- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
SemiAnnual Report
Capital Appreciation Fund
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
Report Highlights
================================================================================
Capital Appreciation Fund
* The stock market added two more positive quarters to its long bull run,
posting 10 consecutive quarterly increases for the first time in 40 years.
Large, blue chip stocks led the advance.
* The fund's return for the first half was solid but, reflecting our
conservative approach, did not match the surging S&P 500 Stock Index or
Lipper peer group average.
* Security diversification changed little over the period, with 52% of net
assets in common stocks and 27% in convertibles remaining our largest
commitments.
* The media group was a major contributor to the fund's first half advance,
and mergers and acquisitions were also beneficial.
* We intend to maintain our risk-averse strategy to help shareholders stay
the course by cushioning the fund's share price from the brunt of a market
decline.
Fellow Shareholders
================================================================================
<PAGE>
Let's not get Spellbound. Equity markets continued upward, completing their
ninth and tenth consecutive positive quarters. This hasn't happened in 40 years.
Persistently low levels of inflation and a strong (but not too strong) economy
were the key positives. Fixed income markets were flat to slightly higher. The
Federal Reserve modestly raised the interest rate it charges banks, but this
dampened investor enthusiasm only temporarily. Meanwhile, the potential vertigo
inherent in today's historically high equity valuations remains ignored by most
investors N but we view them with suspicion.
Capital Appreciation Fund continued its cautious approach. We have always
taken what appear to us to be prudent risks, continually locking in gains and
using asset allocation and other strategies to protect your investment. The
fund's first half performance was strong, although behind that of our Lipper
peer group average and the broad, unmanaged Standard & Poor's 500 Stock Index.
For the longer period, the fund surpassed the average capital appreciation fund
but not the broad market.
Market Environment and Performance Recap
================================================================================
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 6/30/97 6 Months 12 Months
- --------------------------------------------------------------------------------
Capital Appreciation Fund 8.78% 18.81%
S&P 500 20.61 34.70
Lipper Capital Appreciation
Funds Average 10.16 14.44
================================================================================
Financial markets and most of their subsectors were almost universally
strong in the first half of 1997. Foreign equities moved up almost as rapidly as
those in the United States. The U.S. dollar strengthened on balance, consumer
confidence soared, and commodity prices trended down; it was close to a perfect
environment. Other than those owning gold stocks or securities in a few obscure
locales, most investors made money, and some made a great deal.
The big winners were owners of very large, quality growth companies. These
stocks have been the driving force behind the strong equity indices. Apart from
the hapless gold stocks, whose index fell about 20%, almost all other groups
were up as well, but nowhere near the 40% recorded by a handful of top names.
[Pie chart "Security Diversification" Common stocks 52%, convertibles 27%,
preferred stocks 4%, bonds 6%, reserves]
<PAGE>
Capital Appreciation, I confess, was not well positioned to participate in
the market's surge. First, by design, we attempt to hold down our risk exposure
and currently are only about half invested in common stocks, as shown in the
Security Diversification chart. Our other positions posted solid gains, but not
when compared with stocks. Second, we held only minor positions in the large
growth companies that dominate the S&P 500. The frenzy that drove prices for
these securities may or may not be justified, but the resulting high valuations
are certainly not appropriate for a risk-averse fund. Third, we have large
exposure to electric utility and energy sector companies, groups that
significantly lagged the market. Fortunately, a series of individual security
successes enabled the fund to provide respectable returns.
Portfolio Highlights
================================================================================
The media group, a long-time portfolio focus, continued to generate
outstanding gains in the first half. THE NEW YORK TIMES and THE WASHINGTON POST
were particularly large contributors, as shown in the table following this
letter. These companies were all purchased when the underlying values of their
properties (measured by the prices those properties would command if sold
separately) far exceeded their share prices. Today the gap between underlying
values and stock values has narrowed substantially, and although we don't see
the stocks as overpriced, we have begun to trim these positions to lock in
gains. We also shifted significant assets into TIME WARNER convertible bonds, a
security whose terms should limit its risk while giving us some continued upside
exposure to media industry growth.
CIBA-GEIGY/SANDOZ CAPITAL/NOVARTIS -- yes, it's all actually one entity --
is another example of your fund's risk control portfolio dynamics at work. About
two years ago, we became convinced that this major Swiss pharmaceutical
manufacturer was underpriced. We gradually built a large position in its common
stock and were rewarded with solid gains in 1996. Nine months ago, as this
security reached our price targets, we shifted a substantial portion of the
money into its convertible bonds N a move that exchanged some future
appreciation potential for a solid underpinning of loss protection. Now these
bonds have also soared, and with fond regret, we are eliminating the position.
