================================================================================
CAPITAL APPRECIATION FUND
SEMIANNUAL REPORT
================================================================================
June 30,1996
- --------------------------------------------------------------------------------
================================================================================
Report Highlights
- --------------------------------------------------------------------------------
*The stock market and your fund started the year with a head of steam, slowed
a bit in the second half, but generated respectable results.
*The rally was broad-based, although interest-sensitive stocks like utilities
tended to underperform.
*Reflecting our conservative investment posture and focus on reducing risk,
your fund achieved solid results -- 6.95% and 16.03% for the 6- and 12-month
periods -- but lagged the overall market.
*The major change in asset allocation was a reduction in reserves to purchase
convertible bonds. One of our best contributors to the share price gain was
Schuller, the former Manville, in which we hold several types of securities.
*Of the major market influences, we see the economy as a positive in the
second half, while interest rates, inflation, and valuations look
increasingly unhealthy. The election should be a transitory positive.
<PAGE>
================================================================================
Fellow Shareholders
- --------------------------------------------------------------------------------
Your fund came out of the starting blocks just fine -- befitting this
Olympic year. First quarter results for the fund and stocks in general were
strong. Both were still running well in the second quarter despite some loss of
momentum, and returns remained reasonable.
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 6/30/96 6 Months 12 Months
Capital Appreciation Fund 6.95% 16.03%
S&P 500 10.10 26.00
Lipper Capital Appreciation
Funds Average 11.50 23.97
- --------------------------------------------------------------------------------
Your fund has always taken a measured approach to investing. We are pacing
ourselves, hoping to maintain some performance consistency when the track gets
rougher and the bull market eventually falters. Our conservative equity posture
has prevented our full participation in the stock runup, as shown in the table.
However, by the same token, it should limit the damage when the markets become
less favorable.
================================================================================
Market Environment
- --------------------------------------------------------------------------------
Building on 1995's financial market strength, the stock market continued to
reach record highs in the first half of this year. The principal driver of this
success is never quite certain, but we suspect that the usual fundamental
factors -- interest rates, corporate profits, dividend growth, and so on -- were
neutral at best. More likely the impetus came largely from the flood of money
into equity mutual funds. It would surprise us if this money flow reversed, but
it could slow sharply in the second half.
Most major stock groups moved higher, with small companies doing
particularly well. Electric utilities were one of the few groups that had
negative returns, largely due to a significant jump in interest rates. Bonds
(remember when they were the investment of choice for widows and orphans?) were
particularly hurt by the higher rates.
<PAGE>
The first half also had its share of unsettling although somewhat
extraneous factors. We're thinking particularly of the Japanese company that
lost billions of dollars trading copper. A "rogue" trader was blamed, but we're
suspicious of that explanation. Apart from the ripple effects on the markets, we
saw this as an unsettling example of excessive risk-taking. Many managements
today demand superior quantitative results over shorter and shorter periods.
Unfortunately, quality measurements have not advanced to anywhere near the same
degree as those for quantity. Potentially high returns from high-risk activities
that may end in disaster can nevertheless be attractive to people reaching
beyond their abilities and to those under unrealistic pressure. The analogy of
performance-enhancing drugs comes to mind.
[Pie chart "Security Diversification" -- Common Stocks 51%, Convertibles 25%,
Preferred Stocks 3%, Bonds 3%, Reserves 18%]
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
Our asset allocation changed somewhat during the period. Cash reserves were
drawn down to fund the purchase of convertible bonds offering more upside
potential. Besides augmenting existing holdings, we established five new
positions. Our commitment to common stocks, preferred stocks, and bonds was
essentially unchanged. During the first half, all five of your fund's asset
classes had solid positive returns, which was especially pleasing in light of
the weak bond market.
Four of our equity holdings were gold medal winners. Ciba-Geigy, Teledyne,
New York Times, and Schuller all appreciated by more than 25% and had
significant impact on our net asset value (see table following this letter).
