ANNUAL REPORT
----------------------
Capital Appreciation Fund
----------------------
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
----------------------
FOR ASSISTANCE WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
----------------------
T. ROWE PRICE
100 East Pratt Street
Baltimore, Maryland 21202
----------------------
This report is authorized for distribution only to shareholders and to
others who have received a copy of the prospectus of the T. Rowe Price
Capital Appreciation Fund.
<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
Nothing but aces. Strong corporate earnings, low inflation, a possible
balanced budget, and two Federal Reserve rate reductions were all major
positives for U.S. financial markets in 1995. The stock market soared to new
highs and the bond market more than recovered its 1994 losses.
The Capital Appreciation Fund had a pleasant 22.6% return. This exceeded
our long-term expectations, but was below the unmanaged broad market averages
and many competitive funds. Our risk-averse style was not in sync with the
go-for-broke stock market of 1995, although fund results were reasonable
nonetheless. The sophisticated strategies of many professional investors today
are analogous to the intricacies of contract bridge, and for them 1995 was a
grand slam. In contrast, we are always trying as hard to minimize possible
losses as to maximize gains; comparing levels of complexity, you might say we
are playing the game of Old Maid.
- --------------------------------------------------------------------------------
Performance Comparison
================================================================================
Periods Ended 12/31/95
6 Months 12 Months
-------------------------
Capital Appreciation Fund 8.5% 22.6%
S&P 500 14.5 37.6
Lipper Capital Appreciation
Fund Average 11.9 30.3
================================================================================
YEAR-END DISTRIBUTIONS
The fund's Board of Trustees declared a year-end income dividend of $0.44
per share, a long-term capital gain of $0.40 per share, and a short-term capital
gain of $0.32 per share. All were paid December 28 to shareholders of record on
December 26. Your check or statement reflecting these distributions was mailed
in early January and Form 1099-DIV reporting them for tax purposes was sent
toward month-end.
<PAGE>
MARKET ENVIRONMENT
The stock market reached one high after another in 1995. Almost all sectors
were strong -- blue chips, value stocks, growth stocks, technology stocks, most
industries, and so on. Retailing, one of the largest segments of the economy but
only a moderate portion of the equities market, was one of the few poor
performers. As companies have reduced costs by downsizing, the wages that drive
retail sales have stagnated -- an unusual development given strong overall
profit growth. This, in turn, explains the low level of inflation. Wages
represent nearly two-thirds of costs throughout the economy, and when they are
stagnant there is little upward pressure on prices.
The Federal Reserve, which had raised short-term interest rates six times
in 1994, took advantage of the benign price environment to lower them twice this
past year. Investors responded enthusiastically to this shift. A year ago they
thought rates would head higher; today many expect them to fall further. Since
most security prices tend to rise when interest rates fall, rates trumped other
factors, helping assure favorable markets.
The second half of 1995 also witnessed growing momentum toward a balanced
budget. Recognizing the futility of commenting on a subject that changes daily,
it seems likely that some progress will be made. Just over 17% of federal
revenue is now absorbed by interest expense, up significantly from 15 years ago
despite today's much lower interest rates. This cannot continue. Our choice is
to rationally debate spending priorities and make unpleasant but necessary
cutbacks, raise taxes, or drift into a national financial disaster. The current
poker game of bluff and counter-bluff between President Clinton and the
Republican Congress might be entertaining were it not so serious.
PORTFOLIO HIGHLIGHTS
We shot the moon with two major holdings this past year. LOEWS rose 80% in
price and added $0.22 to our net asset value per share. STUDENT LOAN MARKETING
(SALLIE MAE) doubled and contributed $0.21. Each of these positions offset the
negative impact of all our losers. The tables on pages 4 and 5 of this report
give details of performance contributions by individual holding and sector. Not
surprisingly, our retail sector holdings, including PETRIE STORES, HILLS STORES,
and TOYS "R" US, were the biggest disappointments, although actual losses were
moderate.
In recent months, the strong price gains of major holdings caused us to
trim some of our winners. The cash raised was largely used to establish new
positions (one was CIBA-GEIGY) or to add to laggards that remain attractive. On
balance, the portfolio became a shade more conservative since our last report on
June 30, with reserves at 24% of net assets compared with 22% six months ago,
and common stocks at 51% compared with 52%. Remember, the broad totals don't
show the "gin rummy" approach we favor, constantly adding and discarding
holdings to upgrade the portfolio.