Trying to have a lifeboat handy has reduced our gains somewhat, but when the
market turns ugly, the benefits can be dramatic.
One major portfolio management success of the period doesn't show up in the
typical statistical summaries. We swapped portions of our HOMESTAKE MINING and
NEWMONT MINING holdings for an expanded position in SANTA FE GOLD. This company
was then merged into Newmont, reestablishing a larger but cheaper position in
that stock. Unfortunately, the substantial weakness in gold mining generally
left us with an insignificant loss rather than the gains we might normally have
realized with such a successful series of interrelated trades.
<PAGE>
Among the usual buying and selling of positions that occurred over the past
six months, several other programs stand out. We initiated holdings in
WHEELABRATOR TECHNOLOGIES, acquiring 850,000 shares (equal to 1% of our assets).
This buying has now stopped due to the announced takeover of the company by an
affiliate at a reasonably higher price. We continued to add to AMERADA HESS and
UNION TEXAS PETROLEUM with most of the money coming from our sales of SUN
COMPANY. The net of these and our other energy transactions was pretty much a
wash, but we do believe that we've enhanced the fund's profit potential. In the
convertible sector, a major purchase was U.S. CELLULAR (in addition to Time
Warner). Finally, we saw through to completion the merger/sale of PHH, one of
our stellar long-term holdings. We are now attempting to maximize the value of
numerous hedging transactions undertaken with regard to the PHH position.
Outlook
================================================================================
Stock market cycles, economic cycles, and credit cycles always seem
similar, but only when viewed through the rear window of history. Today we are
hearing extreme projections with regard to all these phenomena -- and with every
shade of expectation in between. For the record, we expect fairly strong
economic growth to continue, and with inflation seemingly subdued, it appears
some time will elapse before the next move in Federal Reserve policy.
Nevertheless, when that action does come, we anticipate it will be another
incremental increase rather than a decrease in interest rates. As for the stock
market, we have not a shadow of a doubt that it is overvalued and will decline,
but we don't know when or from what level.
==============================
. . . we will continue our
overall policy of risk
avoidance . . .
- ------------------------------
Given the future's uncertainties and our particular skills, we will
continue our overall policy of risk avoidance, while maintaining our primary
focus on individual security selection. The past six months have been a
particularly trying period: it's never easy when many around you seem to be
getting rich effortlessly -- and I have often seen myself as the man who knew
too much, yet not enough. Yes, it would have been nice if Capital Appreciation
Fund had been somewhat less concerned with risk, but that would be a different
fund, and I'd be the wrong man tomanage it. We have made fine returns recently
and good returns in the past when some investors even lost money.
Investment history teaches us that down markets are inevitable, if
unpredictable. When they come, they often have a notorious effect on investor
wealth, for two very good reasons: First, market drops are often large and
concentrated. Second, shareholders tend to get discouraged, perhaps even panic
and exit the market. Then, they don't buy back in to take advantage of the
typical recovery stage. We see our fund's investment approach as mitigating
these risks. As managers, we continually seek to limit the potential drop that
might occur if financial markets, particularly the stock market, were to weaken.
This more muted volatility should help you, our shareholders, maintain your
commitment to these high-return markets over the longer term. As always, we
appreciate the confidence you have shown by investing in the fund.
