<PAGE>
Semiannual Report
CAPITAL
APPRECIATION
FUND
- -------------
June 30, 1998
- -------------
T. ROWE PRICE
<PAGE>
Report Highlights
- --------------------------------------------------------------------------------
Capital Appreciation Fund
. Large-cap stocks surged in the U.S. during the six months ended June 30,
1998, but Asian and emerging markets stocks declined sharply.
. The fund provided reasonable returns but lagged its peer group, due in part
to our conservatively structured portfolio.
. We maintained our common stock allocation at 53%, with convertibles as the
next largest holding at 21%.
. The fund's best contributors included Niagara Mohawk and several media
holdings; poor performers included Newmont Mining in the weak natural
resources sector.
. We remain concerned about the market's high valuation but are confident that
our low-risk strategy will serve shareholders well over time.
<PAGE>
Fellow Shareholders
Whoa! Today's financial markets remind us of trying to ride a bucking bronco.
Nothing illustrates the risks of being thrown more clearly than the wide
disparity of results on the investment track in the last six months. European
stocks surged while Asian and other emerging markets declined substantially.
Here in the United States, large stable growth companies galloped ahead, while
cyclical companies and smaller firms generally lagged the field.
----------------------
Performance Comparison
-------------------------------------------------------------------------
Periods Ended 6/30/98 6 Months 12 Months
-----------------------------------------------------------------------
Capital Appreciation Fund 5.85% 13.07%
.......................................................................
S&P 500 17.71 30.16
.......................................................................
Lipper Capital Appreciation
Funds Average 12.85 22.12
.......................................................................
With interest rates lower, fixed income securities and related funds
had good results. The Capital Appreciation Fund ran a respectable race
but could not match the amazing strength of the broad equity market
indices. Due in part to our conservatively structured portfolio, we
also lagged our peer group. We could argue that any comparison of
results needs to be handicapped for our risk-averse investment style,
but regardless we were mildly disappointed with recent results.
Market Environment
There's no question that the economy is strong. The question is whether
it is too strong, strong but sustainable, or strong but about to slow.
Consumer spending is robust, and unemployment is at 30-year lows, with
an amazing 64% of all people over the age of 16 working. Surging
business demand has even caused unusual operating problems, such as
those experienced by the Union Pacific railroad, surprising managements
and customers alike. Normally, one could expect such prolonged economic
strength to trigger a policy response by the Federal Reserve, but aside
from one small rate increase in March 1997, there has been nothing.
Some observers believe that Asia's contraction -- 20% stock market
declines have been commonplace -- renders
1
<PAGE>
action unnecessary. They argue that weakness will spread to the U.S.
and slow our otherwise rampant growth. Declining commodity markets,
such as copper, and the stock market's lack of enthusiasm for most
natural resource companies lend credence to this opinion. On the other
hand, utility stocks were weak and technology stocks rebounded --
neither typical of a prerecession phase. My own cynical view is that
unless inflation moves from today's very low level and becomes
unbearable there is no political will for anything other than a policy
of maximum growth. As citizens, we can only hope that the economy's
natural checks will keep us from serious imbalances.
PORTFOLIO HIGHLIGHTS
The fund's basic asset allocation among equities, convertibles, bonds,
preferred stocks, and reserves changed little these past six months. We
did, however, extensively groom the first two categories. Our largest
purchases were Times Mirror convertible bonds and Niagara Mohawk common
stock, making them two of our largest holdings. We significantly
reduced FirstEnergy, also a top holding, in response to its tremendous
run over the past 18 months. Three positions -- Union Texas Petroleum,
Wheelabrator Technologies, and Energy Group -- were liquidated
following favorable takeovers. The significant variation in performance
within the stock market's many sectors was mirrored in the portfolio.
(Tables following this letter break out both the individual security
and industry group contributions to our results.) Our electric utility
holdings did particularly well considering the lackluster recent
returns achieved by most investors in this group. Media holdings,
including New York Times, Washington Post, and Time Warner, continued
to occupy our winners' circle. We have generally been able to establish
positions in this group during periods of uncertainty and then reap the
double benefits of renewed investor enthusiasm and solid corporate
growth.
