ANNUAL REPORT
- --------------------------------------------------------------------------------
Capital Appreciation Fund
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December 31, 1996
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Report Highlights
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* Shaking off a variety of concerns, the stock market rose for the sixth
straight year as the Federal Reserve kept the economy on an even keel.
* The Capital Appreciation Fund gained 9.23% and 16.82% for the 6- and
12-month periods, respectively, surpassing its Lipper category but not the
broad market.
* Energy stocks and companies involved in mergers and restructurings were
among the major contributors to the fund's share price gain.
* The fund's overall common stock exposure was unchanged over the year at
51%, but we increased holdings of convertible securities from 19% a year
ago to 28% of net assets.
* While underlying conditions are generally favorable, the market's long run
and high valuations make us cautious for the coming year.
<PAGE>
Fellow Shareholders
- --------------------------------------------------------------------------------
The wind was at our back. The U.S. stock market advanced to its second
straight 20%-plus annual gain in a financial environment that was, in a word,
benevolent. The Capital Appreciation Fund enjoyed strong results for 1996 that
did not match the broad stock market (represented by the unmanaged Standard &
Poor's 500 Stock Index) but were in line with competing funds.
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 12/31/96 6 Months 12 Months
- --------------------------------------------------------------------------------
Capital Appreciation Fund 9.23% 16.82%
S&P 500 11.68 22.96
Lipper Capital Appreciation
Funds Average 4.70 16.31
================================================================================
Our risk-averse approach to investing typically does not generate
above-market returns in exuberant years like 1996. It did, however, furnish
outstanding capital protection during the few periods of market difficulty, as
shown by the fund's six-month return versus its Lipper group. As usual, we
expended great effort in conserving your wealth although, as in recent years,
the favorable market made such efforts unnecessary. Nothing could make us
happier.
Year-End Distributions
- --------------------------------------------------------------------------------
On December 26, your Board of Directors declared an income distribution of
$0.60 per share, a short-term capital gain of $0.22 per share, and a long-term
capital gain of $0.68 per share. All were paid on December 30 to shareholders of
record on December 26. You should already have received a check or statement
reflecting these distributions as well as your Form 1099-DIV reporting them for
tax purposes.
<PAGE>
Market Environment
- --------------------------------------------------------------------------------
The stock market advanced for the sixth straight year. In all this time
there has not been a single 10% price decline, approximately doubling the
previous record for such easy sailing. Largely responsible for this fine
financial weather was the Federal Reserve's success in coping with myriad
economic and monetary problems. The exchange value of the dollar, the budget
deficit, the trade deficit, trading partner crises, excessive bond speculation -
it mattered not. The Fed adroitly kept our economy and financial position on an
even keel.
==============================
Large-company stocks
substantially outperformed
smaller ones.
- ------------------------------
Beneath the generally tranquil surface were dangerous currents and eddies.
Most bond market investors, for example, were lucky to earn their coupons. Not
only did interest rates rise modestly over the year, they were higher than many
overseas rates. The continuing tidal wave of money into equity mutual funds
suggested an absence of normal financial prudence. Large-company stocks
substantially outperformed smaller ones. Inflation, while moderate, showed signs
of accelerating. While the economic barometer suggested a slowdown over the
summer, by year-end it was clear this was not the case. Our biggest concern is
the burgeoning growth of unfunded liabilities represented by future Social
Security and Medicare costs. In short, any number of issues could have triggered
a major market correction; that they did not is largely to the credit of the Fed
and perhaps general investor confidence - or overconfidence.
Portfolio Highlights
- --------------------------------------------------------------------------------
The fund had several notable successes in 1996. Specifically, during the
second half PHH and Centerior Energy made major contributions to performance.
Both were the object of merger negotiations. We were particularly pleased with
Centerior since it is the fund's largest holding and, we believe, has further
upside potential once the merger is completed. Other positions that benefited
from corporate transactions such as mergers and financial restructuring were
Ciba-Geigy, Teledyne, Alexander & Alexander, Reebok, DeBartolo,
Manville/Schuller, Murphy Oil, Corning, and Santa Fe Pacific Gold.