<PAGE>
[Security Diverstification - a pie chart showing assets as of 12/31/95: common
stocks 51%, preferred stocks 4%, convertibles 19%, bonds 2%, reserves 24%.]
FUND OPERATING GUIDELINES
We include these partly for the benefit of our many new shareholders and
also because we believe these guidelines differentiate the fund from its
competitors.
* We work as hard to reduce risk as to maximize gain.
* Attractively priced value stocks (as opposed to growth stocks) are our
investment of choice.
* 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.
* Our asset allocations result from individual security decisions, not vice
versa.
* In general, we favor large-cap stocks over small-cap, because we usually
take big positions to make the most of our intensive analysis of individual
securities.
OUTLOOK
As always, the economy, corporate profits, interest rates, inflation, and
market valuation combine as keys to our outlook for the upcoming year. These
seem neutral to modestly positive except for valuations, which we view as a
negative. But this year there is a wild card. By March, the presidential
campaign will be well under way, and with incumbent presidents advantaged by a
strong economy, we think it likely that governmental policies -- both fiscal and
monetary -- will be geared toward accentuating growth.
With this as likely background, we intend as always to focus our attention
on individual securities, buying when others are discouraged, selling when they
are enthusiastic. Beyond that, we will play the cards we're dealt.
Respectfully submitted,
[signature]
Richard P. Howard
President and Chairman of the
Investment Advisory Committee
January 18, 1996
<PAGE>
- --------------------------------------------------------------------------------
A Word on Market Corrections
================================================================================
After the stock market's spectacular run in 1995, concerns about a
"correction" have intensified. Most market observers consider a correction to be
a short and sometimes steep decline following a period of rising prices.
Moderate corrections of around 10% have been quite common, occurring on average
about once every two years over the last half-century, according to Ned Davis
Research.
The market as measured by the Dow Jones Industrial Average has not
experienced a moderate correction since early 1994. Furthermore, the Dow last
hit a bear market bottom -- defined as a drop of at least 20% -- in October
1990. Therefore, it would not be surprising to see a modest pullback in 1996, on
the order of 5% to 10%. In fact, as we write, the market has gotten off to a
rocky start.
Corrections are not only common, but can be beneficial for long-term
investors, especially those who invest in regular amounts through dollar cost
averaging. In a correction, overall stock prices decline, often leading to more
attractive valuations and good buying opportunities. History has shown that
investors who continue to buy through a downturn fare quite well. In fact, the
Dow has proven resilient in the aftermath of past corrections of around 10%,
taking an average of just six months to recover its losses, according to Ned
Davis. (To realize the benefits of dollar cost averaging, you should be prepared
to continuously purchase securities over a period of time, in up and down
markets. This approach does not assure a gain nor protect you from a loss in
declining markets.)
We raise the issue of a market correction not as a prediction, but as a
reminder that stock prices do not move in only one direction. If you are
satisfied that your investments are appropriate for your various objectives, we
recommend that you stay the course when a correction eventually occurs.