Schuller, the former Manville, has been a particularly gratifying champion. We
first visited the company in the summer of 1991 and began buying its bonds and
preferred stock that August. In early 1993, the company's recovery from an
asbestos-induced bankruptcy reached the point where we began buying its common
stock. We accumulated positions in three different company securities and were
well rewarded by all of them. The aggregate position, once our largest, is now
much reduced. Schuller repurchased our bonds and preferred stock at a full
price, and we have been trimming the common stock holding.
As always, we've had some losers, but none of serious magnitude. Centerior
Energy drifted lower, and we used the decline to build it into the fund's
largest position. Our investment is about 60% common stock and 40% preferred. We
have had great returns from troubled electric utilities in the past and
anticipate similar success with Centerior.
<PAGE>
================================================================================
Managing Risk
- --------------------------------------------------------------------------------
The race is not always to the swift. Myriad factors -- including luck and
plain old mistakes -- play a role in investing as in athletics. These
uncertainties add up to the risk facing shareholders in Capital Appreciation
Fund. Since the fund's inception, however, we have attempted to both reduce and
control that risk consistent with pursuing the fund's objective. Our strategy
has had five basic facets: adjusting asset allocation, protecting principal with
put options, emphasizing value rather than growth stocks, searching for the
unusual security, and stressing convertibles with stable bond values. A word on
each.
During the strong equity market of the last 18 months, we sometimes
wondered why we owned anything but common stocks. Bonds, preferred stocks, cash
reserves, and even convertibles can't keep up with a zippy equity. But the
market doesn't always set records, and our asset allocation strategy has other
significant benefits. When equity markets are driven by interest rate changes --
either up or down -- all asset class prices usually move in the same direction.
When other factors predominate, a broad asset diversification can buffer the
returns of the portfolio from extreme swings. For example, if a poor economy
drives down stock prices, bond prices often rise.
=============================
Companies that sell at low
valuations . . . tend to
swing less wildly in price.
- -----------------------------
Presently, we own put options which protect portions of eight of our
investments. This protection, which typically costs us a bit of return each
year, is used only occasionally and then in moderation. Value stocks are a
staple of our investment approach. Companies that sell at low valuations,
whether based upon price-to-earnings, price-to-book value, dividend yield, or
other measures tend to swing less wildly in price. Their business problems may
typically be somewhat greater than the average stock, but the risk of sudden
investor disenchantment is almost always much less. Unusual securities are just
that -- unusual and hard to find. In the past, we've owned preferred stocks that
weren't paying their dividends, bonds in bankrupt companies, and contingent
rights of uncertain value. They have typically provided good returns for us
whether the overall stock market went up or down. Our convertible holdings are
chosen with an eye on their value as fixed income investments as well as their
potential equity reward. We emphasize convertibles that we believe will hold up
pretty well even when interest rates rise.
<PAGE>
Notice that we have not said anything about the statistical measures of
risk. Some independent evaluators of mutual funds rank fund performance in
relation to the amount of volatility experienced in achieving it. We find this
yet another example of quantity rather than quality measurement. Nevertheless,
it may be comforting to know that by virtually all statistical measures, Capital
Appreciation Fund's risk profile is lower than that of other equity funds. For
example, the fund's beta is 0.55, which means it is 45% less volatile than the
overall market as measured by the S&P 500.
================================================================================
Outlook
- --------------------------------------------------------------------------------
Here's how I size up the major influences on the long-running bull market.
The economy reminds me of a lead runner, with loose form and a relaxed but
focused face. Why some are predicting it will falter is beyond me. Inflation
also seems comfortably under control, perhaps deteriorating gradually, but not
worrisome. Interest rate volatility scares me: 1994 was the worst year for
bonds, 1995 was one of the best, and 1996 is looking bad again. Stock valuations
are clearly in bad shape: none look healthy; most are horrible. Corporate
profits are fair but not good. All things considered, the outlook seems neutral
at best.
Ah, but what about that other every-four-years contest, the election? It's
gradually having a positive influence on the financial markets and everything
else. The Federal Reserve is likely to act with restraint, government spending
is sure to remain strong, and our perception of events and conditions will be
manipulated upward. We will know what's truly going on only after November.
On the eve of the Olympics, your fund also achieved a milestone -- its
tenth anniversary. Throughout the years, the fund has consistently been managed
to reduce possible losses as well as to maximize potential gains, as spelled out
in its prospectus. That approach goes in and out of style among mutual funds,
but with us it is timeless.