- ------------------------
Security Diversification
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Bonds 11%
Common Stocks 53%
Convertibles 21%
Preferred Stocks 3%
Reserves 12%
Based on net assets as of 6/30/98.
2
<PAGE>
The fund's worst contributor was Loews, whose major asset is CNA
Insurance but which derives about 20% of its market value from a
cigarette subsidiary. The stock suffered when investors shied away from
tobacco-related stocks. Most of our other poor performers were in the
natural resources area, and while we retain confidence in the
individual companies, we were disappointed that the industry picture
turned so negative. Nothing illustrates this better than Newmont Mining
and our other precious metals stocks. Despite being fine companies with
solid properties and managements, they are viewed by many as long shots
in an environment of low inflation and general disenchantment with
nonfinancial assets. At the very least, we think a normalization of the
current negative sentiment will provide reasonable returns going
forward, and beyond that, we can envision various market conditions
that could generate runaway returns for gold stocks when the rest of
the market is faltering.
OUR PERSPECTIVE ON RISK
The Capital Appreciation Fund is regarded as T. Rowe Price's
lowest-risk equity fund. Third-party evaluators, such as Chicago-based
Morningstar, also label the fund "low risk." We agree with the
characterization but for different reasons, so we'd like to talk
briefly about risk-- how outsiders view it and how we see it in
managing the portfolio.
Harnessing the power of computers, outside evaluators calculate the
change in mutual fund prices compared to corresponding changes in the
overall stock market. The relative wiggle of these number streams is
termed "volatility" (often expressed by a measure known as "beta"), and
the higher the volatility the greater the perceived risk of a fund.
Capital Appreciation's recent historical beta indicates that the fund
is about half as volatile as the S&P 500. There is a great deal wrong
with beta as a risk indicator, but (1) it seems to produce largely
correct answers, (2) no other easily quantifiable approach works as
well, and (3) we think it generates an appropriate answer for your
fund.
In managing the fund, however, we approach risk very differently. We do
not consider the volatility of individual stocks or other financial
securities in our evaluation; we find this approach close to
ridiculous. Is a stock that sells for $25 and has daily price changes
of $1 riskier than the same stock six months later selling for $125
with 50-cent price moves? Almost certainly not: the amount paid for a
stock is perhaps the critical risk factor. In addition to the purchase
price, many risk
3
<PAGE>
factors arise from the companies themselves. For example: How much
financial leverage does the company have? Is its cost structure fixed
in the short run? Will its business contract faster or slower than most
others in a recession? Does management represent its results fairly?
What types of business exposure does it have?
Then there are risks associated with a security's weight in the
portfolio and those arising from the portfolio in aggregate. Will other
investors provide liquidity if we need to sell or if the business
deteriorates? How will changing interest rates or stock market
valuations affect the fund? Is our diversification adequate? What are
the risks of foreign investments, particularly those denominated in
currencies other than the dollar? We see risk assessment as a very
inexact science with no sensible mathematical solution and try to
reduce it by using judgment and hard work. A final comment: It's
impossible to achieve desirable returns without assuming some level of
risk -- at a minimum, it must be a risk perceived by others.
Outlook
. . . IF TOO MUCH MONEY IS BET ON ONE HORSE THE ODDS BECOME
UNACCEPTABLE.
We wish we had a clear picture, but we don't. We expect the economy to
slow from its recent pace largely due to the current flat yield curve--
flat in the sense that interest rates are about the same regardless of
maturity. Historically, flatness has hurt financial businesses, such as
banks, and has slowed economic activity. We're not sure the economy
will respond as quickly this time, because of modern financial
techniques, but yield relationships should have some measurable impact.
As for the general level of interest rates, we rule nothing out. They
might fall to surprising lows if the economy slows more than most
anticipate. Only if inflation steps up dramatically would large
increases be likely. Remember that interest rates and the economy are
significantly interdependent and what hurts one is likely to be
partially offset by the other.