<PAGE>
Respectfully submitted,
/s/
Richard P. Howard
President and Chairman of the Investment Advisory Committee
July 21, 1997
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/97
Centerior Energy/Cleveland Electric ........................... 6.4%
Time Warner 3.5
Genentech ..................................................... 3.3
Amerada Hess .................................................. 2.8
Loews ......................................................... 2.8
Automatic Data Processing ..................................... 2.8
New York Times ................................................ 2.7
Tennessee Valley .............................................. 2.5
Newmont Mining ................................................ 2.2
Rouse ......................................................... 2.2
Unicom ........................................................ 2.1
U S WEST ...................................................... 2.1
Washington Post 2.1
Roche Holdings ................................................ 1.7
WMX Technologies .............................................. 1.7
Homestake Mining .............................................. 1.6
Texaco ........................................................ 1.4
Murphy Oil .................................................... 1.4
Kemper ........................................................ 1.4
Philip Morris ................................................. 1.4
Great Lakes Chemical .......................................... 1.4
Grand Metropolitan ............................................ 1.4
Union Texas Petroleum ......................................... 1.3
Chris-Craft 1.3
LONRHO ........................................................ 1.3
- --------------------------------------------------------------------------------
Total ......................................................... 54.8%
================================================================================
<PAGE>
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 6/30/97
Ten Best Contributors
- --------------------------------------------------------------------------------
New York Times 10c
Sandoz Capital ......................................................... 7
Corning 5
Washington Post 4
Genentech .............................................................. 4
Sallie Mae ** .......................................................... 3
Automatic Data Processing .............................................. 3
Polaroid ............................................................... 3
American Express ....................................................... 3
Chris-Craft 3
Total .................................................................. 45c
Ten Worst Contributors
- --------------------------------------------------------------------------------
Unicom -3c
Price Company ** ....................................................... 2
Reader's Digest 1
Hills Stores ........................................................... --
Silicon Graphics * ..................................................... --
Newmont Mining ......................................................... --
Rouse .................................................................. --
Homestake Mining ....................................................... --
LONRHO ................................................................. --
Kerr-McGee ............................................................. --
Total .................................................................. -6c
12 Months Ended 6/30/97
Ten Best Contributors
- --------------------------------------------------------------------------------
Centerior Energy/Cleveland Electric .................................... 27c
New York Times ......................................................... 17
PHH *** 13
Automatic Data Processing .............................................. 9
Loews .................................................................. 9
Sallie Mae ............................................................. 8
Corning 7
Sandoz Capital ......................................................... 6
Texaco ................................................................. 6
American Express ....................................................... 6
Total .................................................................. 108c
<PAGE>
Ten Worst Contributors
- --------------------------------------------------------------------------------
Price Company ** ....................................................... -3c
Newmont Mining ......................................................... 3
Unicom ................................................................. 2
Great Lakes Chemical ................................................... 1
Hills Stores ........................................................... 1
Homestake Mining ....................................................... 1
LONRHO ................................................................. 1
Reader's Digest 1
A.T. Cross ............................................................. --
Entergy -
Total .................................................................. -13c