Respectfully submitted,
[Signature]
Richard P. Howard
President and
Chairman of the Investment Advisory Committee
July 19, 1996
<PAGE>
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/96
- --------------------------------------------------------------------------------
Centerior Energy/Cleveland Electric 5.7%
Automatic Data Processing 4.7
Genentech 3.0
New York Times 2.9
Loews 2.6
Ciba-Geigy 2.5
Washington Post 2.0
Rouse 2.0
Kemper 1.9
Newmont Mining 1.8
Texaco 1.8
U.S.West 1.7
Turner Broadcasting Systems 1.6
Murphy Oil 1.4
Sallie Mae 1.4
PHH 1.4
Atlantic Richfield 1.4
Entergy 1.3
Homestake Mining 1.3
WMX Technologies 1.3
USF&G 1.3
Price Company 1.2
Polaroid 1.2
Chris-Craft 1.1
Reebok 1.1
- --------------------------------------------------------------------------------
Total 49.6%
<PAGE>
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 6/30/96
Ten Best Contributors
================================================================================
Ciba-Geigy 11cents
Schuller 5
Teledyne 4
New York Times 4
PHH 3
Washington Post 3
Automatic Data Processing 3
Sallie Mae 3
Newmont Mining 3
Reebok 2
- --------------------------------------------------------------------------------
Total 41cents
Ten Worst Contributors
================================================================================
Centerior Entergy/Cleveland Electric -2cents
Great Lakes Chemical -1
Polaroid 0
Genentech 0
Potomac Electric Power 0
Fannie Mae 0
Overseas Shipholding Group 0
U.S.WEST 0
Edison International 0
Outboard Marine 0
- --------------------------------------------------------------------------------
Total -3cents
12 Months Ended 6/30/96
Ten Best Contributors
================================================================================
Sallie Mae 12cents
New York Times 12
Ciba-Geigy 11
Automatic Data Processing 11
Loews 11
Philip Morris 7
Entergy 6
Texaco 5
Washington Post 5
Newmont Mining 5
- --------------------------------------------------------------------------------
Total 85cents
<PAGE>
Ten Worst Contributors
================================================================================
Hills Stores -4cents
Centerior Energy/Cleveland Electric -3
Weyerhaeuser -1
Hecla Mining -1
Overseas Shipholding Group 0
International Paper 0
Union Texas Petroleum 0
Outboard Marine 0
Fannie Mae 0
Grand Metropolitan 0
- --------------------------------------------------------------------------------
Total -9cents
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
PERFORMANCE CONTRIBUTIONS
Cents-Per-SharePercent of
ContributionNet Assets
Sector 6/30/96 6/30/96
- --------------------------------------------------------------------------------
Basic Materials 3cents 3%
Business Services and Transportation 8 8
Consumer Cyclicals 6 6
Consumer Nondurables 15 8
Consumer Services 11 13
Energy 9 9
Financial 8 14
Process Industries -1 2
Technology 4 2
Utilities -3 10
U.S. Governments/Options -1 3
Miscellaneous 2 4
Reserves and Income 34 18
- --------------------------------------------------------------------------------
Total Portfolio 95cents 100%
<PAGE>
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
[SEC Graph shown here]
================================================================================
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
================================================================================
Periods Ended 6/30/96 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Capital Appreciation Fund 16.03% 13.59% 12.89% 13.31%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original purchase.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
Unaudited For a share outstanding throughout each period
==============================================================================================================
Financial Highlights
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6 Months Year
Ended Ended
6/30/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