<PAGE>
Looking at our holdings from an industry perspective, it was gratifying to
see strong upswings in our media and energy positions. Major newspapers such as
the New York Times and the Washington Post typically benefit from Olympic- and
election-year cycles, and this was clearly the case in 1996. Many of our oil
stocks also appreciated significantly, making energy one of the major
contributors among sectors, as shown in the Performance Contributions table
following this letter. Texaco was a standout. While we have been selling a
number of these positions as they reach our price targets, we remain confident
of the oil industry's outlook and have also established some new positions,
notably Amerada Hess.
On the negative side of the ledger we were fortunate to have few
significant losers. We are skeptical that good security selection alone is
responsible for this gratifying phenomenon; the placid economic waters and
strong stock market are as likely contributors. Until we experience some rough
weather, we won't know for sure if or where the ship leaks.
[Pie chart here (wrap following paragraph around it). Edgar description: A pie
chart "Security Diversification": common stocks 51%, convertibles 28%, preferred
stocks 4%, bonds 6%, reserves 11%.]
Our asset allocation continued to shift in the second half of the year. We
have found a considerable number of attractive convertible securities, and that
asset class now represents 28% of the portfolio. These purchases were funded
largely by drawing down cash reserves. Common stocks, our largest asset
category, finished the year at 51% of the portfolio, unchanged from June 30 as
significant buying and selling of different stocks largely offset one another.
While we continue to focus our management effort on individual securities, it's
comforting to remember that the fund's broad asset diversification provides some
ballast to temper the pitch and roll of its share price.
Fund Operating Guidelines
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Every year we make hundreds of large and small decisions while managing
your fund. Obviously, we try to make them in a thoughtful manner, weighing each
individually. At the same time, we maintain broad guidelines to provide a
consistent theme to all these decisions. Since the guidelines are important and
help distinguish the fund from its competitors, we like to include them in
annual reports.
* 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.
<PAGE>
* 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
like to take big positions, making the most of our intensive analysis of
individual securities.
Outlook
- --------------------------------------------------------------------------------
New highs by both the stock market and your fund have become commonplace,
making it easy to forget that in the 16 years ending 1982 (the first years of my
career) there was virtually no appreciation by the market whatsoever. We only
wish we knew which of these two extreme conditions is most probable in the
future. Clearly, the market's six straight positive years have moved us into
uncharted waters, and only an unabashed optimist or fool would not prepare for
possible difficulties ahead. Of course, there have been many valid reasons for
concern during recent years, but the very fact that none seriously distressed
the market makes it even more difficult for today's investors to maintain
caution. Nevertheless, we think the odds favor a storm and, while always sailing
with battened-down hatches, intend to be particularly careful.
==============================
The market's six straight
positive years have moved us
into uncharted waters.
- ------------------------------
Our outlook continues to be based upon an examination of three broad market
factors: earnings, interest rates and valuation. A word on each.
Earnings seem likely to continue growing in 1997. Personal incom e
gains, while strong, have mainly benefited higher-paid workers so far.
Lower-paid workers are in increasing demand, however, which sh ould improve
their incomes significantly. As sure as calm follows storm, we are certain that
rising incomes will boost retail sales, setting off a chain reaction that will
generate an improving economy and reasonable earnings gains.
<PAGE>
We are less optimistic about interest rates. With wages moving higher and
raw materials prices, particularly energy, showing some strength, inflation
seems likely to continue creeping higher. Since the U.S. budget and trade
deficits give the Fed little leeway, the best we can hope for in the strong
economy we anticipate is flat interest rates. Only if the economy and
consequently earnings were to weaken - hardly good for stocks - would we expect
interest rates to fall.
Valuation is the big negative. Based on price/book and price/earnings
ratios, and on dividend yields, the stock market is dramatically overvalued. Of
course, one could have said the same thing over the last several years, and we
did. It's impossible to know when or even how this valuation extreme will be
corrected. Strong earnings and dividend growth may continue, or prices may
decline.
Given this uncertain outlook, we intend to continue acting in moderation.
There are always attractive securities to buy, and we will buy them. When
holdings reach our target prices or prove themselves otherwise unworthy, we will
sell them. We urge our shareholders to be similarly moderate. True, we often
cannot predict, much less command, the wind. We can, however, adjust the sails.
