 11 23
Consumer Nondurables 10 17
Consumer Services 11 24
Energy 7 15
Financial 8 5
Foreign 0 2
Process Industries 5 14
Technology 4 7
Utilities 8 9
U.S. Governments/Options 5 4
Total 76 152
Miscellaneous 1 0
Reserves & Income 23 26
Total Portfolio 100% 178 CENTS
Contributions to the Net Asset Value Per Share
T. Rowe Price Capital Appreciation Fund
Three Months Ended December 31, 1993
Ten Best Contributors
Philip Morris 7 CENTS
Petrie Stores 5
Eli Lilly 5
Reebok 4
IBM 4
Overseas Shipholding Group 4
Tandy 4
Washington Post 3
Homestake Mining 3
Newmont Mining 3
Total 42 CENTS
Ten Worst Contributors
Pennzoil - 3 CENTS
American Express 2
Chris-Craft Industries 2
Kemper 2
Murphy Oil 2
Texaco 1
Fund American Enterprises 1
Ryder Systems 1
Kerr-McGee 1
Eastman Kodak 1
Total - 16 CENTS
Twelve Months Ended December 31, 1993
Ten Best Contributors
Homestake Mining 9 CENTS
Tandy 8
Overseas Shipholding Group 7
Monsanto 6
Gulf States Utilities 6
Meredith 6
Pennzoil 6
Newmont Mining 6
Manville 6
Paramount Communication 6
Total 66 CENTS
Ten Worst Contributors
Loews 5 CENTS
Upjohn 1
Public Service of New Mexico 1
K mart 1
Atlantic Richfield 0
W.R. Grace 0
New York Times 0
Alexander & Alexander 0
Albany International 0
American Brands 0
Total - 8 CENTS
Chart Number 2: Performance Comparison Chart (see Appendix)
Total Return Performance
Periods Ended December 31, 1993
Since Inception
1 Year 5 Years<F1> 6/30/86<F1>
15.66% 13.02% 13.37%
<F1>Average Annual Compound Total Return
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Investment Record
T. Rowe Price Capital Appreciation Fund
The table below shows the investment record of one share of the T. Rowe
Price Capital Appreciation Fund, purchased at the initial price of $10.00,
for the period 6/30/86 through 12/31/93. Over this time, stock prices in
general have risen. The results shown should not be considered as a
representation of the income or capital gain or loss which may be realized
from an investment made in the Fund today.
<TABLE>
<CAPTION>
Per-Share Data
With Capital Gains and Income Dividends Annual
Taken in Cash Reinvested in Additional Shares Total Return
On Investment
% Change
Year Net Capital Capital
Ended Asset Gain Income Gain Income Value of
12/31 Value Distribution<F1> Dividend Distribution Dividend Investment Fund S&P 500
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986<F2> $10.85 _ _ _ _ $10.85 8.5 % - 1.8 %
1987 9.15 $1.85 $0.48 $1.95 $0.50 11.47 5.7 5.3
1988 10.42 0.37 0.28 0.47 0.35 13.91 21.2 16.5
1989 10.82 1.36 0.45 1.81 0.60 16.88 21.4 31.6
1990 9.98 0.31 0.39 0.48 0.61 16.67 - 1.3 - 3.1
1991 11.02 0.64 0.43 1.07 0.72 20.27 21.6 30.3
1992 11.39 0.16 0.50 0.29 0.92 22.17 9.4 7.6
1993 12.66 0.33 0.18 0.64 0.35 25.64 15.7 10.1
Total $5.02 $2.71 $6.71 $4.05
<FN>
<F1>Includes short-term capital gains of $1.74 in 1987, $0.28 in 1988, $1.10 in 1989, $0.08 in 1990, and $0.21 in 1991,
$0.09 in 1992 and $0.14 in 1993.