NET ASSET VALUE
Beginning of period $13.67 $12.10 $12.66 $11.39 $11.02 $9.98
Investment activities
Net investment income 0.34 0.43 0.35 0.26 0.51 0.44
Net realized and
unrealized gain (loss) 0.61 2.30 0.13 1.52 0.52 1.67
Total from
investment activities 0.95 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 $14.62 $13.67 $12.10 $12.66 $11.39 $11.02
Ratios/Supplemental Data
Total return 6.95% 22.57% 3.80% 15.66% 9.36% 21.59%
Ratio of expenses to
average net assets 0.81%* 0.97% 1.10% 1.09% 1.08% 1.20%
Ratio of net investment
income to average
net assets 4.71%* 3.28% 2.91% 2.37% 4.28% 3.90%
Portfolio turnover rate 43.9%* 47.0% 43.6% 39.4% 30.3% 50.7%
Average commission
rate paid $0.0598 - - - - -
Net assets, end of period
(in thousands) $906,280 $864,273 $654,999 $536,244 $359,272 $215,693
- --------------------------------------------------------------------------------------------------------------
<FN>
* Annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Unaudited June 30, 1996
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
In thousands
Shares/Par Value
Common Stocks 50.9%
FINANCIAL 8.1%
Insurance 3.5%
Home Beneficial (Class B) .................. 74,500 $ 1,918
Loews ...................................... 300,000 23,663
Unitrin .................................... 128,000 6,048
31,629
Financial Services 4.4%
American Express ........................... 200,000 8,925
Fannie Mae ................................. 200,000 6,700
Fund American Enterprises .................. 65,000 5,265
Sallie Mae ................................. 170,000 12,580
Salomon .................................... 75,000 3,300
Zurich Reinsurance ......................... 94,500 2,976
39,746
Bank and Trust 0.2%
Bank Fuer International Zahlung (CHF) ...... 75 660
Greenpoint Financial ....................... 40,000 1,130
1,790
Total Financial 73,165
UTILITIES 5.3%
Electric Utilities 5.3%
Centerior Energy ......................... 4,200,000 30,975
Entergy .................................. 430,000 12,201
Public Service of New Mexico ............. 250,000 5,125
Total Utilities 48,301
<PAGE>
CONSUMER NONDURABLES 8.1%
Hospital Supplies/Hospital Management 0.0%
Lynx Therapeutics ........................ 810 4
4
Pharmaceuticals 6.0%
Ciba-Geigy (CHF) ......................... 18,900 23,054
Genentech * .............................. 525,000 27,497
Schering-Plough .......................... 60,000 3,765
54,316
Miscellaneous Consumer Products 2.1%
Philip Morris ............................ 90,000 $ 9,360
Reebok ................................... 300,000 10,088
19,448
Total Consumer Nondurables 73,768
CONSUMER SERVICES 8.2%
General Merchandisers 0.2%
Hills Stores * ........................ 175,000 1,553
1,553
Specialty Merchandisers 1.0%
Petrie Stores Liquidation Trust ....... 2,560,000 7,200
Toys "R" Us * ......................... 65,000 1,852
9,052
Media and Communications 7.0%
Chris-Craft * ......................... 230,224 10,130
Meredith .............................. 130,000 5,428
New York Times (Class A) .............. 810,000 26,426
Times Mirror (Class A) ................ 70,000 3,045
Washington Post (Class B) ............. 57,000 18,468
63,497
Total Consumer Services 74,102
<PAGE>
CONSUMER CYCLICALS 2.0%
Miscellaneous Consumer Durables 2.0%
Corning ............................... 200,000 7,675
Polaroid .............................. 230,000 10,494
Total Consumer Cyclicals 18,169
TECHNOLOGY 1.6%
Information Processing 0.6%
IBM .......................................... 50,000 4,950
4,950
Aerospace and Defense 1.0%
Teledyne ..................................... 260,000 9,392
9,392
Total Technology 14,342
BUSINESS SERVICES AND
TRANSPORTATION 2.4%
Transportation Services 2.3%
Overseas Shipholding Group ................... 225,000 $ 4,078
PHH .......................................... 220,000 12,540
Ryder System ................................. 170,000 4,782
21,400
Miscellaneous Business Services 0.1%