<PAGE>
- --------------------------------------------------------------------------------
Twenty-Five Largest Holdings
================================================================================
December 31, 1995
Percent of
Company Net Assets
- ---------------------------------------- ------------
Automatic Data Processing 5.0%
Centerior Energy/Cleveland Electric 3.6
Genentech 3.3
Manville 3.2
Loews 2.9
Kemper 2.7
New York Times 2.6
Entergy 2.1
Newmont Mining 1.9
Rouse 1.9
Washington Post 1.8
Texaco 1.8
Sallie Mae 1.8
Philip Morris 1.6
Atlantic Richfield 1.4
Polaroid 1.4
Price Company 1.3
PHH 1.3
Weyerhaeuser 1.3
Murphy Oil 1.2
American Express 1.2
Chubb 1.1
Chris-Craft Industries 1.1
Homestake Mining 1.0
U.S. West 1.0
Total 49.5%
<PAGE>
- --------------------------------------------------------------------------------
Contributions to the Change in Net Asset Value Per Share
- --------------------------------------------------------------------------------
T. Rowe Price Capital Appreciation Fund
Six Months Ended December 31, 1995
- --------------------------------------------------------------------------------
TEN BEST CONTRIBUTORS
Loews 11 cents
Sallie Mae 10
New York Times 8
Automatic Data Processing 8
Entergy 8
Philip Morris 5
Meredith 5
Genentech 5
Texaco 4
Fannie Mae 3
------
Total 67 cents
- --------------------------------------------------------------------------------
TEN WORST CONTRIBUTORS
Petrie Stores -5 cents
Hills Stores -4
Weyerhaeuser -2
Manville -1
Union Texas Petroleum -1
International Paper 0
IBM 0
Overseas Shipholding Group 0
Pennzoil 0
Oryx Energy 0
------
Total -13 cents
<PAGE>
- --------------------------------------------------------------------------------
Twelve Months Ended December 31, 1995
================================================================================
TEN BEST CONTRIBUTORS
Loews 22 cents
Sallie Mae 21
Philip Morris 13
Automatic Data Processing 12
Entergy 11
New York Times 11
Manville 8
Delta* 8
Polaroid 7
Fannie Mae 6
------
Total 119 cents
- --------------------------------------------------------------------------------
TEN WORST CONTRIBUTORS
Toys "R" Us* -3 cents
Petrie Stores -3
Hills Stores -2
Overseas Shipholding Group -1
Reebok* -1
Tandy* 0
Chemical Waste* 0
Intuit* 0
Murphy Oil 0
Union Texas Petroleum 0
-------
Total -10 cents
* Position eliminated
<PAGE>
- --------------------------------------------------------------------------------
Performance Contributions
================================================================================
Twelve Months Ended December 31, 1995
Cents-Per-Share Percent of
Sector Contribution Net Assets
- ---------------------- --------------- -----------
Basic Materials 4 cents 4.0%
Business Services and Transportation 26 8.0
Capital Equipment 1 0.0
Consumer Cyclicals 22 7.0
Consumer Nondurables 33 8.0
Consumer Services 24 11.0
Energy 15 9.0
Financial 68 12.0
Process Industries 12 3.0
Technology 6 1.0
Utilities 19 9.0
U.S. Government/Options 3 3.0
Total 233 75.0
Miscellaneous 0 1.0
Reserves and Income 40 24.0
--------------- -----------
Total Portfolio 273 cents 100.0%
- --------------------------------------------------------------------------------
Average Annual Compound Total Return
Periods Ended December 31, 1995
================================================================================
Since
Inception
1 Year 5 Years 6/30/86
------- ------- --------
22.57% 14.37% 13.25%
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
[Performance Comparison line graph for Capital Appreciation Fund annual report
(December 31,1995)]
<PAGE>
- --------------------------------------------------------------------------------
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 12/31/95. 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>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Data
- -------------------------------------------------------------------------------
With Capital Gains and Income Dividends Annual
Taken in Cash Reinvested in Additional Shares Total Return
Year Net Capital Capital on Investment
Ended Asset Gain Income Gain Income Value of % Change
12/31 Value Distributions(1) Dividends Distributions Dividends Investment Fund S&P 500
- ------- -------- -------------- ------------ --------------- ---------- ---------- ------ ----------
1986(2) $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 -1.2 -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
1994 12.10 0.69 0.35 1.40 0.71 26.62 3.8 1.3
1995 13.67 0.72 0.44 1.58 0.97 32.62 22.6 37.6
Total $6.43 $3.50 $9.69 $5.73
<FN>
(1) Includes short-term capital gains of $1.74 in 1987; $0.28 in 1988; $1.10 in
1989; $0.08 in 1990; $0.21 in 1991; $0.09 in 1992; $0.14 in 1993; $0.25 in 1994;
and $0.32 in 1995.
(2) From inception 6/30/86 to 12/31/86.