Despite the uncertainties, never before have so many Americans had such
a large stake in the stock market. It is accepted wisdom that in the
long run equities are the investment of choice -- and we agree with
that assessment. At the same time, we all know that if too much money
is bet on one horse the odds become unacceptable.
4
<PAGE>
Furthermore, we note with concern that corporate insiders and
corporations themselves have been heavy sellers of securities. Whatever
else may influence their decision, we know they aren't expecting
considerably higher prices in the very near term. Of course, they can
be wrong, but they're in a position to make better judgments than most
investors.
Our biggest concern remains the stock market's high valuation levels.
By most measures -- price/earnings ratios, dividend yields, price/book
values, etc. -- stock prices are at record highs. Furthermore, we see
financial accounting being stretched to the limit of truthfulness.
Witness: some calculations show that over the last decade more than
one-quarter of all S&P 500 earnings were subsequently written off. We
think that high valuation levels and suspect corporate reporting
dramatically lower the odds of successful investing. Why then do we
maintain even 50% in common stocks, with more exposure in convertibles?
First, we are unwilling to be left at the gate in history's most
rewarding investing climate. Second and more important, we have been
able to make investments we deem low risk that capture a good bit of
the returns enjoyed by more aggressive investors.
For the last two years, these letters have stressed the stock market's
negatives while concluding that an overly cautious strategy was not
appropriate; we retain that view. To conclude with yet another
equestrian allusion: We may be a Clydesdale racing against quarter
horses, but it's a long race and the track's getting muddy. I'm
comfortable with our strategy, and I know we are going to be in the
saddle at the finish.
Respectfully submitted,
/s/ Richard P. Howard
Richard P. Howard
President and Chairman of the Investment Advisory Committee
July 20, 1998
- --------------------------------------------------------------------------------
INTERVIEW ON TAPE
IN A RECENT INTERVIEW, RICH HOWARD DISCUSSED IN DETAIL HIS INVESTMENT
PHILOSOPHY AND STRATEGY IN MANAGING THE CAPITAL APPRECIATION FUND. IF
YOU WOULD LIKE TO RECEIVE A FREE COPY OF THIS AUDIOTAPE, PLEASE CALL
1-800-638-5660.
5
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/98
- --------------------------------------------------------------------------------
Tennessee Valley 5.6%
................................................................................
Firstenergy/Cleveland Electric 4.5
................................................................................
Amerada Hess 4.1
................................................................................
Loews 3.4
................................................................................
Rouse 3.0
................................................................................
Niagara Mohawk 3.0
................................................................................
Washington Post 2.7
................................................................................
Times Mirror 2.3
................................................................................
New York Times 2.1
................................................................................
Genentech 1.9
................................................................................
WMX Technologies 1.8
................................................................................
Chris-Craft 1.8
................................................................................
Inco 1.8
................................................................................
Automatic Data Processing 1.8
................................................................................
Texaco 1.8
................................................................................
Unicom 1.6
................................................................................
Murphy Oil 1.6
................................................................................
Homestake Mining 1.5
................................................................................
Great Lakes Chemical 1.5
................................................................................
Lonrho 1.4
................................................................................
Philip Morris 1.4
................................................................................
Chiron 1.4
................................................................................
Kemper 1.3
................................................................................
Newmont Mining 1.3
................................................................................
Roche Holdings 1.2
- --------------------------------------------------------------------------------
Total 55.8%
- --------------------------------------------------------------------------------
6
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 6/30/98
TEN BEST CONTRIBUTORS
-----------------------------------------------------------------------------
NIAGARA MOHAWK 10(cent)
.............................................................................
Union Texas Petroleum** 8
.............................................................................
Washington Post 6
.............................................................................
Genentech 6
.............................................................................
Time Warner 5
.............................................................................
New York Times 5
.............................................................................
ALZA** 5
.............................................................................
Automatic Data Processing 5
.............................................................................
Waste Management 4
.............................................................................