John H. Harland .............................. 26,000 640
640
Total Business Services and Transportation 22,040
ENERGY 7.9%
Integrated Petroleum - Domestic 5.1%
Atlantic Richfield ......................... 105,000 12,442
Kerr-McGee ................................. 24,000 1,461
Murphy Oil ................................. 280,000 12,705
Oryx Energy * .............................. 285,000 4,631
Pennzoil ................................... 70,000 3,238
Sun Company ................................ 105,000 3,189
Union Texas Petroleum ...................... 385,000 7,508
Unocal ..................................... 20,000 675
45,849
<PAGE>
Integrated Petroleum - International 2.4%
Petro-Canada ............................... 475,000 5,878
Texaco ..................................... 190,000 15,937
21,815
Energy Services 0.4%
Helmerich & Payne .......................... 95,000 3,479
3,479
Total Energy
71,143
PROCESS INDUSTRIES 3.3%
Paper and Paper Products 0.3%
International Paper ........................ 80,000 2,950
2,950
Forest Products 1.1%
Weyerhaeuser ............................... 230,000 $ 9,775
9,775
Building and Construction 1.1%
Schuller .............................. 965,000 10,012
10,012
Specialty Chemicals 0.8%
Great Lakes Chemical .................. 110,000 6,848
Petrolite ............................. 3,000 95
6,943
Total Process Industries 29,680
BASIC MATERIALS 2.3%
Mining 2.2%
Homestake Mining ...................... 100,000 1,712
Newmont Mining ........................ 325,000 16,047
Santa Fe Pacific Gold ................. 150,000 2,119
<PAGE>
19,878
Metals 0.1%
Hecla Mining * ........................ 140,000 980
980
Total Basic Materials 20,858
CONGLOMERATES 0.2%
LONRHO (GBP) .......................... 700,000 2,011
Total Conglomerates 2,011
Miscellaneous Common Stocks 1.5% 13,656
Total Common Stocks (Cost $353,786) 461,235
Preferred Stocks 2.8%
Cleveland Electric, $1.88, Adj., Series L ... 60,000 4,260
Cleveland Electric, $90, Series S ........... 10,700 9,978
Cleveland Electric, 8.80%, Series R ......... 6,525 6,150
Entergy-GSU., Dep., Adj. B, 8.75% ........... 39,959 1,901
Teledyne, $15, Cum .......................... 13,040 200
Miscellaneous Preferred Stocks
2,750
Total Preferred Stocks (Cost $ 22,883)
25,239
Convertible Preferred Stocks 1.9%
Kemper (144a), Series E ..................... 326,000 $16,952
Miscellaneous Convertible Preferred Stocks 567
Total Convertible Preferred Stocks (Cost $ 16,606) 17,519
Convertible Bonds 22.9%
<PAGE>
Automatic Data Processing, LYONS, Zero Coupon, 2/20/12 $82,000,000 42,459
Chubb, 6.00%, 5/15/98 ................................ 7,000,000 8,353
Comcast, Sub. Deb., 3.375%, 9/9/97 ................... 8,000,000 7,577
Cooper Industries, Sub. Deb., 7.05%, 1/1/15 .......... 1,728,000 1,853
Food Lion (144a), 5.00%, 6/1/03 ...................... 4,200,000 4,497
Gencorp, Sub. Deb., 8.00%, 8/1/02 .................... 1,500,000 1,624
Grand Metropolitan, 6.50%, 1/31/00 ................... 3,100,000 3,379
Grand Metropolitan (144a), 6.50%, 1/31/00 ............ 3,100,000 3,379
Homestake Mining (144a), Sub. Deb., 5.50%, 6/23/00 ... 10,200,000 10,123
INA, 5.00%, 6/28/01 .................................. 3,500,000 3,570
LONRHO Finance, 6.00%, 2/27/04 (GBP) ................. 3,500,000 5,470
Office Depot, LYONS, Zero Coupon, 11/1/08 ............ 7,500,000 4,406
Outboard Marine, Deb., 7.00%, 7/1/02 ................. 4,500,000 4,534
Pennzoil, Exch., 4.75%, 10/1/03 ...................... 3,000,000 3,256
Potomac Electric Power, Sub. Deb., 5.00%, 9/1/02 ..... 5,800,000 5,191
Price Company, Sub. Deb., 5.50%, 2/28/12 ............. 6,500,000 6,695
Price Company, Sub. Deb., 6.75%, 3/1/01 .............. 4,000,000 4,310
Rouse, Sub. Deb., 5.75%, 7/23/02 ..................... 18,000,000 17,775
Turner Broadcasting System, LYONS, Zero Coupon, 2/13/07 1,500,000 14,805
U S WEST, LYONS, Zero Coupon, 6/25/11 ................ 45,000,000 15,637