================================================================================
* Position added
** Position eliminated
*** Acquired by another company
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
PERFORMANCE CONTRIBUTIONS
6 months ended 6/30/97
Cents-Per-Share Percent of
Sector Contribution Net Assets
- --------------------------------------------------------------------------------
Basic Materials ........................................ -1c 5%
Business Services and Transportation ................... 16 8
Consumer Cyclicals ..................................... 4 5
Consumer Nondurables ................................... 23 9
Consumer Services ...................................... 28 16
Energy ................................................. 6 11
Financial .............................................. 18 10
Process Industries ..................................... 6 3
Technology ............................................. 1 1
Utilities .............................................. 3 16
U.S. Governments/Options ............................... -- 1
Miscellaneous .......................................... -- 4
Reserves and Income .................................... 23 11
- --------------------------------------------------------------------------------
Total Portfolio ........................................ 127c 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.
[Capital Appreciation Fund SEC chart 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 6/30/97 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Capital Appreciation Fund 18.81% 17.58% 14.60% 13.02%
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
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
6 Months Year
Ended Ended
6/30/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
NET ASSET VALUE
Beginning of period ............... $ 14.47 $ 13.67 $ 12.10 $ 12.66 $ 11.39 $ 11.02
Investment activities
Net investment income ......... 0.24 0.60 0.43 0.35 0.26 0.51
Net realized and
unrealized gain (loss) ........ 1.03 1.70 2.30 0.13 1.52 0.52
Total from
investment activities ......... 1.27 2.30 2.73 0.48 1.78 1.03
Distributions
Net investment income ......... -- (0.60) (0.44) (0.35) (0.18) (0.50)
Net realized gain ............. -- (0.90) (0.72) (0.69) (0.33) (0.16)
Total distributions ........... -- (1.50) (1.16) (1.04) (0.51) (0.66)
NET ASSET VALUE
End of period ..................... $ 15.74 $ 14.47 $ 13.67 $ 12.10 $ 12.66 $ 11.39
Ratios/Supplemental Data
Total return ...................... 8.78% 16.82% 22.57% 3.80% 15.66% 9.36%
Ratio of expenses to
average net assets ................ 0.66%+ 0.76% 0.97% 1.10% 1.09% 1.08%
Ratio of net investment
income to average
net assets ........................ 3.12%+ 4.07% 3.28% 2.91% 2.37% 4.28%
Portfolio turnover rate ........... 52.7%+ 44.2% 47.0% 43.6% 39.4% 30.3%
Average commission
rate paid ......................... $ 0.0420 $ 0.0584 -- -- -- --
Net assets, end of period
(in millions) ..................... $ 1,024 $ 960 $ 864 $ 655 $ 536 $ 359
====================================================================================================================================
<FN>
+ Annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Unaudited June 30, 1997
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
Shares/Par Value
In thousands
Common Stocks 51.5%
FINANCIAL 7.0%
Insurance 4.3%
Harleysville Group ........................... 85,000 $ 3,235
Loews ........................................ 285,000 28,536
Risk Capital Holdings * ...................... 40,000 830
Unitrin ...................................... 130,000 7,971
Willis-Corroon ADR ........................... 274,800 3,074
43,646
Financial Services 2.6%
American Express ............................. 110,000 8,195
Fannie Mae ................................... 145,000 6,326
Fund American Enterprises .................... 65,000 6,825
Zurich Reinsurance * ......................... 145,000 5,727
27,073
Bank and Trust 0.1%
Bank Fuer International Zahlung (CHF) ........ 100 702
702
Total Financial .............................. 71,421
UTILITIES 7.1%
Electric Utilities 7.1%
Centerior Energy ............................. 3,950,000 44,191
Ohio Edison .................................. 320,000 6,980
Unicom ....................................... 989,900 22,025
Total Utilities .............................. 73,196
CONSUMER NONDURABLES 5.5%
Food Processing 0.2%
McCormick .................................... 70,000 1,772
1,772
Pharmaceuticals 3.8%
Genentech * .................................. 575,000 33,889
Perrigo * .................................... 22,000 276
Schering-Plough .............................. 100,000 4,788
38,953
Miscellaneous Consumer Products 1.5%
A. T. Cross (Class A) ........................ 115,000 $ 1,466
Philip Morris ................................ 325,000 14,422
15,888
Total Consumer Nondurables ................... 56,613
<PAGE>
CONSUMER SERVICES 9.3%
General Merchandisers 0.5%
Hills Stores * ............................... 200,000 687
Wal-Mart ..................................... 125,000 4,227
4,914
Specialty Merchandisers 1.4%
Petrie Stores Liquidation Trust * ............ 2,560,000 8,080