<F2>From inception 6/30/86 to 12/31/86
</FN>
</TABLE>
Statement of Net Assets (Value in thousands)
T. Rowe Price Capital Appreciation Fund/December 31, 1993
Common Stocks _ 50.7%
FINANCIAL _ 6.8%
Value
INSURANCE _ 5.3%
31,500shs.<F1> Fund American Enterprises $ 2,473
200,000 Kemper 7,250
130,000 Loews 12,090
150,000 Unitrin 6,525
28,338
FINANCIAL SERVICES _ 1.5%
145,000 American Express 4,477
85,000 Dreyfus 3,825
8,302
Total Financial 36,640
UTILITIES _ 5.8%
TELEPHONE _ 1.8%
246,560 Telefonica De Espana, ADR 9,616
ELECTRIC UTILITIES _ 4.0%
406,523 Entergy 14,635
600,000 <F1> Public Service of New Mexico 6,750
21,385
Total Utilities 31,001
CONSUMER NONDURABLES _ 9.4%
BEVERAGES _ 0.4%
145,000 Coca-Cola Enterprises 2,211
FOOD PROCESSING _ 0.5%
160,000 Pet 2,800
HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT _ 0.3%
3,300 <F1> Lynx Therapeutics 1
75,001 Manor Care 1,828
1,829
PHARMACEUTICALS _ 2.9%
190,000 Eli Lilly 11,281
140,000 Upjohn 4,078
15,359
MISCELLANEOUS CONSUMER PRODUCTS _ 5.3%
18,000 Paramount Communications 1,393
295,000 Philip Morris 16,446
70,000 <F1> Philips, N.V., ADR 1,444
300,000 Reebok 9,000
28,283
Total Consumer Nondurables 50,482
CONSUMER SERVICES _ 8.6%
SPECIALTY MERCHANDISERS _ 3.0%
125,178shs.<F1> Federated Department Stores $ 2,597
405,000 Petrie Stores 11,796
100,000 Rite Aid 1,588
15,981
MEDIA & COMMUNICATIONS _ 5.6%
15,000 CBS 4,328
130,000 <F1> Chris-Craft Industries 4,761
135,000 Meredith 5,400
160,000 New York Times 4,200
45,000 Washington Post (Class B) 11,464
30,153
Total Consumer Services 46,134
CONSUMER CYCLICALS _ 1.3%
MISCELLANEOUS CONSUMER DURABLES _ 1.3%
200,000 Polaroid 6,750
Total Consumer Cyclicals 6,750
TECHNOLOGY _ 2.4%
ELECTRONIC SYSTEMS _ 0.3%
42,000 Perkin-Elmer 1,617
INFORMATION PROCESSING _ 1.0%
100,000 IBM 5,650
AEROSPACE & DEFENSE _ 1.1%
50,000 <F1> Litton Industries 3,219
100,000 Teledyne 2,600
5,819
Total Technology 13,086
BUSINESS SERVICES & TRANSPORTATION _ 3.0%
TRANSPORTATION SERVICES _ 3.0%
425,000 Overseas Shipholding Group 10,041
90,000 PHH 3,735
100,000 Ryder System 2,650
16,426
Total Business Services & Transportation 16,426
ENERGY _ 6.3%
INTEGRATED PETROLEUM-DOMESTIC _ 4.6%
50,000 Atlantic Richfield 5,263
45,000 Kerr-McGee 2,031
130,000 Murphy Oil 5,200
120,000 Pennzoil 6,390
135,000 Sun Company 3,966
70,000 Unocal 1,951
24,801
T. Rowe Price Capital Appreciation Fund/Statement of Net Assets (Cont'd)
INTEGRATED PETROLEUM- INTERNATIONAL _ 1.7%
140,000 shs. Texaco $ 9,048
Total Energy 33,849
PROCESS INDUSTRIES _ 4.7%
DIVERSIFIED CHEMICALS _ 1.8%
42,000 Cabot 2,263
100,000 Monsanto 7,338
9,601
PAPER & PAPER PRODUCTS _ 0.8%
100,000 Scott Paper 4,113
FOREST PRODUCTS _ 1.3%
155,000 Weyerhaeuser 6,917
BUILDING & CONSTRUCTION _ 0.8%
550,000 Manville 4,606
Total Process Industries 25,237
BASIC MATERIALS _ 2.1%
MINING _ 1.9%
210,000 Homestake Mining 4,620
110,000 LAC Minerals 963
75,000 Newmont Mining 4,322
9,905
METALS _ 0.2%
40,000 Inco 1,075
Total Basic Materials 10,980
FOREIGN _ 0.3%
EUROPE _ 0.3%
200 Bank for International Settlements (CHF) 1,384
Total Foreign 1,384
Total Common Stocks (Cost _ $228,727) 271,969
Preferred Stocks _ 2.7%
49,662 Gulf States Utilities 8.75% Dep. Pfd.