USF&G, Zero Coupon, 3/3/09 ........................ 20,000,000 11,650
WMX Technologies, Sub. Deb., 2.00%, 1/24/05 ....... 12,800,000 11,776
Miscellaneous Convertible Bonds 15,573
Total Convertible Bonds (Cost $ 195,790) 207,892
U.S. Government Obligations/
Agencies 3.0%
Fannie Mae
5.37%, 2/7/01 .................................... 5,000,000 4,744
U.S. Treasury Notes
5.75%, 10/31/97 .................................. 9,000,000 8,978
6.75%, 5/31/99 ................................... $5,000,000 $ 5,058
7.375%, 11/15/97 ................................. 8,000,000 8,142
Total U.S. Government Obligations/Agencies (Cost $26,851) 26,922
Index Notes 0.2%
Republic of Austria, 8/15/96 * ............... 75,000 1,472
Total Index Notes (Cost $780) 1,472
Options Purchased 0.2%
<PAGE>
Allegheny Ludlum "B" Put, 10/19/96 @ $22.50 * ....... 350 127
Allegheny Ludlum "B" Put, 1/18/97 @ $20.00 * ........ 130 33
Allegheny Ludlum "B" Put, 1/18/97 @ $22.50 * ........ 170 70
Automatic Data Processing "B" Put, 8/17/96 @ $45.00 * 170 104
Automatic Data Processing "B" Put, 11/16/96 @ $40.00 * 255 59
IBM "B" Put, 7/20/96 @ $100.00 * .................... 100 34
IBM "B" Put, 7/20/96 @ $120.00 * .................... 200 412
IBM "B" Put, 10/19/96 @ $130.00 * ................... 200 615
Kerr McGee "B" Put, 7/20/96 @ $70.00 * .............. 120 106
Philip Morris "B" Put, 9/21/96 @ $105.00 * .......... 100 48
Texaco "B" Put, 10/19/96 @ $90.00 * ................. 100 70
Times Mirror "B" Put, 9/21/96 @ $40.00 * ............ 100 8
Toys "R" Us "B" Put, 09/21/96 @ $30.00 * ............ 100 21
Toys "R" Us "B" Put, 12/21/96 @ $35.00 * ............ 500 319
Unocal "B" Put, 7/20/96 @ $32.50 * .................. 200 6
Miscellaneous Options Purchased 78
Total Options Purchased (Cost $1,871) 2,110
Short-Term Investments 17.1%
Certificates of Deposit 2.0%
Commerzbank, 5.31%, 7/1/96 $10,000,000 10,000
Westdeutsche Landesbank Girozentrale, (London)
5.39%, 7/11/96 ........... 8,000,000 8,000
Commercial Paper 14.0%
Bex America Finance, 5.35%, 7/9/96 ................... 10,000,000 9,988
BHF Finance (Delaware), 5.35%, 7/10/96 ............... 20,000,000 19,973
BMW U.S. Capital, 5.30%, 8/19/96 ..................... 5,000,000 4,964
Ciesco, 4(2), 5.35%, 7/15/96 ......................... $10,000,000 $9,979
Countrywide Funding, 5.38%, 7/18/96 .................. 10,000,000 9,975
Den Danske, 5.38%, 8/12/96 ........................... 10,000,000 9,937
France Telecom, 5.33%, 7/9/96 ........................ 10,000,000 9,988
Investments in Commercial Paper through a joint account
5.49-5.68%, 7/1/96 ................................ 1,666,279 1,666
Korea Development Bank, 5.30%, 7/25/96 ............... 10,000,000 9,965
Preferred Receivables Funding, 5.40%, 7/10/96 ....... 10,000,000 9,987
Province of Quebec, 5.30%, 7/12/96 ................... 10,000,000 9,984
Rockwell International, 5 40%, 7/2/96 ................ 10,000,000 9,998
Tasmanian Public Finance, 5.10%, 7/15/96 ............. 10,000,000 9,980
126,384
<PAGE>
Medium-Term Notes 1.1%
Morgan Stanley Group, VR, 5.61328%, 1/31/97 .......... 10,000,000 10,003
10,003
Total Short-Term Investments (Cost $154,387) 154,387
Total Investments in Securities
99.0% of Net Assets (Cost $772,954) ................................ $896,776
Other Assets Less Liabilities ...................................... 9,504
Net Assets Consist of:
Accumulated net investment income - net of distributions ........... $ 21,055
Accumulated net realized gain/loss - net of distributions .......... 33,392
Net unrealized gain (loss) ......................................... 123,822
Paid-in-capital applicable to 61,970,485 shares of no par
value capital stock outstanding; unlimited shares authorized ....... 728,011
NET ASSETS ......................................................... $906,280
NET ASSET VALUE PER SHARE .......................................... $ 14.62
* Non-income producing
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
3.9% of net assets.