Respectfully submitted,
[Signature]
Richard P. Howard
President and Chairman of the Investment Advisory Committee
January 20, 1997
================================================================================
Sticking To Your Game Plan
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[Chart showing TIME REDUCES VOLATILITY OF MARKET RETURNS]
In our report to you one year ago, we mentioned the possibility of a modest
decline in stock prices. In fact, from May to July 1996, the broad market (as
measured by the Standard & Poor's 500 Stock Index) fell around 7%. However, the
bull market resumed its charge to post a robust 23% gain for the year.
Some believe the market is poised for a significant downturn. We do not
expect a major drop in stock prices in 1997, although another modest pullback is
possible. On balance, we expect stocks to advance at a much slower pace.
<PAGE>
How should you prepare for a potential market pullback? As always, our
advice is to diversify your investments and focus on the long term. If you've
implemented a sound investment strategy, stay the course. Stocks have
historically overcome periods of volatility to provide better returns than most
other investments. Market corrections can even have a silver lining because they
result in good buying opportunities.
Furthermore, the volatility of stock market returns has diminished
significantly over longer time frames. The chart shows the best and worst
annualized returns on stocks over various rolling time periods between 1950 and
1996. (For instance, there were 37 rolling 10-year periods: 1950-1960,
1951-1961, etc.) Investors who held stocks for only one year could have had as
much as a 52.6% gain, or as little as a 26.5% loss -- a spread of 79 percentage
points. However, investors who held stocks for 10-year periods or longer always
overcame interim volatility to post gains for the entire period.
In addition, a well-diversified portfolio can weather volatility better than a
more concentrated portfolio over the long term and particularly during market
corrections. For example, during last summer's correction, small-company stocks
fell nearly 16% while large-company issues dropped 7.3%. However, a portfolio
diversified among large U.S. companies (30% of assets), small U.S. companies
(15%), foreign companies (15%), intermediate-term Treasury bonds (30%), and
Treasury bills (10%) would have lost a smaller 5.2% of its value. {1}
Above all, remember that investing is a long-distance race, not a
sprint.
{1} Ned Davis Research.
<PAGE>
Portfolio Highlights
================================================================================
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
6 Months Ended 12/31/96
Ten Best Contributors
================================================================================
Centerior Energy/Cleveland Electric 25cents
PHH 12
Loews 7
New York Times 7
Automatic Data Processing 7
Sallie Mae 5
Murphy Oil 5
Texaco 4
American Express 3
USF&G 3
- --------------------------------------------------------------------------------
Total 78cents
<PAGE>
Ten Worst Contributors
Great Lakes Chemical -4cents
Newmont Mining 2
Sandoz Capital * 1
Republic of Austria ** 1
Homestake Mining 1
A. T. Cross 1
LONRHO 1
Hills Stores 1
Sun Company 1
Polaroid 1
- --------------------------------------------------------------------------------
Total -14cents
12 Months Ended 12/31/96
================================================================================
Ten Best Contributors
Centerior Energy/Cleveland Electric 23cents
PHH 16
Ciba-Geigy *** 12
New York Times 11
Automatic Data Processing 10
Sallie Mae 8
Loews 8
Murphy Oil 7
Texaco 6
Schuller 5
- --------------------------------------------------------------------------------
Total 106cents
Ten Worst Contributors
Great Lakes Chemical -6cents
Entergy 1
Polaroid 1
Sandoz Capital 1
Hills Stores 1
Republic of Austria 0
Niagara Mohawk 0
A. T. Cross 0
Overseas Shipholding Group 0
Outboard Marine 0
- --------------------------------------------------------------------------------
Total -10cents
- --------------------------------------------------------------------------------
* Position added
** Position eliminated
*** Merged into Novartis
<PAGE>
================================================================================
Portfolio Highlights
================================================================================
TWENTY-FIVE LARGEST HOLDINGS
- --------------------------------------------------------------------------------
Percent of
Net Assets
12/31/96
- --------------------------------------------------------------------------------
Centerior Energy/Cleveland Electric 6.8%
Automatic Data Processing 4.5
Genentech 3.2
Loews 2.9
New York Times 2.9
- --------------------------------------------------------------------------------
Amerada Hess 2.4
Rouse 2.0
Washington Post 2.0