Series D 2,532
4,800 <F1> Lynx Therapeutics 4
480,000 Manville $2.70 Cum. Pfd. Series B 11,940
Total Preferred Stocks (Cost _ $11,176) 14,476
Convertible Preferred Stocks _ 2.8%
25,000 shs. Ashland Oil Company,$3.125 Cv.Pfd. $ 1,528
13,000 GATX $3.875 Cv. Pfd. Series A 722
75,000 Kemper, Series E, Cv. Pfd. 3,600
50,000 Newmont Mining, $2.75 Cv. Pfd. 3,406
160,000 Tandy, $2.14, Series C, PERCS 5,840
Total Convertible Preferred Stocks (Cost _ 13,440) 15,096
Convertible Bonds _ 12.5%
$ 2,000,000 American Brands, Cv. 5.75%, 4/11/05 2,307
7,000,000 Ceridian,Cv.Sub.Deb.,8.50%,6/15/11 7,175
6,000,000 Champion International, Cv.Sub.Deb.,
6.50%, 4/15/11 6,390
3,000,000 CIGNA, Cv., 8.20%, 7/10/10 3,071
30,000,000 Eastman Kodak Lyons, Cv. Zero Coupon,
10/15/11 9,825
500,000 Homestake Mining, Cv. Sub. Deb.,
5.50%, 6/23/00 600
4,000,000 Petrie Stores, Cv. Sub. Deb., 8.00%,
12/15/10 5,320
2,500,000 Potomac Electric Power, Cv. Deb.,
5.00%, 9/1/02 2,312
4,000,000 Price Company, Cv. Sub. Deb., 5.50%,
2/28/12 4,020
1,750,000 Price Company, Cv. Sub. Deb., 6.75%,
3/1/01 1,820
16,000,000 Rockefeller Center, Cv. Deb., 8.00%,
12/31/00 15,840
5,400,000 Rouse, Cv., 5.75%, 7/23/02 5,090
10,000,000 U.S. West Cv., Zero Coupon, 6/25/11 2,975
Total Convertible Bonds (Cost _ $62,952) 66,745
Corporate Bonds _ 1.3%
6,650,000<F1>Macy (R.H.), Sr. Sub. Deb., 14.50%,
10/15/98 2,760
1,418,000 <F1> Manville, Def. Sub. Deb., 9.00%,
12/31/03 1,410
1,000,000 Southern Pacific Rail, Sr. Notes,
9.375%, 8/15/05 1,064
1,500,000 USAir, 9.625%, 9/1/03 1,489
Total Corporate Bonds (Cost _ $5,192) 6,723
U.S. Govt Obligations/Agencies _ 4.7%
$ 2,500,000 U.S. Treasury Notes,3.875%,3/31/95 $ 2,501
2,500,000 U.S. Treasury Notes,4.25%,5/15/96 2,492
2,500,000 U.S. Treasury Notes, 4.625%,
11/30/94 2,521
2,500,000 U.S. Treasury Notes,4.625%,8/15/95 2,521
2,500,000 U.S. Treasury Notes, 4.625%, 2/15/96 2,516
2,500,000 U.S. Treasury Notes, 5.00%, 6/30/94 2,520
2,500,000 U.S. Treasury Notes, 5.125%,11/15/95 2,542
2,500,000 U.S. Treasury Notes, 5.75%, 3/31/94 2,516
2,500,000 U.S. Treasury Notes, 6.00%, 11/15/94 2,549
2,500,000 U.S. Treasury Notes, 7.00%, 4/15/94 2,526
Total U.S. Government Obligations/Agencies (Cost _ $25,373) 25,204
Index Notes _ 0.4%
169,600 shs. <F1>Republic of Austria, Stock Index
Growth Notes, 8/15/96 2,184
Total Index Notes (Cost _ $1,822) 2,184
Options Purchased _ 0.1%
25 cts. CBS 'B' Put, 2/19/94 (a) $270 11
25 CBS 'B' Put, 2/19/94 (a) $280 16
50 CBS 'B' Put, 5/21/94 (a) $290 89
25 CBS 'B' Put, 5/21/94 (a) $320 92
25 CBS 'B' Put, 5/21/94 (a) $310 75
200 Entergy 'B' Put,4/16/94 (a) $40.00 87
110 Entergy 'B' Put, 6/19/94 (a) $ 35 17
200 Entergy 'B' Put,6/19/94 (a) $40.00 95
375 Federated Department Stores
Put,8/20/94 (a) $15.61,
capped (a) $10.61 26
500 Federated Department Stores Put,