Unicom 4
-----------------------------------------------------------------------------
Total 58(cent)
TEN WORST CONTRIBUTORS
-----------------------------------------------------------------------------
Loews - 10(cent)
.............................................................................
Newmont Mining 4
.............................................................................
Mitchell Energy & Development 3
.............................................................................
Philip Morris 2
.............................................................................
Polaroid 2
.............................................................................
Smith & Nephew 1
.............................................................................
Murphy Oil 1
.............................................................................
Exide 1
.............................................................................
Toys "R" Us 1
.............................................................................
Corning 1
.............................................................................
Total - 26(cent)
12 Months Ended 6/30/98
TEN BEST CONTRIBUTORS
-----------------------------------------------------------------------------
First Energy/Centerior Energy 32(cent)
.............................................................................
Automatic Data Processing 17
.............................................................................
Unicom 17
.............................................................................
New York Times 16
.............................................................................
Washington Post 13
.............................................................................
Niagara Mohawk 11
.............................................................................
Union Texas Petroleum 8
.............................................................................
Time Warner 8
.............................................................................
Genentech 7
.............................................................................
ALZA 6
.............................................................................
Total 135(cent)
TEN WORST CONTRIBUTORS
-----------------------------------------------------------------------------
Newmont Mining - 12(cent)
.............................................................................
Loews 7
.............................................................................
Corning 5
.............................................................................
Polaroid 4
.............................................................................
Lonrho 3
.............................................................................
Great Lakes Chemical 3
.............................................................................
Philip Morris 2
.............................................................................
MacMillan Bloedel* 2
.............................................................................
Homestake Mining 2
.............................................................................
Smith & Nephew* 1
-----------------------------------------------------------------------------
Total - 41(cent)
* Position added
** Position eliminated
7
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
PERFORMANCE CONTRIBUTIONS
6 Months Ended 6/30/98
Cents-Per-Share Percent of
Sector Contribution Net Assets
------------------------------------------------------------------------------
Basic Materials - 3(cent) 7%
.............................................................................
Business Services and Transportation 9 5
.............................................................................
Capital Equipment - 1 -
.............................................................................
Consumer Cyclicals - 2 5
.............................................................................
Consumer Nondurables 17 10
.............................................................................
Consumer Services 23 14
.............................................................................
Energy 5 9
.............................................................................
Financial - 4 9
.............................................................................
Process Industries 3 5
.............................................................................
Technology 2 2
.............................................................................
Utilities 14 12
.............................................................................
U.S. Governments/Options - 9
.............................................................................
Miscellaneous - 1
.............................................................................
Reserves and Income 23 12
------------------------------------------------------------------------------
8
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- ----------------------
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
S&P 500 Appreciation
Index Fund
6/31/1987 10000 10000
Jun-88 12055 11806
Jun-89 14042 12805
Jun-90 15081 14183
Jun-91 17104 15631
Jun-92 19435 17743
Jun-93 19707 19007
Jun-94 24846 22412
Jun-95 31306 26005
Jun-96 42170 30898
6/31/1996 54889 34937
- ------------------------------------
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 6/30/98 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Capital Appreciation Fund 13.07% 15.95% 14.51% 13.33%
- --------------------------------------------------------------------------------
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
9
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
UNAUDITED
- --------------------
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
6/30/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
NET ASSET VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $ 14.71 $ 14.47 $ 13.67 $ 12.10 $ 12.66 $ 11.39
................................................................................
Investment activities
Net investment income 0.24 0.50 0.60 0.43 0.35 0.26
Net realized and
unrealized gain (loss) 0.62 1.82 1.70 2.30 0.13 1.52
................................................................................
Total from investment activities 0.86 2.32 2.30 2.73 0.48 1.78
................................................................................
Distributions
Net investment income -- (0.50) (0.60) (0.44) (0.35) (0.18)
Net realized gain -- (1.58) (0.90) (0.72) (0.69) (0.33)
................................................................................
Total distributions -- (2.08) (1.50) (1.16) (1.04) (0.51)
................................................................................