CHF Swiss franc
GBP British sterling
The accompanying notes are an integral part of these financial statements.
<PAGE>
Unaudited
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands 6 Months
Ended
6/30/96
Investment Income
Income
Dividend $14,403
Interest 10,040
Total income 24,443
Expenses
Investment management 2,210
Shareholder servicing 1,152
Custody and accounting 91
Registration 63
Prospectus and shareholder reports 36
Legal and audit 11
Directors 10
Miscellaneous 11
Total expenses 3,584
Net investment income 20,859
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on
Securities 29,495
Options (650)
Foreign currency transactions 49
Net realized gain (loss) 28,894
Change in net unrealized gain or loss on
Securities 9,883
Options 61
Change in net unrealized gain or loss 9,944
Net realized and unrealized gain (loss) 38,838
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $59,697
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The accompanying notes are an integral part of these financial statements.
<PAGE>
Unaudited
================================================================================
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands 6 Months Year
Ended Ended
6/30/96 12/31/95
Increase (Decrease) in Net Assets
Operations
Net investment income $20,859 $25,466
Net realized gain (loss) 28,894 37,005
Change in net unrealized gain or loss 9,944 92,350
Increase (decrease) in net assets from operations 59,697 154,821
Distributions to shareholders
Net investment income - (25,734)
Net realized gain - (42,109)
Decrease in net assets from distributions - (67,843)
Capital share transactions *
Shares sold 123,420 240,766
Distributions reinvested - 65,960
Shares redeemed (141,110) (184,430)
Increase (decrease) in net assets from capital
share transactions (17,690) 122,296
Net Assets
Increase (decrease) during period 42,007 209,274
Beginning of period 864,273 654,999
End of period $906,280 $864,273
*Share information
Shares sold 8,676 18,018
Distributions reinvested - 4,829
Shares redeemed (9,946) (13,738)
Increase (decrease) in shares outstanding (1,270) 9,109
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Unaudited June 30, 1996
================================================================================
Notes to Financial Statements
================================================================================
================================================================================
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 and commenced operations on June 30, 1986.
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.
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>
Premiums and Discounts Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles.
================================================================================
NOTE 2 - INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
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.
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. Options are reflected in the accompanying Statement of Net Assets at
market value.
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.
Other Purchases and sales of portfolio securities, other than short-term
and U.S. government securities, aggregated $182,599,000 and $148,737,000,
respectively, for the six months ended June 30, 1996.
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 June 30, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $772,954,000, and net unrealized gain
aggregated $123,822,000, of which $135,491,000 related to appreciated
investments and $11,669,000 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 $303,000 was payable at June 30, 1996. 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 0.305% for assets in excess of $50 billion. At
June 30, 1996, and for the six months then ended, the effective annual group fee
rate was 0.33% and 0.34%, respectively. 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 six
months ended June 30, 1996 decreased management fees by $591,000.
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 $1,043,000 for the six months
ended June 30, 1996, of which $174,000 was payable at period-end.
<PAGE>
For yield, price, last transaction,
and current balance, 24 hours,
7 days a week, call:
1-800-638-2587 toll free
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.
T. Rowe Price Investment Services, Inc., Distributor
RPRTCAF 6/30/96