8/20/94 (a) $13.375 13
375 Federated Department Stores Put,
8/20/94 (a) $15.61 24
50 IBM Leap Call, 1/15/94 (a) $55.00 13
60 IBM Leap Call, 1/15/94 (a) $70.00 0
100 cts. Litton Put, 3/19/94 (a) $75.00 $ 106
255 New York Times Put,
1/22/94 (a) $25.00 3
100 New York Times Put,
1/22/94 (a) $30.00 35
65 New York Times Put,4/16/94 (a) $30 25
Total Options Purchased (Cost _ $1,151) 727
Options Written _ (0.1%)
1,078 Federated Department Stores Call,
8/20/94 (a) $19.77 (394)
Total Options Written (Cost _ $(268)) (394)
Miscellaneous (Cost _ $3,233) _ 0.6% 3,200
Short-Term Investments _ 23.2%
BANK NOTES _ 1.9%
$5,000,000 Nations Bank, 3.50%, 5/27/94 5,005
5,000,000 Pittsburgh National Bank,
3.25%, 4/19/94 4,997
10,002
COMMERCIAL PAPER _ 19.8%
5,000,000 Abbey National North America,
3.30%, 1/10/94 4,914
5,000,000 Bank of Nova Scotia,3.25%, 1/21/94 4,961
5,000,000 Bear Stearns, VRMTN,3.37%,12/13/94 5,000
5,000,000 BP Oil New Zealand,3.25%,1/14/94 4,989
5,836,000 BT Securities, 3.25%, 1/3/94 5,834
5,000,000 Caisse des Depots et Consignations,
3.32%, 1/21/94 4,963
5,000,000 Canadian Imperial Holding,
3.25%,2/2/94 4,930
5,000,000 Commerzbank United States Finance,
3.41%, 8/19/94 4,889
5,000,000 Commonwealth Bank of Australia,
3.35%, 1/26/94 4,920
5,000,000 Corporate Asset Fund,
VRMTN,3.40%,12/12/94 4,999
6,000,000 Corporate Asset Funding,
3.20%, 3/7/94 5,908
10,000,000 Finnish Export Credit Limited,
3.30 - 3.35%, 1/28 - 5/16/94 9,875
5,000,000 Goldman Sachs Group, VRNTS,
3.47%, 6/3/94 5,000
752,000 Harvard University, 3.20%, 1/3/94 752
5,000,000 MCA Funding (144a), 3.23%, 4/8/94 4,918
T. Rowe Price Capital Appreciation Fund/Statement of Net Assets (Cont'd)
$5,000,000 Merrill Lynch,VRMTN,3.15%,9/2/94 $ 5,000
5,000,000 Morgan Stanley Group, VRMTN, 3.58%,
7/27/94 5,012
5,000,000 PPG Holdings B.V.,4(2),3.35%,
2/2/94 4,965
4,700,000 South Australian Government, 4(2),
3.35%, 1/4/94 4,636
5,000,000 US Bancorp, 3.45%, 1/14/94 4,971
5,000,000 Wells Fargo, VRMTN,3.64%,8/31/94 5,012
106,448
CERTIFICATES OF DEPOSIT _ 1.5%
8,000,000 Societe Generale, 3.35%, 5/3/94 8,001
Total Short-Term Investments (Cost _ $124,451) 124,451
Total Investments in Securities _ 98.9% (Cost $477,249) 530,381
Other Assets Less Liabilities _ 1.1% $ 5,863
Net Assets Consisting of:
Accumulated net investment income -
net of distributions $ 576
Accumulated realized gains/losses -
net of distributions 8,635
Unrealized appreciation of investments 53,131
Paid-in-capital applicable to 42,347,540
shares of no par value shares of
beneficial interest outstanding;
unlimited number of shares 473,902
Net Assets - 100.0% $ 536,244
Net Asset Value Per Share $12.66
144a Security was purchased pursuant to Rule 144a under the
Securities Act of 1993 and may not be resold subject to that
rule except to qualified institutional buyers.