The Limited .................................. 210,000 4,252
Toys "R" Us * ................................ 55,000 1,925
14,257
Entertainment and Leisure 0.8%
HFS * ........................................ 83,500 4,843
Reader's Digest (Class A) .................... 50,000 1,434
Reader's Digest (Class B) .................... 75,000 2,077
8,354
Media and Communications 6.6%
Chris-Craft * ................................ 275,000 13,269
Meredith ..................................... 230,000 6,670
New York Times (Class A) ..................... 550,000 27,225
Washington Post (Class B) .................... 53,000 21,094
68,258
Total Consumer Services 95,783
CONSUMER CYCLICALS 2.1%
Miscellaneous Consumer Durables 2.1%
Corning ...................................... 200,000 11,125
Polaroid ..................................... 180,000 9,990
Total Consumer Cyclicals ..................... 21,115
TECHNOLOGY 0.7%
Information Processing 0.7%
IBM .......................................... 75,000 $ 6,764
6,764
Specialized Computer 0.0%
Silicon Graphics * ........................... 25,000 375
375
Total Technology ............................. 7,139
BUSINESS SERVICES AND
TRANSPORTATION 2.4%
Transportation Services 1.1%
Overseas Shipholding Group ................... 285,000 5,593
Ryder System ................................. 170,000 5,610
11,203
Miscellaneous Business Services 1.3%
Wheelabrator Technologies .................... 850,000 13,122
13,122
Total Business Services and Transportation ... 24,325
<PAGE>
ENERGY 9.6%
Exploration and Production 0.6%
Mitchell Energy & Development ................ 260,000 5,655
5,655
Integrated Petroleum - Domestic 7.0%
Amerada Hess ................................. 525,000 29,170
Atlantic Richfield ........................... 160,000 11,280
Kerr-McGee ................................... 30,000 1,901
Murphy Oil ................................... 300,000 14,625
Sun Company .................................. 40,000 1,240
Union Texas Petroleum ........................ 650,000 13,610
71,826
Integrated Petroleum - International 1.4%
Texaco ....................................... 135,000 14,681
14,681
Energy Services 0.6%
Energy Group PLC ADR ......................... 145,000 6,145
6,145
Total Energy ................................. 98,307
PROCESS INDUSTRIES 3.8%
Specialty Chemicals 1.4%
Great Lakes Chemical ......................... 275,000 14,403
14,403
Forest Products 1.6%
Deltic Timber ................................ 60,000 1,759
International Paper .......................... 70,000 3,399
Weyerhaeuser ................................. 220,000 11,440
16,598
Building and Construction 0.8%
Hanson PLC ADR ............................... 125,000 3,125
Johns Manville ............................... 450,000 5,316
8,441
Total Process Industries ..................... 39,442
BASIC MATERIALS 3.4%
Metals 0.1%
Hecla Mining * ............................... 65,000 349
349
Mining 3.3%
Bougainville Copper (AUD) * .................. 1,000,000 401
Homestake Mining ............................. 325,000 4,245
LONRHO (GBP) ................................. 3,271,436 6,919
Newmont Mining ............................... 576,250 22,474
34,039
Total Basic Materials ........................ 34,388
<PAGE>
Miscellaneous Common Stocks 0.6% ............. 6,213
Total Common Stocks (Cost $ 386,623) ........ 527,942
Preferred Stocks 3.9%
Cleveland Electric, $1.88 Adj., (Series L) ... 60,000 5,310
Cleveland Electric, $90, (Series S) .......... 9,000 9,461
Cleveland Electric, 8.80%, (Series R) ........ 6,575 6,846
Entergy GSU, 8.75%, Adj. B ................... 39,959 1,938
Kemper, (Series E) ........................... 280,000 14,560
Niagara Mohawk, Adj., (Series A) ............. 30,000 608
Niagara Mohawk, Adj., (Series B) ............. 25,349 596
Niagara Mohawk, Adj., (Series C) ............. 28,000 $ 626
Total Preferred Stocks (Cost$ 33,625) ...... 39,945
Convertible Preferred Stocks 0.6%
International Paper, 5.25% ........................... 20,000 1,077
Rouse, $3.00, (Series B) ............................. 110,000 5,307
Total Convertible Preferred Stocks (Cost $6,192) ..... 6,384
Convertible Bonds 26.5%
ALZA, LYONs, Sub. Notes, Zero Coupon, 7/14/14 ........ $13,800,000 6,107
Automatic Data Processing, LYONs
Zero Coupon, 2/20/12 ......................... 46,100,000 27,876
Comcast, Sub. Deb., STEP, 3.375%, 9/9/05 ............. 10,000,000 10,559
ENSERCH, Sub. Deb., 6.375%, 4/1/02 ................... 11,550,000 11,579
Grand Metropolitan
6.50%, 1/31/00 ............................... 7,650,000 10,747
(144a), 6.50%, 1/31/00 ....................... 2,600,000 3,653
Homestake Mining, (144a), Sub. Deb., 5.50%, 6/23/00 .. 12,300,000 11,885
LONRHO Finance, 6.00%, 2/27/04 GBP 4,000,000 ........ 6,245
Marriott International, LYONs, Zero Coupon, 3/25/11 .. $15,000,000 9,145
McKesson, Sub. Deb., 4.50%, 3/1/04 ................... 3,250,000 2,852
Office Depot, LYONs
Zero Coupon, 12/11/07 ........................ 2,000,000 1,359
Zero Coupon, 11/1/08 ......................... 12,500,000 7,764
Outboard Marine, Deb., 7.00%, 7/1/02 ................. 4,000,000 4,005
Peninsular & Orient, 7.25%, 5/19/03 GBP 3,700,000 .... 6,562
Potomac Electric Power, Sub. Deb., 5.00%, 9/1/02 ..... $ 6,000,000 5,550