</FN>
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Statement of Net Assets
T. Rowe Price Capital Appreciation Fund / December 31, 1995
================================================================================
(AMOUNTS IN THOUSANDS, EXCEPT CAPITAL STOCK INFORMATION)
Value
-----
Common Stocks -- 50.2%
FINANCIAL -- 9.6%
INSURANCE -- 4.7%
106,000shs Home Beneficial (Class B) ... $2,557
130,000 Kemper ...................... 6,451
325,000 Loews ....................... 25,472
128,000 Unitrin ..................... 6,096
40,576
FINANCIAL SERVICES -- 4.7%
245,000 American Express ............. 10,137
65,000 Fannie Mae ................... 8,068
62,000 Fund American Enterprises .... 4,619
230,000 Sallie Mae ................... 15,151
85,000 Zurich Reinsurance ........... 2,582
40,557
BANK AND TRUST -- 0.2%
100 Bank for International
Settlements (CHF) .......... 841
30,000 Greenpoint Financial ......... 799
1,640
TOTAL FINANCIAL 82,773
UTILITIES -- 5.0%
ELECTRIC UTILITIES -- 5.0%
1,250,000 Centerior Energy ............. 11,094
625,000 Entergy ...................... 18,281
225,000 Niagara Mohawk ............... 2,166
475,000 *Public Service of
New Mexico ................. 8,372
180,000 SCEcorp ...................... 3,195
TOTAL UTILITIES 43,108
CONSUMER NONDURABLES -- 6.6%
HOSPITAL SUPPLIES/HOSPITAL MANAGEMENT -- 0.0%
8,100 *#Lynx Therapeutics .......... 2
<PAGE>
Value
-----
PHARMACEUTICALS -- 5.0%
7,500 Ciba-Geigy (CHF) ............. $6,593
540,000 *Genentech .................... 28,620
75,000 Pharmacia & Upjohn ........... 2,906
100,000 Schering-Plough .............. 5,475
43,594
MISCELLANEOUS CONSUMER PRODUCTS -- 1.6%
150,000shs Philip Morris ................ $13,575
TOTAL CONSUMER NONDURABLES 57,171
CONSUMER SERVICES -- 7.7%
GENERAL MERCHANDISERS -- 0.2%
190,000 *Hills Stores ................. 1,876
SPECIALTY MERCHANDISERS -- 0.8%
2,537,790 Petrie Stores ................ 6,979
MEDIA AND COMMUNICATIONS -- 6.7%
223,519 *Chris-Craft Industries ...... 9,667
160,000 Meredith ..................... 6,700
765,000 New York Times (Class A) ..... 22,663
80,000 Times Mirror (Class A) ....... 2,710
56,000 Washington Post (Class B) .... 15,792
57,532
TOTAL CONSUMER SERVICES 66,387
CONSUMER CYCLICALS -- 2.1%
BUILDING AND REAL ESTATE -- 0.1%
70,000 DeBartolo Realty, REIT ...... 910
MISCELLANEOUS CONSUMER DURABLES -- 2.0%
150,000 Corning ...................... 4,800
255,000 Polaroid ..................... 12,081
16,881
TOTAL CONSUMER CYCLICALS 17,791
TECHNOLOGY -- 1.5%
INFORMATION PROCESSING -- 0.6%
58,100 IBM Sicovam (FRF) ............ 5,196
<PAGE>
Value
-----
AEROSPACE AND DEFENSE -- 0.9%
35,000 *Litton Industries $1,558
245,000 Teledyne ..................... 6,278
7,836
TOTAL TECHNOLOGY 13,032
BUSINESS SERVICES AND TRANSPORTATION -- 2.3%
TRANSPORTATION SERVICES -- 2.2%
180,000shs Overseas Shipholding
Group ...................... 3,420
240,000 PHH .......................... 11,220
170,000 Ryder System ................. 4,208
18,848
MISCELLANEOUS BUSINESS SERVICES -- 0.1%
70,000 John H. Harland .............. 1,461
TOTAL BUSINESS SERVICES AND TRANSPORTATION 20,309
ENERGY -- 7.9%
EXPLORATION AND PRODUCTION -- 0.0%
11,000 Cross Timbers Oil ............ 194
INTEGRATED PETROLEUM - DOMESTIC -- 4.9%
110,000 Atlantic Richfield ........... 12,182