Sandoz Capital 2.0
Tennessee Valley 1.9
- --------------------------------------------------------------------------------
Texaco 1.8
Homestake Mining 1.8
Murphy Oil 1.8
Kemper 1.8
U.S. West 1.7
- --------------------------------------------------------------------------------
Turner Broadcasting Systems 1.6
USF&G 1.5
Newmont Mining 1.4
Time Warner 1.4
Cellular Communications 1.3
- --------------------------------------------------------------------------------
Unicom 1.3
Atlantic Richfield 1.2
Comcast 1.2
Sallie Mae 1.2
Chris-Craft 1.1
- --------------------------------------------------------------------------------
Total 52.7%
================================================================================
<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 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 12/31/96 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Capital Appreciation Fund 16.82% 14.12% 13.46% 13.39%
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>
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year
Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
NET ASSET VALUE
Beginning of period ..................... $ 13.67 $ 12.10 $ 12.66 $ 11.39 $ 11.02
Investment activities
Net investment income ............... 0.60 0.43 0.35 0.26 0.51
Net realized and
unrealized gain (loss) .............. 1.70 2.30 0.13 1.52 0.52
Total from
investment activities ............... 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 ........................... $ 14.47 $ 13.67 $ 12.10 $ 12.66 $ 11.39
Ratios/Supplemental Data
Total return ............................ 16.82% 22.57% 3.80% 15.66% 9.36%
Ratio of expenses to
average net assets ...................... 0.76% 0.97% 1.10% 1.09% 1.08%
Ratio of net investment
income to average
net assets .............................. 4.07% 3.28% 2.91% 2.37% 4.28%
Portfolio turnover rate ................. 44.2% 47.0% 43.6% 39.4% 30.3%
Average commission
rate paid ............................... $ 0.0769 -- -- -- --
Net assets, end of period
(in thousands) .......................... $ 959,942 $ 864,273 $ 654,999 $ 536,244 $ 359,272
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
Shares/Par Value
In thousands
- --------------------------------------------------------------------------------
Common Stocks 50.4%
FINANCIAL 8.4%
Insurance 4.5%
Alexander & Alexander .............................. 100,000 $ 1,738
Harleysville Group ................................. 110,000 3,327
Loews .............................................. 300,000 28,275
Unitrin ............................................ 130,000 7,280
Willis-Corroon ADR ................................. 250,000 2,875
43,495
Financial Services 3.9%
American Express ................................... 150,000 8,475
Fannie Mae ......................................... 195,000 7,264
Fund American Enterprises .......................... 65,000 6,224
Sallie Mae ......................................... 125,000 11,641
Zurich Reinsurance ................................. 110,000 3,437
37,041
Bank and Trust 0.0%
Bank Fuer International Zahlung (CHF) ............ 75 560
560
Total Financial 81,096
UTILITIES 6.6%
Electric Utilities 6.6%
Centerior Energy ................................. 4,040,000 43,430
Entergy .......................................... 140,000 3,885
Ohio Edison ...................................... 80,000 1,820
Public Service of New Mexico ..................... 95,000 1,865
Unicom ........................................... 450,000 12,206
Total Utilities................................... 63,206
CONSUMER NONDURABLES 5.2%
Food Processing 0.2%
McCormick ........................................ 70,000 1,650
1,650
Pharmaceuticals 3.8%
Genentech * .................................... 575,000 $ 30,834
Novartis (CHF) ................................. 2,666 3,053
Schering-Plough ................................ 50,000 3,238
37,125
<PAGE>
Miscellaneous Consumer Products 1.2%
A. T. Cross (Class A) .......................... 115,000 1,337
Philip Morris .................................. 90,000 10,136
11,473
Total Consumer Nondurables ..................... 50,248
CONSUMER SERVICES 8.3%
General Merchandisers 0.4%
Hills Stores * ................................. 200,000 1,200
Wal-Mart ....................................... 115,000 2,631
3,831
Specialty Merchandisers 0.9%
Petrie Stores Liquidation Trust * .............. 2,560,000 6,880
Toys "R" Us * .................................. 50,000 1,500
8,380
Entertainment and Leisure 0.0%
Reader's Digest (Class A) ...................... 10,000 402
402
Media and Communications 7.0%
Chris-Craft * ....................................... 260,000 10,887
Meredith ............................................ 125,000 6,594
New York Times (Class A) ............................ 730,000 27,740
Times Mirror (Class A) .............................. 65,000 3,234