Roche Holdings, LYONs, (144a), Zero Coupon, 5/6/12 ... 40,000,000 17,500
Rouse, Sub. Deb., 5.75%, 7/23/02 ..................... 16,000,000 16,840
Sandoz Capital, 2.00%, 10/6/02 ....................... 1,000,000 1,535
Silicon Graphics, (144a), Zero Coupon, 11/2/13 ....... 10,500,000 5,148
Time Warner, LYONs
Zero Coupon, 12/17/12 ........................ 45,000,000 17,791
Zero Coupon, 6/22/13 ......................... 38,000,000 17,683
U S West, LYONs, Zero Coupon, 6/25/11 ................ 55,000,000 21,207
UBS Finance, MTN, 2.00%, 12/15/00 .................... 1,000,000 965
U.S. Cellular, LYONs, Zero Coupon, 6/15/15 ........... 25,000,000 8,749
USF&G, Zero Coupon, 3/3/09 ........................... $10,750,000 $ 7,772
WMX Technologies, Sub. Deb., 2.00%, 1/24/05 .......... 18,000,000 16,926
Zurich Insurance, 1%, 4/15/03 ........................ 6,100,000 5,871
Miscellaneous Convertible Bonds ...................... 7,677
Total Convertible Bonds (Cost $ 249,317) ........... 271,552
Miscellaneous Corporate Bonds 0.3% (Cost $2,228) .... 2,525
U.S. Government Obligations/
<PAGE>
Agencies 8.0%
Federal National Mortgage Assn., MTN
5.37%, 2/7/01 ................................ 5,000,000 4,825
Tennessee Valley Authority
5.98%, 4/1/36 ................................ 25,000,000 25,202
U.S. Treasury Notes
5.75%, 10/31/97 .............................. 9,000,000 9,007
6.125%, 7/31/00 .............................. 2,000,000 1,993
6.25%, 4/30/01 ............................... 3,000,000 2,992
6.75%, 5/31/99 ............................... 5,000,000 5,058
7.375%, 11/15/97 ............................. 8,000,000 8,050
Miscellaneous U.S. Government Obligations/Agencies ... 24,793
Total U.S. Government Obligations/Agencies (Cost $82,093) 81,920
Options Purchased 0.3%
Automatic Data Processing
Put, 11/22/97 @ $50.00 * ..................... 500 219
Put, 8/16/97 @ $50.00 * ...................... 250 86
Chubb, Put, 7/19/97 @ $55.00 * ....................... 140 2
HFS
Put, 10/18/97 @ $60.00 * ..................... 300 152
Put, 10/18/97 @ $70.00 * ..................... 350 409
Put, 7/19/97 @ $60.00 * ...................... 985 215
IBM
Put, 1/17/98 @ $100.00 * ..................... 240 276
Put, 1/17/98 @ $45.00 * ...................... 250 234
Put, 10/18/97 @ $77.50 * ..................... 150 20
Put, 10/18/97 @ $87.50 * ..................... 250 94
Put, 7/19/97 @ $80.00 * ...................... 250 5
Microsoft, Put, 7/19/97 @ $85.00 * ................... 250 1
Schering Plough
Put, 11/22/97 @ $50.00 * ..................... 250 97
Put, 11/22/97 @ $90.00 * ..................... 500 87
Put, 8/16/97 @ $85.00 * ...................... 500 19
Silicon Graphics
Put, 11/22/97 @ $22.50 * ..................... 250 189
Put, 8/16/97 @ $30.00 * ...................... 250 373
The Limited
Put, 11/22/97 @ $22.50 * ..................... 240 67
Put, 8/16/97 @ $20.00 * ...................... 240 17
Put, 8/16/97 @ $22.50 * ...................... 240 59
Toys "R" Us
Put, 12/20/97 @ $35.00 * ..................... 250 62
Put, 9/20/97 @ $30.00 * ...................... 300 15
Wal Mart
Put, 12/20/97 @ $32.50 * ..................... 250 36
Put, 12/20/97 @ $35.00 * ..................... 250 64
Put, 9/20/97 @ $25.00 * ...................... 500 3
Total Options Purchased (Cost $ 4,781) ............... 2,801
<PAGE>
Short-Term Investments 10.7%
Certificates of Deposit 2.0%
Bank of Nova Scotia, 5.55%, 7/14/97 ................. 10,000,000 10,000
Caisse National De Credit Agricole, 5.63%, 8/11/97 .. 10,000,000 10,000
20,000
Commercial Paper 8.7%
Abbey National, 5.55%, 8/12/97 ...................... 10,000,000 9,935
BT Securities, 5.57%, 8/25/97 ....................... 10,000,000 9,915
GE Capital, 5.57%, 8/14/97 .......................... 10,000,000 9,932
Merrill Lynch, 5.56%, 7/31/97 ....................... 10,000,000 9,954
National Rural Utilities Cooperative Finance
5.55%, 9/8/97 ............................... 10,000,000 9,893
Statoil (Den Norske Stats Oljeselskap),
5.54%, 7/7/97 .................................... 10,000,000 9,991
Investments in Commercial Paper
through a Joint Account
6.05 - 6.20%, 7/1/97 ........................ 29,793,133 29,793
89,413
Total Short-Term Investments (Cost $ 109,413) .... 109,413
Total Investments in Securities
101.8% of Net Assets (Cost $874,272) ................ $ 1,042,482
Other Assets Less Liabilities ....................... (18,047)
NET ASSETS .......................................... $ 1,024,435
Net Assets Consist of:
Accumulated net investment income -
net of distributions ................................ $ 15,580
Accumulated net realized gain/loss -
net of distributions ................................ 69,202
Net unrealized gain (loss) .......................... 168,203
Paid-in-capital applicable to 65,071,718
shares of no par value capital stock
outstanding; unlimited shares authorized ............ 771,450
NET ASSETS .......................................... $ 1,024,435
NET ASSET VALUE PER SHARE ........................... $ 15.74
* Non-income producing
MTN Medium term note
STEP Stepped coupon bond
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 period-end amounts to
3.73% of net assets.