NET ASSET VALUE
End of period $ 15.57 $ 14.71 $ 14.47 $ 13.67 $ 12.10 $ 12.66
--------------------------------------------------------------------------------
Ratios/Supplemental Data
Total return. 5.85% 16.20% 16.82% 22.57% 3.80% 15.66%
..................................................................................................................................
Ratio of expenses to average net assets 0.62%+ 0.64% 0.76% 0.97% 1.10% 1.09%
..................................................................................................................................
Ratio of net investment
income to average net assets 3.06%+ 3.17% 4.07% 3.28% 2.91% 2.37%
..................................................................................................................................
Portfolio turnover rate 29.1% 48.3% 44.2% 47.0% 43.6% 39.4%
..................................................................................................................................
Net assets, end of period
(in millions) $ 1,090 $ 1,060 $ 960 $ 864 $ 655 $ 536
..................................................................................................................................
</TABLE>
. Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
+ Annualized.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Unaudited June 30, 1998
- -----------------------
Statement of Net Assets
- --------------------------------------------------------------------------------
SHARES/PAR VALUE
- --------------------------------------------------------------------------------
In thousands
Common Stocks 52.2%
FINANCIAL 6.6%
Bank and Trust 0.2%
Bank fuer International Zahlung (CHF) * 275 $ 1,807
................................................................................
1,807
...........
Insurance 4.7%
Loews 420,000 36,593
................................................................................
Unitrin 105,000 7,271
................................................................................
Willis-Corroon ADR 555,000 6,972
................................................................................
50,836
...........
Financial Services 1.7%
Fund American Enterprises 72,000 10,656
................................................................................
Leucadia National 257,600 8,517
................................................................................
19,173
...........
Total Financial 71,816
...........
UTILITIES 8.4%
Electric Utilities 8.4%
FirstEnergy 1,070,000 32,902
................................................................................
Kansas City Power & Light 353,000 10,237
................................................................................
Niagara Mohawk 2,050,000 30,622
................................................................................
Unicom 500,000 17,531
................................................................................
Total Utilities 91,292
...........
CONSUMER NONDURABLES 5.7%
Food Processing 0.7%
McCormick 200,000 7,144
................................................................................
7,144
...........
Hospital Supplies/Hospital Management 0.6%
Smith & Nephew (GBP) * 2,600,000 6,490
................................................................................
6,490
...........
Pharmaceuticals 2.6%
Genentech * 310,000 21,041
................................................................................
Pharmacia & Upjohn 47,000 2,168
................................................................................
Schering-Plough 50,000 4,581
................................................................................
27,790
...........
11
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
SHARES/PAR VALUE
- --------------------------------------------------------------------------------
In thousands
Health Care Services 0.3%
Aetna 50,000 $ 3,806
................................................................................
3,806
...........
Miscellaneous Consumer Products 1.5%
A. T. Cross (Class A) 115,000 1,711
................................................................................
Philip Morris 380,000 14,962
................................................................................
16,673
...........
Total Consumer Nondurables 61,903
...........
CONSUMER SERVICES 10.3%
General Merchandisers 0.5%
Hills Stores * 165,000 949
................................................................................
Wal-Mart 75,000 4,556
................................................................................
5,505
...........
Specialty Merchandisers 1.0%
Petrie Stores Liquidation Trust * 2,585,000 7,412
................................................................................
Toys "R" Us * 150,000 3,534
................................................................................
10,946
...........
Entertainment and Leisure 0.5%
Reader's Digest (Class A) 140,000 3,798
................................................................................
Reader's Digest (Class B) 75,000 2,034
................................................................................
5,832
...........
Media and Communications 8.3%
Chris-Craft * 360,000 19,688
................................................................................
Meredith 185,000 8,683
................................................................................
New York Times (Class A) 285,000 22,586
................................................................................
Time Warner 116,385 9,944
................................................................................
Washington Post (Class B) 51,000 29,376
................................................................................
90,277
...........
Total Consumer Services 112,560
...........