24,000 Kerr-McGee ................... 1,524
260,000 Murphy Oil ................... 10,790
335,000 *Oryx Energy .................. 4,481
80,000 Pennzoil ..................... 3,380
75,000 Sun Company .................. 2,053
360,000 Union Texas Petroleum ........ 6,975
40,000 Unocal ....................... 1,165
42,550
INTEGRATED PETROLEUM -
INTERNATIONAL -- 2.6%
550,000 Petro-Canada ................. 6,344
200,000 Texaco ....................... 15,700
22,044
ENERGY SERVICES -- 0.4%
130,000 Helmerich & Payne ............ 3,867
TOTAL ENERGY 68,655
<PAGE>
Value
-----
PROCESS INDUSTRIES -- 4.0%
PAPER AND PAPER PRODUCTS -- 0.3%
80,000 International Paper .......... $3,030
FOREST PRODUCTS -- 1.3%
250,000 Weyerhaeuser ................. 10,812
BUILDING AND CONSTRUCTION -- 1.4%
950,000 *Manville ..................... 12,469
SPECIALTY CHEMICALS -- 1.0%
100,000 Great Lakes Chemical ......... 7,200
50,000 Petrolite .................... 1,394
8,594
TOTAL PROCESS INDUSTRIES 34,905
BASIC MATERIALS -- 2.6%
MINING -- 2.6%
300,228shs Homestake Mining ............. 4,691
367,381 Newmont Mining ............... 16,624
80,000 Santa Fe Pacific Gold ....... 970
TOTAL BASIC MATERIALS 22,285
CONGLOMERATES -- 0.4%
1,207,741 LONRHO (GBP) ................. 3,301
TOTAL CONGLOMERATES 3,301
MISCELLANEOUS COMMON STOCKS -- 0.5% 4,345
TOTAL COMMON STOCKS (COST $339,323) 434,062
Preferred Stocks -- 4.3%
60,000 Cleveland Electric, $1.88,
Adj., Series L ............. 4,230
10,700 Cleveland Electric, $90,
Series S ..................... 9,523
6,525 Cleveland Electric, 8.80%,
Series R ..................... 5,742
42,981 Gulf States Utilities, Adj.,
Series B ..................... 2,063
548,000 Manville, $2.70, Cum.,
Series B ..................... 13,768
10,540 Teledyne, $15, Cum............ 152
35,478
MISCELLANEOUS PREFERRED STOCKS 1,889
TOTAL PREFERRED STOCKS (COST $32,508) 37,367
<PAGE>
Value
-----
Convertible Preferred Stocks -- 2.5%
326,000 Kemper (144a), Series E ...... $17,013
85,000 Rouse, 6.50%, Series A ....... 4,388
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $20,509) 21,401
Convertible Bonds -- 16.4%
$15,000,000 ALZA, LYONS, Zero Coupon,
7/14/14 .................... 6,008
87,000,000 Automatic Data Processing,
LYONS, Zero Coupon,
2/20/12 .................... 42,964
8,750,000 Chubb, 6.00%, 5/15/98 ........ 9,819
5,200,000 Comcast, 3.375%, 9/9/05 4,895
$2,378,000 Cooper Industries,
7.05%, 1/1/15 .............. $2,449
3,200,000 Cross Timbers Oil,
5.25%, 11/1/03 ............. 2,982
4,700,000 Food Lion (144a),
5.00%, 6/1/03 .............. 4,484
4,000,000 Homestake Mining (144a),
Sub. Deb., 5.50%, 6/23/00 4,120
1,000,000 LONRHO Finance, 6.00%
2/27/04 (GBP) .............. 1,522
2,500,000 Outboard Marine,
7.00%, 7/1/02 .............. 2,600
3,000,000 Pennzoil, Exch.,
4.75%, 10/1/03 ............. 3,023
6,800,000 Potomac Electric Power,
Deb., 5.00%, 9/1/02 ........ 6,324
6,825,000 Price Company, Sub. Deb.,
5.50%, 2/28/12 ............. 6,484
5,000,000 Price Company, Sub. Deb.,
6.75%, 3/1/01 .............. 5,119
11,800,000 Rouse, Sub. Deb.,
5.75%, 7/23/02 ............. 11,800
15,000,000 Turner Broadcasting System,
LYONS, Zero Coupon,
2/13/07 .................... 6,854
25,000,000 U. S. WEST, LYONS, Zero
Coupon, 6/25/11 ........... 8,750
9,000,000 WMX Technologies, Sub.