AUD Australian dollar
CHF Swiss franc
GBP British sterling
LYONs Liquid Yield Option Notes
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
Unaudited
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
6/30/97
Investment Income
Income
Interest ................................................. $ 10,852
Dividend ................................................. 7,605
Total income ............................................. 18,457
Expenses
Investment management .................................... 1,874
Shareholder servicing .................................... 1,170
Custody and accounting ................................... 84
Prospectus and shareholder reports ....................... 43
Registration ............................................. 39
Legal and audit .......................................... 11
Proxy and annual meeting ................................. 10
Trustees ................................................. 6
Miscellaneous ............................................ 5
Total expenses ........................................... 3,242
Net investment income ........................................ 15,215
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities ............................................... 50,105
Foreign currency transactions ............................ (8)
Net realized gain (loss) ................................. 50,097
Change in net unrealized gain or loss
Securities ............................................... 18,830
Other assets and liabilities
denominated in foreign currencies ........................ (9)
Change in net unrealized gain or loss .................... 18,821
Net realized and unrealized gain (loss) ...................... 68,918
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ....................................... $ 84,133
================================================================================
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
6/30/97 12/31/96
Increase (Decrease) in Net Assets
Operations
Net investment income ........................... $ 15,215 $ 37,057
Net realized gain (loss) ........................ 50,097 69,939
Change in net unrealized gain or loss ........... 18,821 35,504
Increase (decrease) in net assets from operations 84,133 142,500
Distributions to shareholders
Net investment income ........................... -- (36,888)
Net realized gain ............................... -- (55,332)
Decrease in net assets from distributions ....... -- (92,220)
Capital share transactions *
Shares sold ..................................... 122,085 233,393
Distributions reinvested ........................ -- 89,884
Shares redeemed ................................. (141,725) (277,888)
Increase (decrease) in net assets from capital
share transactions .............................. (19,640) 45,389
Net Assets
Increase (decrease) during period ................... 64,493 95,669
Beginning of period ................................. 959,942 864,273
End of period ....................................... $ 1,024,435 $ 959,942
*Share information
Shares sold ..................................... 8,240 16,009
Distributions reinvested ........................ -- 6,208
Shares redeemed ................................. (9,510) (19,115)
Increase (decrease) in shares outstanding ....... (1,270) 3,102
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
Unaudited June 30, 1997
================================================================================
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 are valued at the last quoted sales price on
the day the valuations are made. A security which is listed or traded on more
than one exchange is valued at the quotation on the exchange determined to be
the primary market for such security. Listed securities not traded on a
particular day and securities regularly traded in the over-the-counter market
are valued at the mean of the latest bid and asked prices. In the absence of a
last sale price, purchased and written options are valued at the mean of the
latest 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 amortized 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.
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.
<PAGE>
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. Transactions in options written and related premiums received
during the six months ended June 30, 1997, were as follows:
================================================================================
Number of
Contracts Premiums
- --------------------------------------------------------------------------------
Outstanding at beginning of period - $ -
Written 350 191,000
Exercised (350) (191,000)
Outstanding at end of period - $ -
================================================================================
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 $224,421,000 and $248,481,000,
respectively, for the six months ended June 30, 1997.
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 June 30, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $874,272,000, and net unrealized gain
aggregated $168,210,000, of which $181,838,000 related to appreciated
investments and $13,628,000 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 $323,000 was payable at June 30, 1997. 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 0.30% for assets in excess of $80 billion. At June
30, 1997, and for the six months then ended, the effective annual group fee rate
was 0.33%. 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, 1997 decreased management fees by $1,184,000.
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 $1,038,000 for the six months
ended June 30, 1997, of which $188,000 was payable at period-end.