Washington Post (Class B) ........................... 57,000 19,102
67,557
Total Consumer Services 80,170
CONSUMER CYCLICALS 2.1%
Miscellaneous Consumer Durables 2.1%
Corning ............................................. 224,750 10,395
Polaroid ............................................ 215,000 9,352
Total Consumer Cyclicals ............................ 19,747
TECHNOLOGY 1.2%
Information Processing 0.6%
IBM ................................................. 37,500 $ 5,663
5,663
Aerospace and Defense 0.6%
Allegheny Teldyne ................................... 235,000 5,405
5,405
Total Technology .................................... 11,068
<PAGE>
BUSINESS SERVICES AND
TRANSPORTATION 1.8%
Transportation Services 1.8%
Overseas Shipholding Group .......................... 275,000 4,675
PHH ................................................. 187,500 8,063
Ryder System ........................................ 170,000 4,781
Total Business Services and Transportation .......... 17,519
ENERGY 9.7%
Exploration and Production 0.6%
Mitchell Energy & Development .................... 250,000 5,625
5,625
Integrated Petroleum - Domestic 7.3%
Amerada Hess ..................................... 400,000 23,150
Atlantic Richfield ............................... 90,000 11,925
Kerr-McGee ....................................... 40,000 2,880
Murphy Oil ....................................... 305,000 16,966
Oryx Energy * .................................... 70,000 1,733
Sun Company ...................................... 225,000 5,484
Union Texas Petroleum ............................ 340,000 7,607
69,745
Integrated Petroleum - International 1.8%
Petro-Canada ..................................... 30,000 420
Texaco ........................................... 175,000 17,172
17,592
Total Energy ..................................... 92,962
PROCESS INDUSTRIES 3.2%
Specialty Chemicals 1.0%
Great Lakes Chemical ............................. 205,000 $ 9,584
9,584
Paper and Paper Products 0.3%
International Paper .............................. 80,000 3,230
3,230
Forest Products 1.1%
Weyerhaeuser ..................................... 225,000 10,659
10,659
Building and Construction 0.8%
Schuller ........................................ 680,000 7,225
7,225
Total Process Industries ........................ 30,698
<PAGE>
BASIC MATERIALS 3.0%
Metals 0.1%
Hecla Mining * .................................. 140,000 787
787
Mining 2.9%
Bougainville Copper (AUD) ....................... 1,000,000 366
Homestake Mining ................................ 375,000 5,344
LONRHO (GBP) .................................... 700,000 1,499
Newmont Mining .................................. 300,000 13,425
Santa Fe Pacific Gold ........................... 500,000 7,687
28,321
Total Basic Materials ........................... 29,108
Miscellaneous Common Stocks 0.9% ................ 8,358
Total Common Stocks (Cost $ 356,979)............ 484,180
Preferred Stocks 4.6%
Cleveland Electric, $1.88 Adj., Series L ........ 60,000 4,890
Cleveland Electric, $90, Series S ............... 10,800 10,874
Cleveland Electric, 8.80%, Series R ............. 6,575 6,555
Entergy GSU, 8.75%, Adj. B ...................... 39,959 1,958
Kemper (144a), Series E ......................... 326,000 16,952
Niagara Mohawk, Adj., Series A .................. 34,000 $ 604
Niagara Mohawk, Adj., Series B .................. 25,349 497
Niagara Mohawk, Adj., Series C .................. 99,300 1,887
Total Preferred Stocks (Cost $ 38,920)......... 44,217
Convertible Preferred Stocks 0.6%
International Paper, 5.25% ...................... 25,000 1,156
Microsoft, $2.196, Series A * ................... 50,000 4,003
Total Convertible Preferred Stocks (Cost $5,165). 5,159
Convertible Bonds 27.6%
ALZA, LYONS, Zero Coupon, 7/14/14....................... $11,300,000 4,675
Automatic Data Processing, LYONS
Zero Coupon, 2/20/12 .......................... 76,000,000 43,351
Cellular Communications (144a), Zero Coupon, 7/27/99 ... 15,450,000 12,901
Chubb, 6.00%, 5/15/98 .................................. 5,500,000 6,820
Comcast, Sub. Deb., 3.375%, 9/9/05 ..................... 12,500,000 11,754
Cooper Industries, Sub. Deb., 7.05%, 1/1/15 ............ 1,728,000 1,848
Enserch, 6.375%, 4/1/02 ................................ 9,650,000 9,505
Grand Metropolitan, 6.50%, 1/31/00 ..................... 2,600,000 3,085
Grand Metropolitan (144a), 6.50%, 1/31/00 .............. 7,650,000 9,078
Home Depot, 3.25%, 10/1/01 ............................. 3,750,000 3,663
Homestake Mining (144a), Sub. Deb., 5.50%, 6/23/00 ..... 12,300,000 11,839
<PAGE>
LONRHO, 6.00%, 2/27/04 (GBP) ........................... 3,500,000 5,434
McKesson, Sub. Deb., 4.50%, 3/1/04 ..................... 3,250,000 2,849
Office Depot, LYONS, Zero Coupon, 12/11/07 ............. 2,000,000 1,198
Office Depot, LYONS, Zero Coupon, 11/1/08 .............. 8,000,000 4,549