Deb., 2.00%, 1/24/05 ....... 7,785
137,982
MISCELLANEOUS CONVERTIBLE BONDS 3,494
TOTAL CONVERTIBLE BONDS (COST $129,844) 141,476
<PAGE>
Value
-----
Corporate Bonds -- 0.2%
1,813,580 Manville, Sub. Deb., 9.00%,
12/31/03 ................... $1,814
TOTAL CORPORATE BONDS (COST $1,517) 1,814
U.S. Government Obligations Agencies -- 3.0%
U.S. Treasury Notes
2,500,000 4.25%, 5/15/96 ............. 2,491
6,000,000 4.625%, 2/15 - 2/29/96 ..... 5,996
9,000,000 5.75%, 10/31/97 ............ 9,087
8,000,000 7.375%, 11/15/97 ........... 8,302
TOTAL U.S. GOVERNMENT OBLIGATIONS/AGENCIES
(COST $25,138) 25,876
Index Notes -- 0.2%
$75,000 *Republic of Austria,
8/15/96 .................... 1,322
TOTAL INDEX NOTES (COST $779) 1,322
Options Purchased -- 0.1%
170cts *Automatic Data Processing
"B" Put, 5/18/96 @ $85.00 .. 180
140 *Guidant "B" Put, 1/20/96 @
$30.00 ..................... 0
100 *IBM "B" Put, 1/20/96
@ $110.00 ................. 200
100 *IBM "B" Put, 1/20/96
@ $120.00 ................. 289
100 *IBM "B" Put, 4/20/96
@ $105.00 ................. 141
100 *IBM "B" Put, 4/20/96
@ $110.00 ................. 196
120 *Kerr McGee "B" Put,
4/20/96 @ $65.00 .......... 39
100 *Times Mirror "B" Put,
6/22/96 @ $35.00 .......... 25
100 *Upjohn "B" Put, 4/20/96 @
$55.00 .................... 24
TOTAL OPTIONS PURCHASED (COST $916) 1,094
Short-Term Investments -- 22.1%
CERTIFICATES OF DEPOSIT -- 1.1%
$10,000,000 Den Danske Bank London,
5.74%, 2/20/96 ............ 10,000
<PAGE>
Value
-----
COMMERCIAL PAPER -- 19.8%
10,000,000 Ameritech, 5.58%, 2/9/96 ...... $9,930
10,000,000 ANZ (Delaware),
5.70%, 1/26/96 .............. 9,834
10,000,000 Asset Securitization
Cooperative 4(2),
5.70%, 1/24/96 .............. 9,857
10,000,000 AT&T Capital, 5.53%,
3/8/96 ...................... 9,888
10,000,000 Barnett Banks, 5.70%,
1/25/96 ..................... 9,945
10,000,000 Becton Dickinson 4(2),
5.80%, 1/18/96 .............. 9,944
10,000,000 Caisse des Depots et
Consignations 4(2),
5.76%, 1/17/96 .............. 9,931
10,000,000 Cheltenham & Glouster,
5.58%, 2/8/96 ............... 9,924
10,000,000 Ciesco L.P. 4(2),
5.53%, 2/27/96 .............. 9,896
10,000,000 Commerzbank,
5.77%, 1/8/96 ............... 9,947
10,000,000 CPC International 4(2),
5.66%, 2/15/96 .............. 9,852
5,000,000 International Nederland
Bank, 5.47%, 3/22/96 ........ 4,931
7,816,414 Investments in Commercial
Paper through a joint
account, 5.90-6.05%,
1/2/96 ...................... 7,811
10,000,000 Knight-Ridder, 6.00%, 1/8/96 .. 9,980
10,000,000 National Australia Funding
(Delaware), 5.72%,
1/22/96 ..................... 9,868
10,000,000 Preferred Receivables Funding,
5.72%, 1/31/96 .............. 9,903
10,000,000 Westpac Capital,
5.52%, 4/10/96 .............. 9,816
10,000,000 Yale University,
5.70%, 1/17/96 .............. 9,853
171,110
MEDIUM-TERM NOTES -- 1.2%
10,000,000 Morgan Stanley Group, VR,
6.063%, 1/31/97 ............. 10,003
TOTAL SHORT-TERM INVESTMENTS (COST $191,113) 191,113
<PAGE>
Value
-----
TOTAL INVESTMENTS IN SECURITIES -- 99.0% OF
NET ASSETS (COST $741,647) $855,525
OTHER ASSETS LESS LIABILITIES .................. 8,748
NET ASSETS CONSIST OF: Value
-------
Accumulated net investment
income - net of distributions ........ $196
Accumulated net realized
gain/loss - net of distributions ..... 4,498
Net unrealized gain (loss) ............. 113,878
Paid-in-capital applicable to
63,239,806 shares of no par
value capital stock outstanding;
unlimited shares authorized 745,701
-------
NET ASSETS ...................................... $864,273
========
NET ASSET VALUE PER SHARE ....................... $13.67
======
* Non-income producing
# Securities contain some restrictions as to public
resale -- total of such securities at year-end
amounts to 0.0% of net assets.