CONSUMER CYCLICALS 1.0%
Miscellaneous Consumer Durables 1.0%
Corning 175,000 6,081
................................................................................
Polaroid 150,000 5,335
................................................................................
Total Consumer Cyclicals 11,416
...........
12
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
SHARES/PAR VALUE
- --------------------------------------------------------------------------------
In thousands
TECHNOLOGY 1.5%
Information Processing 0.4%
IBM 40,000 $ 4,592
................................................................................
4,592
...........
Telecommunications Equipment 1.1%
MCI 200,000 11,619
................................................................................
11,619
...........
Total Technology 16,211
...........
CAPITAL EQUIPMENT 0.1%
Electrical Equipment 0.1%
Exide 80,000 1,345
................................................................................
Total Capital Equipment 1,345
...........
BUSINESS SERVICES AND TRANSPORTATION 0.6%
Transportation Services 0.6%
Overseas Shipholding Group 300,000 6,112
................................................................................
Total Business Services and Transportation 6,112
...........
ENERGY 8.7%
Exploration and Production 0.5%
Mitchell Energy & Development (Class B) 270,000 5,198
................................................................................
5,198
...........
Integrated Petroleum - Domestic 6.4%
Amerada Hess 825,000 44,808
................................................................................
Atlantic Richfield 90,000 7,031
................................................................................
Kerr-McGee 20,000 1,158
................................................................................
Murphy Oil 335,000 16,980
................................................................................
69,977
...........
Integrated Petroleum - International 1.8%
Texaco 325,000 19,398
................................................................................
19,398
...........
Total Energy 94,573
...........
PROCESS INDUSTRIES 5.2%
Octel * 275,000 5,466
................................................................................
13
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Specialty Chemicals 1.5%
Great Lakes Chemical 415,000 $ 16,367
................................................................................
16,367
..........
Forest Products 2.4%
Domtar 900,000 6,075
................................................................................
Macmillan Bloedel (CAD) 1,100,000 11,790
................................................................................
Weyerhaeuser 175,000 8,083
................................................................................
25,948
..........
Building and Construction 0.8%
Hanson ADR 125,000 3,789
................................................................................
Johns Manville 340,000 5,121
................................................................................
8,910
..........
Total Process Industries 56,691
..........
BASIC MATERIALS 2.9%
Mining 2.9%
Bougainville Copper (AUD) * 1,000,000 236
................................................................................
Homestake Mining 430,000 4,461
................................................................................
Lonrho (GBP) 1,275,000 5,982
................................................................................
Lonrho Africa (GBP) 850,400 1,044
................................................................................
Newmont Mining 600,000 14,175
................................................................................
Prime Resources Group 820,900 5,695
................................................................................
Total Basic Materials 31,593
..........
Miscellaneous Common Stocks 1.2% 13,064
..........
Total Common Stocks (Cost $439,687) 568,576
..........
Preferred Stocks 3.1%
Cleveland Electric, (Series L), $1.88 Adj 60,000 6,000
................................................................................
Cleveland Electric, (Series R), 8.80% 5,000 5,407
................................................................................
Cleveland Electric, (Series S), $90 4,000 4,344
................................................................................
Entergy-GSU (Series B) 36,330 1,837
................................................................................
Kemper, (Series E), (144a), 5.75% 280,000 14,560
................................................................................
Niagara Mohawk, (Series A), Adj 30,000 756
................................................................................
Niagara Mohawk, (Series B), Adj 25,349 627
................................................................................
Niagara Mohawk, (Series C), Adj 16,000 399
................................................................................
Total Preferred Stocks (Cost $27,960) 33,930
..........
14
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Convertible Preferred Stocks 2.2%
International Paper, 5.25% 20,000 $ 1,000
................................................................................
Rouse, (Series B), $3 375,000 18,656
................................................................................
Union Pacific Capital Trust, 6.25% 100,000 4,712
................................................................................
Total Convertible Preferred Stocks (Cost $24,087) 24,368
............
Convertible Bonds 19.1%
Automatic Data Processing, LYONs, 0%, 2/20/12 $21,000,000 19,555
................................................................................