Outboard Marine, Deb., 7.00%, 7/1/02 ................... 4,500,000 4,421
Potomac Electric Power, Sub. Deb., 5.00%, 9/1/02 ....... 5,800,000 5,394
PriceCostco, Sub. Deb., 5.50%, 2/28/12 ................. 2,500,000 2,668
Rouse, Sub. Deb., 5.75%, 7/23/02 ....................... 18,000,000 19,417
Sandoz Capital, 2.00%, 10/6/02 ......................... 17,500,000 18,812
Silicon Graphics (144a), Zero Coupon, 11/2/13 .......... 11,250,000 5,963
Time Warner, LYONS, Zero Coupon, 12/17/12 .............. 35,000,000 13,316
Turner Broadcasting Systems, LYONS
Zero Coupon, 2/13/07 .......................... 31,500,000 15,474
U. S. West, LYONS, Zero Coupon, 6/25/11................. $ 45,000,000 $ 16,407
UBS Finance Delaware, MTN, 2.00%, 12/15/00.............. 1,000,000 933
USF&G, Zero Coupon, 3/3/09.............................. 21,000,000 14,144
WMX Technologies, Sub. Deb., 2.00%, 1/24/05............. 11,500,000 10,765
Miscellaneous Convertible Bonds......................... 4,428
Total Convertible Bonds (Cost $247,953)................ 264,691
U.S. Government Obligations/
Agencies 7.5%
Federal National Mortgage Assn., MTN
5.37%, 2/7/01 .................................. 5,000,000 4,829
Tennessee Valley Authority
5.98%, 4/1/36 .................................. 18,000,000 18,281
U.S. Treasury Notes
5.75%, 10/31/97 ................................ 9,000,000 9,013
6.125%, 7/31/00 ................................ 2,000,000 2,000
6.75%, 5/31/99 ................................. 5,000,000 5,085
7.375%, 11/15/97 ............................... 8,000,000 8,115
Miscellaneous U.S. Government Obligations/Agencies ..... 24,789
Total U.S. Government Obligations/Agencies (Cost $71,709) 72,112
Options Purchase 0.5%
Allegheny Teledyne "B" Puts, 1/18/97 @ $20.00 * ........ 130 2
Allegheny Teledyne "B" Puts, 1/18/97 @ $22.50 * ........ 220 8
Allegheny Teledyne "B" Puts, 4/19/97 @ $25.00 * ........ 120 30
Amerada Hess "B" Puts, 5/17/97 @ $60.00 * .............. 250 102
Automatic Data Processing "B" Puts, 2/22/97 @ $40.00 * . 235 12
Automatic Data Processing "B" Puts, 2/22/97 @ $45.00 * . 610 164
Automatic Data Processing "B" Puts, 2/22/97 @ $50.00 * . 100 71
HFS "B" Puts, 4/19/97 @ $60.00 * ....................... 250 164
HFS "B" Puts, 4/19/97 @ $85.00 * ....................... 250 633
HFS "B" Puts, 7/19/97 @ $60.00 * ....................... 500 494
Home Depot "B" Puts, 5/17/97 @ $60.00 * ................ 250 250
<PAGE>
IBM "B" Puts, 1/18/97 @ $110.00 * ...................... 160 1
IBM "B" Puts, 4/19/97 @ $140.00 * ...................... 75 38
IBM "B" Puts, 7/19/97 @ $155.00 * ...................... 125 170
IBM "B" Puts, 7/19/97 @ $160.00 * ..................... 125 $ 203
IBM "B" Puts, 7/19/97 @ $170.00 * ..................... 125 287
Microsoft "B" Puts, 7/19/97 @ $85.00 * ................ 250 203
Philip Morris "B" Puts, 3/22/97 @ $105.00 * ........... 100 23
Philip Morris "B" Puts, 3/22/97 @ $115.00 * ........... 150 79
PriceCostco "B" Puts, 7/19/97 @ $30.00 * .............. 250 132
Schering Plough "B" Puts, 5/17/97 @ $70.00 * .......... 250 162
Schering Plough "B" Puts, 5/17/97 @ $75.00 * .......... 250 269
Silicon Graphics "B" Puts, 2/22/97 @ $30.00 * ......... 250 117
Texaco "B" Puts, 4/19/97 @ $95.00 * ................... 100 31
Times Mirror "B" Puts, 3/22/97 @ $50.00 * ............. 110 24
Toys R Us "B" Puts, 1/18/97 @ $35.00 * ................ 100 49
Toys R Us "B" Puts, 3/22/97 @ $35.00 * ................ 200 102
Toys R Us "B" Puts, 6/21/97 @ $40.00 * ................ 500 503
Wal Mart "B" Puts, 3/22/97 @ $27.50 * ................. 700 319
Wal Mart "B" Puts, 3/22/97 @ $30.00 * ................. 450 321
Total Options Purchased (Cost $5,216) ................. 4,963
Short-Term Investments 10.0%
Certificates of Deposit 2.1%
Bayerische Hypotheken und Wechsel, (London)
5.62%, 2/27/97 .............................. $10,000,000 10,000
National Westminster Bank, 5.41%, 2/10/97 ........... 10,000,000 10,000
20,000
Commercial Paper 6.9%
Beta Finance, 4(2), 5.34%, 1/7/97 ........................ 10,000,000 9,991
Caterpillar Financial Services, 5.40%, 2/4/97 ............ 10,000,000 9,949
Cregem North America, 5.45%, 1/10/97 ..................... 10,000,000 9,986
Falcon Asset Securitization, 4(2), 5.30%, 2/19/97 ........ 10,000,000 9,928
Investments in Commercial Paper through a joint account
6.75-7.10%, 1/2/97 ............................... 16,149,004 16,146
Unifunding, 5.44%, 1/6/97 ................................ 10,000,000 9,993
65,993
Medium-Term Notes 1.0%
Morgan Stanley Group, VR, 5.656%,
1/31/97 ................................... 10,000,000 10,003
10,003
<PAGE>
Total Short-Term Investments (Cost $95,996) 95,996
Total Investments in Securities
101.2% of Net Assets (Cost $821,938) ...... $ 971,318
Other Assets Less Liabilities ............. (11,376)
NET ASSETS $ 959,942 Net Assets Consist of:
Accumulated net investment income -