REIT Real Estate Investment Trust
VR Variable rate
4(2) Commercial paper sold within terms of a private
placement memorandum, exempt from registration
under section 4.2 of the Securities Act of 1933,
as amended, and may be sold only to dealers in
that program or other "accredited investors."
144a Security was purchased pursuant to Rule 144a
under the Securities Act of 1933 and may not be
resold subject to that rule except to qualified
institutional buyers -- total of such securities
at year-end amounts to 3.0% of net assets.
CHF Swiss franc
FRF French franc
GBP British sterling
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Operations
T. Rowe Price Capital Appreciation Fund / Year Ended December 31, 1995
================================================================================
(IN THOUSANDS)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Interest ................................................ $18,551
Dividend ................................................ 14,485
-------
Total income ............................................ 33,036
-------
Expenses
Investment management ................................... 4,940
Shareholder servicing ................................... 2,134
Custody and accounting .................................. 182
Prospectus and shareholder reports ...................... 152
Registration ............................................ 81
Legal and audit ......................................... 28
Trustees ................................................ 21
Miscellaneous ........................................... 32
-------
Total expenses .......................................... 7,570
-------
Net investment income ..................................... 25,466
-------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Securities .............................................. 35,713
Options ................................................. 1,274
Foreign currency transactions ........................... 18
-------
Net realized gain (loss) ................................ 37,005
-------
Change in net unrealized gain or loss on:
Securities .............................................. 93,597
Options ................................................. (1,244)
Other assets and liabilities denominated
in foreign currencies ................................. (3)
-------
Change in net unrealized gain or loss ................... 92,350
-------
Net realized and unrealized gain (loss) ................... 129,355
-------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ......... $154,821
=======
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Changes in Net Assets
T. Rowe Price Capital Appreciation Fund
================================================================================
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Year Ended December 31,
1995 1994
------ ------
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income .............................. $25,466 $17,318
Net realized gain (loss) ........................... 37,005 35,332
Change in net unrealized gain or loss .............. 92,350 (31,603)
------- -------
Increase (decrease) in net assets from operations .. 154,821 21,047
------- -------
Distributions to shareholders
Net investment income .............................. (25,734) (17,429)
Net realized gain .................................. (42,109) (34,365)
------- -------
Decrease in net assets from distributions .......... (67,843) (51,794)
------- -------
Capital share transactions*
Shares sold ........................................ 240,766 215,254
Distributions reinvested ........................... 65,960 50,316
Shares redeemed .................................... (184,430) (116,068)
------- -------
Increase (decrease) in net assets from
capital share transactions........................ 122,296 49,502
------- -------
Increase (decrease) in net assets .................... 209,274 118,755
NET ASSETS
Beginning of period .................................. 654,999 536,244
------- -------
End of period ........................................ $864,273 $654,999
======= =======
*Share information
Shares sold ........................................ 18,018 16,627
Distributions reinvested ........................... 4,829 4,162
Shares redeemed .................................... (13,738) (9,006)
------- -------
Increase (decrease) in shares outstanding .......... 9,109 11,783
======= =======
<PAGE>
================================================================================
Notes To Financial Statements
T. Rowe Price Capital Appreciation Fund / December 31, 1995
================================================================================
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 are valued at the last quoted sales price at the time the valuations
are made. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. Listed securities that are not traded on a particular day and
securities that are regularly traded in the over-the-counter market are valued
at the mean of the latest bid and asked prices. Other equity securities are
valued at a price within the limits of the latest bid and asked prices deemed by
the Board of Trustees, or by persons delegated by the Trustees, best to reflect
fair value. In the absence of a last sale price, purchased options are valued at
the latest bid price.