During the six months ended June 30, 1997, the fund, in the ordinary course
of business, placed security purchase and sale orders aggregating $641,000 with
certain affiliates of the manager and paid commissions of $1,000 related
thereto.
<PAGE>
================================================================================
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
Investment Services And Information
- --------------------------------------------------------------------------------
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE Shareholder service representatives are available from 8 a.m. to
10 p.m. ET Monday through Friday and from 8:30 a.m. to 5 p.m. ET on weekends.
Call 1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
IN PERSON Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. You can also
drop off applications or obtain prospectuses and other literature at these
centers.
AUTOMATED 24-HOUR SERVICES
TELE*ACCESS [REGISTRATION MARK] Call 1-800-638-2587 to obtain information
such as account balance, date and amount of your last transaction, latest
dividend payment, fund prices, and yields. Additionally, you have the ability to
request prospectuses, statements, and account and tax forms; to reorder checks;
and to initiate purchase, redemption, and exchange orders for identically
registered accounts.
T.ROWE PRICE ONLINE Through a personal computer via dial-up modem, you can
replicate all the services available on Tele*Access plus conduct transactions in
your Discount Brokerage and Variable Annuity accounts.
Account Services
CHECKING Write checks for $500 or more on any money market and most bond
fund accounts (except the High Yield and Emerging Markets Bond Funds).
AUTOMATIC INVESTING Build your account over time by investing directly from
your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A $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
distributions, or take them in cash. We give you maximum flexibility and
convenience.
<PAGE>
DISCOUNT BROKERAGE*
INVESTMENTS AVAILABLE You can trade stocks, bonds, options, precious
metals, and other securities at a savings over regular commission rates.
TO OPEN AN ACCOUNT Call a shareholder service representative for more
information.
Investment Information
COMBINED STATEMENT A comprehensive overview of your T. Rowe Price accounts
is provided. The summary page gives you earnings by tax category, provides total
portfolio value, and lists your investments by typeNstock, bond, and money
market. Detail pages itemize account transactions by fund.
SHAREHOLDER REPORTS Portfolio managers review the performance of the funds
in plain language and discuss T. Rowe Price's economic outlook.
T. ROWE PRICE REPORT This is a quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
PERFORMANCE UPDATE This quarterly report reviews recent market developments
and provides comprehensive performance information for every T. Rowe Price fund.
INSIGHTS This library of information includes reports on mutual fund tax
issues, investment strategies, and financial markets.
DETAILED INVESTMENT GUIDES Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Diversifying Overseas: A Guide to International Investing,
Retirees Financial Guide, and Retirement Planning Kit (also available on disk
for PC use) can help you determine and reach your investment goals.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
<PAGE>
================================================================================
Annual Meeting Results
- --------------------------------------------------------------------------------
The Capital Appreciation Fund held an annual meeting on April 24, 1997, to
elect directors of the fund; to ratify the Board of Directors' selection of
Coopers & Lybrand L.L.P. as the fund's independent accountants; and to vote on a
proposed change in the fund's Investment Management Agreement.
The results of voting were as follows (by numbers of shares):
FOR NOMINEES TO THE BOARD OF DIRECTORS:
DONALD W. DICK, JR.
In favor: 33,416,439.819
Withheld: 1,160,435.051
DAVID K. FAGIN
In favor: 33,498,742.643
Withheld: 1,078,132.227
HANNE M. MERRIMAN
In favor: 33,476,495.338
Withheld: 1,100,379.532
JAMES S. RIEPE
In favor: 33,493,068.701
Withheld: 1,083,806.169
GEORGE A. ROCHE
In favor: 33,496,901.223
Withheld: 1,079,973.647
M. DAVID TESTA
In favor: 33,484,755.580
Withheld: 1,092,119.290
HUBERT D. VOS
In favor: 33,417,430.150
Withheld: 1,159,444.720
PAUL M. WYTHES
In favor: 33,418,385.076
Withheld: 1,158,489.794
FOR A CHANGE IN THE FUND'S INVESTMENT MANAGEMENT AGREEMENT:
In favor: 29,405,050.377
Withheld: 1,394,037.431
Opposed: 3,777,787.062
FOR COOPERS & LYBRAND L.L.P AS INDEPENDENT ACCOUNTANTS:
In favor: 33,220,921.562
Withheld: 1,001,605.144
Opposed: 354,348.164
<PAGE>
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access [Registration Mark]:
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address: www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Capital Appreciation Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor. F72-051 6/30/97