Chiron, 1.90%, 11/17/00 16,000,000 14,782
................................................................................
Duetsche Bank Euro, 0%, 2/12/17 2,000,000 1,115
................................................................................
Exide, (144a), 2.90%, 12/15/05 2,000,000 1,257
................................................................................
Homestake Mining, Sub. Deb., (144a), 5.50%, 6/23/00 12,750,000 12,208
................................................................................
Inco, Deb. Notes
5.75%, 7/1/04 18,000,000 16,860
........................................................................
7.75%, 3/15/16 2,500,000 2,483
........................................................................
Interpublic Group, Sub. Notes, 1.80%, 9/16/04 1,250,000 1,170
................................................................................
Lonrho Finance, 6.00%, 2/27/04 (GBP) GBP 5,600,000 8,614
................................................................................
Marriott International LYONs, 0%, 3/25/11 $ 7,000,000 4,586
................................................................................
McKesson, Sub. Deb. Notes, 4.50%, 3/1/04 3,250,000 2,975
................................................................................
National Semiconductor, 6.50%, 10/1/02 3,000,000 2,758
................................................................................
Nelson Thomas, 5.75%, 11/30/99 2,100,000 2,108
................................................................................
News America, Gtd. Notes, LYONs, 0%, 3/11/13 7,500,000 4,840
................................................................................
Office Depot, LYONs, 0%, 11/1/08 2,500,000 1,950
................................................................................
Ogden, Sub. Deb. Notes, 5.75%, 10/20/02 600,000 598
................................................................................
Pep Boys, Sub. Notes
LYONs, 0%, 9/20/11 5,000,000 2,764
........................................................................
4.00%, 9/1/99 5,000,000 4,933
........................................................................
Phycor, 4.50%, 2/15/03 3,500,000 2,982
................................................................................
Potomac Electric Power, Deb. Notes, 5.00%, 9/1/02 7,850,000 7,570
................................................................................
Roche Holdings, LYONs, (144a), 0%, 5/6/12 28,000,000 13,615
................................................................................
Rouse, 5.75%, 7/23/02 12,400,000 14,035
................................................................................
Teck, 3.75%, 7/15/06 7,660,000 5,879
................................................................................
Times Mirror, LYONs, 0%, 4/15/17 56,000,000 25,524
................................................................................
U.S. Cellular, LYONs, 0%, 6/15/15 30,000,000 11,404
................................................................................
WMX Technologies, Sub. Deb., 2.00%, 1/24/05 20,000,000 19,831
................................................................................
Miscellaneous Convertible Bonds 2,186
............
Total Convertible Bonds (Cost $188,827) 208,582
............
15
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- ---------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Corporate Bonds 1.1%
Bellsouth Telecommunications, Deb. Notes
5.85%, 11/15/45 $ 7,000,000 $ 6,992
......................................................................................
Merck, MTN, 5.76%, 5/3/37 2,500,000 2,592
......................................................................................
National Semiconductor, 6.50%, 10/1/02 2,000,000 1,839
......................................................................................
Total Corporate Bonds (Cost $11,429) 11,423
...........
U.S. Government Obligations/
Agencies 12.5%
Federal National Mortgage Assn.
MTN, 5.37%, 2/7/01 5,000,000 4,958
..................................................................................
6.375%, 1/16/02 5,000,000 5,103
..................................................................................
Tennessee Valley Authority
5.88%, 4/1/36 30,000,000 31,190
..................................................................................
5.98%, 4/1/36 10,000,000 10,275
..................................................................................
6.235%, 7/15/45 18,400,000 19,067
..................................................................................
U.S. Treasury Notes
5.50%, 2/28/99 25,000,000 25,004
..................................................................................
5.875%, 2/15/00 25,000,000 25,137
..................................................................................
6.125%, 7/31/00 2,000,000 2,024
..................................................................................
6.25%, 4/30 - 10/31/01 8,000,000 8,159
..................................................................................