net of distributions ...................... $ 365
Accumulated net realized gain/loss -
net of distributions ...................... 19,105
Net unrealized gain (loss) ................ 149,382
Paid-in-capital applicable to
66,341,612 shares of no par
value capital stock outstanding;
unlimited shares authorized ............... 791,090
NET ASSETS ................................ $959,942
NET ASSET VALUE PER SHARE ................. $14.47
- --------------------------------------------------------------------------------
* Non-income producing
MTN Medium term note
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 5.9% of net assets. AUD Australian dollar CHF Swiss
franc GBP British sterling
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/96
- --------------------------------------------------------------------------------
Investment Income
Income
Dividend ................................................. $ 22,219
Interest ................................................. 21,718
Total income ............................................. 43,937
Expenses
Investment management .................................... 4,218
Shareholder servicing .................................... 2,304
Custody and accounting ................................... 178
Registration ............................................. 78
Prospectus and shareholder reports ....................... 62
Legal and audit .......................................... 19
Directors ................................................ 16
Miscellaneous ............................................ 5
Total expenses ........................................... 6,880
Net investment income ........................................ 37,057
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on
Securities ............................................... 69,918
Foreign currency transactions ............................ 21
Net realized gain (loss) ................................. 69,939
Change in net unrealized gain or loss on
Securities ............................................... 35,502
Other assets and liabilities
denominated in foreign currencies ........................ 2
Change in net unrealized gain or loss .................... 35,504
Net realized and unrealized gain (loss) ...................... 105,443
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ....................................... $142,500
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/96 12/31/95
================================================================================
Increase (Decrease) in Net Assets
Operations
Net investment income ........................... $ 37,057 $ 25,466
Net realized gain (loss) ........................ 69,939 37,005
Change in net unrealized gain or loss ........... 35,504 92,350
Increase (decrease) in net assets from operations 142,500 154,821
Distributions to shareholders
Net investment income ........................... (36,888) (25,734)
Net realized gain ............................... (55,332) (42,109)
Decrease in net assets from distributions ....... (92,220) (67,843)
Capital share transactions *
Shares sold ..................................... 233,393 240,766
Distributions reinvested ........................ 89,884 65,960
Shares redeemed ................................. (277,888) (184,430)
Increase (decrease) in net assets from capital
share transactions .............................. 45,389 122,296
Net Assets
Increase (decrease) during period ................... 95,669 209,274
Beginning of period ................................. 864,273 654,999
End of period ....................................... $ 959,942 $ 864,273
*Share information
Shares sold ..................................... 16,009 18,018
Distributions reinvested ........................ 6,208 4,829
Shares redeemed ................................. (19,115) (13,738)
Increase (decrease) in shares outstanding ....... 3,102 9,109
================================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
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 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. 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 Board, best to reflect fair value. In the absence of a last
sale price, purchased options are valued at the mean of the latest bid and asked
prices.
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 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.
<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
securities, aggregated $429,740,000 and $334,697,000, respectively, for the year
ended December 31, 1996.
<PAGE>
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, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $821,938,000, and net unrealized gain
aggregated $149,380,000, of which $164,181,000 related to appreciated
investments and $14,801,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management fee,