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 which, when combined with
accrued interest, approximates fair value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Trustees.
B) Currency Translation - Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated into
U.S. dollars at the prevailing exchange rate on the dates of such transactions.
The effect of changes in foreign exchange rates on realized and unrealized
security gains and losses is reflected as a component of such gains and losses.
<PAGE>
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 the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with federal
income tax regulations and may differ from those determined in accordance with
generally accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks and 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.
A) Options - Call and put options give the holder the right to purchase or
sell, respectively, a security at a specified price on a certain date. Risks
arise from possible illiquidity of the options market and from movements in
security values.
B) Commercial Paper Joint Account - The fund, and other affiliated funds,
may transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
C) Other - Purchases and sales of portfolio securities, other than
short-term securities, aggregated $285,922,000 and $285,782,000, respectively,
for the year ended December 31, 1995.
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, 1995, the aggregate cost of investments for federal income
tax and financial reporting purposes was $741,647,000 and net unrealized gain
aggregated $113,878,000, of which $123,613,000 related to appreciated
investments and $9,735,000 to depreciated investments.
<PAGE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management fee,
of which $416,000 was payable at December 31, 1995. The fee is computed daily
and paid monthly, and consists 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. At
December 31, 1995, and for the year then ended, the effective annual Group Fee
rate was 0.34%. The fund pays a pro rata share of the Group Fee based on the
ratio of its 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, 1995 decreased management fees by $20,000.
In addition, the fund has entered into agreements with the Manager and two
wholly owned subsidiaries of the Manager, pursuant to which the fund receives
certain other services. The Manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc., is the fund's
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc., provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $1,955,000 for the year ended
December 31, 1995, of which $197,000 was payable at period-end.
<PAGE>
================================================================================
Financial Highlights
T. Rowe Price Capital Appreciation Fund
================================================================================
<TABLE>
<S> <C> <C> <C> <C> <C>
For a share outstanding throughout each period
Year Ended December 31,
1995 1994 1993 1992 1991
NET ASSET VALUE, BEGINNING OF PERIOD .................... $12.10 $12.66 $11.39 $11.02 $9.98
------ ------ ------ ------ ------
Investment activities
Net investment income ................................. 0.43 0.35 0.26 0.51 0.44
Net realized and unrealized gain (loss) ............... 2.30 0.13 1.52 0.52 1.67
------ ------ ------ ------ ------
Total from investment activities ...................... 2.73 0.48 1.78 1.03 2.11
------ ------ ------ ------ ------
Distributions
Net investment income ................................. (0.44) (0.35) (0.18) (0.50) (0.43)
Net realized gain ..................................... (0.72) (0.69) (0.33) (0.16) (0.64)
------ ------ ------ ------ ------
Total distributions ................................... (1.16) (1.04) (0.51) (0.66) (1.07)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD .......................... $13.67 $12.10 $12.66 $11.39 $11.02
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Total return ............................................ 22.6% 3.8% 15.7% 9.4% 21.6%
Ratio of expenses to average net assets ................. 0.97% 1.10% 1.09% 1.08% 1.20%
Ratio of net investment income
to average net assets ................................. 3.28% 2.91% 2.37% 4.28% 3.90%
Portfolio turnover rate. ................................ 47.0% 43.6% 39.4% 30.3% 50.7%
Net assets, end of period (in thousands) ................ $864,273 $654,999 $536,244 $359,272 $215,693
</TABLE>
<PAGE>
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 as of December 31, 1995, 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, 1995, by correspondence with the custodia n 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 as of December 31, 1995, 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 L.L.P.
Baltimore, Maryland
January 18, 1996