<F1> Non-income producing
(CHF) Swiss franc denominated
PERCS Participating Equity Redemption Certificates
VRMTN Variable Rate Medium Term Notes
VRNTS Variable Rate Notes
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Capital Appreciation Fund / Year Ended December 31, 1993
Amounts in Thousands
INVESTMENT INCOME
Income
Dividends $ 6,958
Interest 8,813
Total income $15,771
Expenses
Investment management fees 2,741
Shareholder servicing fees & expenses 1,820
Custodian and accounting fees & expenses 174
Prospectus & shareholder reports 85
Registration fees & expenses 83
Legal & auditing fees 29
Trustees' fees & expenses 16
Miscellaneous 16
Total expenses 4,964
Net investment income 10,807
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss)
Securities 22,495
Options (370)
Net realized gain 22,125
Change in unrealized appreciation or depreciation 34,379
Net gain on investments 56,504
INCREASE IN NET ASSETS FROM OPERATIONS $67,311
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price Capital Appreciation Fund
Year Ended December 31,
1993 1992
Amounts in Thousands
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 10,807 $12,369
Net realized gain on investments 22,125 5,035
Change in unrealized appreciation or
depreciation of investments 34,379 8,782
Increase in net assets from operations 67,311 26,186
Distributions to shareholders
Net investment income (7,294) (14,730)
Net realized gain on investments (13,366) (4,718)
Decrease in net assets from distributions
to shareholders (20,660) (19,448)
Capital share transactions
Sold 18,222 and 17,852 shares 219,700 199,908
Distributions reinvested of 1,592 and
1,647 shares 20,008 18,703
Redeemed 8,997 and 7,543 shares (109,387) (84,456)
Increase in net assets from capital
share transactions 130,321 134,155
Net equalization _ 2,686
Total increase 176,972 143,579
NET ASSETS
Beginning of year 359,272 215,693
End of year $536,244 $359,272
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Capital Appreciation Fund / December 31, 1993
Note 1 - Significant Accounting Policies
T. Rowe Price Capital Appreciation Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company.
A) Valuation - Equity securities listed or regularly traded on a
securities exchange (including NASDAQ) 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.
Other equity securities and those listed securities that are not traded
on a particular day are valued at a price within the limits of the
latest bid and asked prices deemed by the Board of Trustees, or by
persons delegated by the Board, best to reflect fair value. In the
absence of a last sale price, purchased and written options are valued
at the last bid and asked prices, respectively.
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by
dealers who make markets in these securities or by an independent
pricing service. Short-term debt securities are valued at their cost in
local currency which, when combined with accrued interest, approximates
fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by, or under the supervision of, the
officers of the Fund, as authorized by the Board of Trustees.
B) Currency translation - Foreign currency amounts are translated into
U.S. dollars at prevailing exchange rates as follows: assets and
liabilities at the rate of exchange at the end of the respective period,
purchases and sales of securities and income and expenses at the rate of
exchange prevailing on the dates of such transactions.
C) 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 an 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 which may differ from
generally accepted accounting principles.
D) Accounting Change - Effective as of the beginning of the year , the
Fund adopted a recently issued accounting standard related to
shareholder distributions and discontinued the practice of equalization.
These changes resulted in a reclassification to paid-in-capital of
permanent differences between tax and financial reporting of net
investment income and net realized gains/losses. The cumulative effect
of these changes as of December 31, 1992 decreased Accumulated net
investment income - net of distributions by $3,105,000, decreased
Accumulated realized gains/losses - net of distributions by $366,000,
and increased Paid-in-capital by $3,471,000. The results of operations
and net assets were not affected by these changes.