of which $332,000 was payable at December 31, 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
December 31, 1996, and for the year 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 year
ended December 31, 1996 decreased management fees by $1,530,000.
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 $2,048,000 for the year ended
December 31, 1996, of which $194,000 was payable at period-end.
<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, 1996, 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, 1996, by correspondence with the custodian. 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, 1996, 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 20, 1997
<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).
<PAGE>
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.
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.
<PAGE>
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, 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.
================================================================================
T. Rowe Price Mutual Funds
================================================================================
================================================================================
Mutual Funds
- --------------------------------------------------------------------------------
Stock Funds
================================================================================
Domestic
- --------------------------------------------------------------------------------
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
<PAGE>
International/Global
- --------------------------------------------------------------------------------
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
Bond Funds
================================================================================
Domestic Taxable
- --------------------------------------------------------------------------------
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-free
- --------------------------------------------------------------------------------
California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
<PAGE>
International/Global
- --------------------------------------------------------------------------------
Global Government Bond
Emerging Markets Bond
International Bond
Money Market
================================================================================
Taxable
- --------------------------------------------------------------------------------
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
- --------------------------------------------------------------------------------
California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
Blended Asset
================================================================================
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
T. Rowe Price No-Load Variable Annuity
================================================================================
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Closed to new investors.
Please call for a prospectus. Read it carefully before you invest or send
money.
<PAGE>
================================================================================
T. Rowe Price Discount Brokerage
================================================================================
================================================================================
Discount Brokerage
A Division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC
- --------------------------------------------------------------------------------
This low-cost service gives you the opportunity to easily consolidate all
your investments with one company. Through T. Rowe Price Discount Brokerage, you
can buy and sell individual securities-stocks, bonds, options, and others-at
considerable commission savings. We also provide a wide range of services,
including:
Automated Telephone and Computer Services
You can enter trades, access quotes, and review account information 24
hours a day, seven days a week. Any trades executed through these programs save
you an additional 10% on commissions.*
Investor Information
A variety of informative reports, such as our Brokerage Insights series,
S&P Market Month newsletter, and optional S&P Stock Reports, can help you better
evaluate economic trends and investment opportunities.
Dividend Reinvestment
Service Virtually all stocks held in customer accounts are eligible for
this service, free of charge.
* Discount applies to our current commission schedule; subject to our $35
minimum commission.
<PAGE>
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
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
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://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
<PAGE>
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.
RPRTCAF 12/31/96