Note 2 - Financial Instruments
As a part of its investment program, the Fund writes call options. The
nature and risk of these options and the reasons for using them are set
forth more fully in the Fund's Prospectus and Statement of Additional
Information.
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price until a
certain date. Transactions in call options written and related premiums
received during the year ended December 31, 1993, were as follows:
Notes to Financial Statements (Cont'd)
Face Amount
Subject
to Options Premiums
Options Outstanding at 12/31/92 107,750 $268,000
Options Exercised, Closed or Expired
During the Period _ _
Options Outstanding at 12/31/93 $107,750 $268,000
Purchases and sales of portfolio securities, other than short-term and
U.S. Government securities, aggregated $222,543,000 and $136,040,000,
respectively, for the year ended December 31, 1993.
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, 1993, the aggregate cost of investments for federal
income tax and financial reporting purposes was $477,249,000 and net
unrealized appreciation aggregated $53,132,000, of which $57,948,000
related to appreciated investments and $4,816,000 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, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.30% 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 0.31% for
assets in excess of $34 billion. The effective annual Group Fee rate at
December 31, 1993 and for the year then ended was 0.35%. The Fund pays a
pro rata portion of the Group Fee based on the ratio of the Fund's net
assets to those of the Group.
Additionally, the management fee is subject to a performance adjustment
dependent upon the investment performance of the Fund as compared to the
Standard & Poor's 500 Stock Index over a running 36-month period, as set
forth in the investment management agreement. The performance adjustment
for the year ended December 31, 1993, decreased management fees by
$220,000.
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc.
(RPS) are wholly owned subsidiaries of the Manager. TRPS provides
transfer and dividend disbursing agent functions and shareholder
services for all accounts. RPS provides subaccounting and recordkeeping
services for certain retirement accounts invested in the Fund. The
Manager, under a separate agreement, calculates the daily share price
and maintains the financial records of the Fund. For the year ended
December 31, 1993, the Fund incurred fees totalling approximately
$1,660,000 for these services provided by related part ies. At December
31, 1993, these investment management and service fees payable were
$485,000.
Financial Highlights
T. Rowe Price Capital Appreciation Fund
For a share outstanding throughout each
Year Ended December 31,
1993 1992 1991 1990 1989
NET ASSET VALUE, BEGINNING
OF YEAR $11.39 $11.02 $ 9.98 $10.82 $10.42
Investment Activities
Net investment income 0.26 0.51 0.44 0.37<F2> 0.46<F1>
Net realized and unrealized
gain (loss) 1.52 0.52 1.67 (0.51) 1.75
Total from
Investment Activities 1.78 1.03 2.11 (0.14) 2.21
Distributions
Net investment income (0.18) (0.50) (0.43) (0.39) (0.45)
Net realized gain (0.33) (0.16) (0.64) (0.31) (1.36)
Total Distributions (0.51) (0.66) (1.07) (0.70) (1.81)
NET ASSET VALUE, END OF YEAR$12.66 $11.39 $11.02 $ 9.98 $10.82
RATIOS/SUPPLEMENTAL DATA
Total Return 15.7% 9.4% 21.6% (1.3)% 21.4%
Ratio of Expenses to
Average Net Assets 1.09% 1.08% 1.20% 1.25%<F2>1.50%<F1>
Ratio of Net Investment Income
to Average Net Assets 2.37% 4.28% 3.90% 3.44% 3.85%
Portfolio Turnover Rate 39.4% 30.3% 50.7% 49.9% 98.9%
Net Assets, End of Year
(in thousands) $536,244 $359,272 $215,693 $141,923 $133,175
Number of Shareholder
Accounts, End of Year 25,000 23,000 18,000 15,000 15,000
<F1> Excludes expenses in excess of a 1.50% voluntary expense
limitation in effect through December 31, 1989.
<F2> Excludes expenses in excess of a 1.25% voluntary expense
limitation in effect through December 31, 1993.
Report of Independent Accountants
To the Shareholders and Board of Trustees of T. Rowe Price Capital
Appreciation Fund
We have audited the accompanying statement of net assets of T. Rowe
Price Capital Appreciation Fund, Inc. as of December 31, 1993, and the
related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of investments owned as of December 31, 1993 by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of T. Rowe Price Capital Appreciation Fund, Inc. as
of December 31, 1993, the results of its operations, the changes in its
net assets and financial highlights for each of the respective periods
stated in the first paragraph in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Baltimore, Maryland
January 19, 1994
T. Rowe Price No-Load Mutual Funds
Stability
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
Conservative Income
Adjustable Rate U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate Tax-Free
Maryland Short-Term Tax-Free Bond
Summit Municipal Intermediate
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Income
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Tax-Free Income
Virginia Tax-Free Bond
Aggressive Income
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE Growth
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Growth & Income
Spectrum Growth
Growth
Blue Chip Growth
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
Aggressive Growth
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
Call if you want to know about any T. Rowe Price fund. We'll send you a
prospectus with more complete information, including management fees and
other expenses. Read it carefully before you invest or send money.
Officers and Trustees
George J. Collins, Chairman
Richard P. Howard, President
Donald W. Dick, Jr., Trustee
David K. Fagin, Trustee
John K. Major, Trustee
James S. Riepe, Vice President/Trustee
Hubert D. Vos, Trustee
Arthur B. Cecil III, Vice President
Henry H. Hopkins, Vice President
Charles A. Morris, Vice President
David L. Rea, Vice President
Alan R. Stuart, Vice President
Lenora V. Hornung, Secretary
Carmen F. Deyesu, Treasurer
David S. Middleton, Controller
Shareholder Services
To help shareholders monitor their current investments and make
decisions that accurately reflect their financial goals, T. Rowe Price
offers a wide variety of information and services_at no extra cost.
Telephone Services
Access Your Account 24 Hours a Day by Calling 1-800-638-2587.
Tele*Access(R)_Gives you your account balance, date and amount of your
last transaction, latest dividend payment, and fund prices and yields.
Also, lets you purchase, exchange, or redeem shares.
Shareholder Service Representatives are available from 8:00 a.m. to
10:00 p.m., Monday- Friday, and Saturday from 9:00 a.m. to 5:00 p.m.,
E.T. Call 1-800-225-5132.
Shareholder Service Center_Call to exchange shares or move money
between
your bank and fund accounts.
Account Services
Checking_Write checks for $500 or more on any money market and most
bond fund accounts.
Automatic Investing_Build your account over time by investing
directly from your bank account or paycheck. A low, $50 minimum makes
it easy to get started.
Automatic Withdrawal_If you need money from your fund account on a
regular basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment
Options_Reinvest all or some of your distribu-tions or take them in
cash. We give you maximum flexibility and convenience.
Investment Information
Combined Statement_A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides
total portfolio value, and lists your investments by type_stock, bond,
and money market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports_Portfolio managers review the
performance of the funds in plain language and discuss T. Rowe Price's
economic outlook.
The T. Rowe Price Report_A quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's
economic perspective.
Insights_A library of information that includes reports on mutual fund
tax issues, investment strategies, and financial markets.
Detailed Investment Guides_Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit
(also available on disk for PC use) and Guide to Risk-Adjusted
Performance can help you determine and reach your investment goals.
Discount Brokerage
Trade stocks, bonds, options, and precious metals at substantial savings
over full-cost brokers.
Tele*Trade_Call this automated phone service after business hours to
place your orders.
Fax*Trade_Buy and sell by simply faxing your order.
Tele*Quote_Provides 24-hour access to stock and option quotes.
Money Fund Sweep Feature_Buy and sell securities and have your "sweep"
account automatically debited or credited. Dividend and interest
payments are credited daily.
If you have questions or would like to add a service to your account,
please call our Shareholder Service Center.
Appendix
Chart Number 1: Security Diversification
A pie chart showing the percent of the Fund's assets investment among
common stocks 52.32%, preferred stocks 2.76%, convertibles 15.48%, bonds
5.95%, and reserves 23.49%.
Chart Number 2: Performance Comparison Chart
Capital Appreciation Fund Performance Comparison
A line graph compares the 12/31/93 value of a hypothetical $10,000
investment made in the Capital Appreciation Fund at its inception
(6/30/86) and a similar investment made concurrently in the S&P 500
Index. At 12/31/93, the Fund investment would have been worth $25643 and
the S&P Index investment would have been worth $23759.