6.75%, 5/31/99 5,000,000 5,054
..................................................................................
Total U.S. Government Obligations/Agencies (Cost $134,585) 135,971
Options Purchased 0.4%
ALZA, Put, 7/18/98 @ $40.00* 250 8
......................................................................................
AMP, Put, 11/21/98 @ $45.00* 250 269
......................................................................................
Automatic Data Processing, Put, 11/21/98 @ $75.00* 220 105
......................................................................................
Clear Channel Communications
Put, 1/16/99 @ $110.00* 112 108
..................................................................................
Put, 1/16/99 @ $120.00* 38 59
..................................................................................
IBM
Put, 1/16/99 @ $130.00* 250 447
..................................................................................
Put, 7/18/98 @ $120.00* 250 137
..................................................................................
</TABLE>
16
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
News Corporation
Put, 10/17/98 @ $30.00 * 250 $ 21
............................................................................
Put, 7/18/98 @ $30.00 * 60 2
................................................................................
Nine West
Put, 9/19/98 @ $25.00 * 20 3
............................................................................
Put, 9/19/98 @ $30.00 * 230 91
................................................................................
Pharmacia & Upjohn
Put, 1/16/99 @ $50.00 * 250 149
............................................................................
Put, 10/17/98 @ $50.00 * 220 114
................................................................................
Reebok, Put, 1/16/99 @ $35.00 * 250 197
................................................................................
Rouse, Put, 7/18/98 @ $40.00 * 75 64
................................................................................
Schering Plough
Put, 11/21/98 @ $95.00 * 250 187
............................................................................
Put, 7/18/98 @ $45.00 * 250 131
............................................................................
Put, 8/22/98 @ $65.00 * 250 3
................................................................................
Time Warner
Put, 12/19/98 @ $95.00 * 250 266
............................................................................
Put, 9/19/98 @ $80.00 * 400 62
............................................................................
Put, 9/19/98 @ $80.00 * 500 222
................................................................................
Tupperware, Put, 10/17/98 @ $30.00 * 410 131
................................................................................
Wal Mart
Put, 12/19/98 @ $60.00 * 500 156
............................................................................
Put, 12/19/98 @ $65.00 * 250 134
............................................................................
Put, 9/19/98 @ $45.00 * 250 2
............................................................................
Put, 9/19/98 @ $55.00 * 250 25
................................................................................
Worldcom
Put, 1/16/99 @ $65.00 * 250 191
............................................................................
Put, 12/19/98 @ $50.00 * 500 181
............................................................................
Put, 12/19/98 @ $50.00 * 1,750 722
............................................................................
Put, 9/19/98 @ $37.50 * 500 19
................................................................................
Total Options Purchased (Cost $7,338) 4,206
...............
Short-Term Investments 9.3%
Money Market Funds 9.3%
Reserve Investment Fund, 5.69%# 101,190,916 101,191
................................................................................
Total Short-Term Investments (Cost $101,191) 101,191
...............
17
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
- ------------------------------------------------------------------------------------
In thousands
<S> <C>
Total Investments in Securities
99.9% of Net Assets (Cost $935,104) $1,088,247
Other Assets Less Liabilities 1,363
..........
Net Assets $1,089,610
----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 16,973
Accumulated net realized gain/loss - net of distributions 80,775
Net unrealized gain (loss) 153,146
Paid-in-capital applicable to 69,958,937 shares of no par value capital
stock outstanding; unlimited shares authorized 838,716
..........
NET ASSETS $1,089,610
----------
NET ASSET VALUE PER SHARE $ 15.57
----------
</TABLE>
# Seven-day yield
* Non-income producing
ADR American Depository Receipt
LYONs Liquid Yield Option Note
MTN Medium term note
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 2.49% of net assets.
AUD Australian dollar
CAD Canadian dollar
CHF Swiss franc
GBP British sterling
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Unaudited
- -----------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
6/30/98
Investment Income
Income
Interest $ 12,960
Dividend 6,806
........
Total income 19,766
........
Expenses
Investment management 1,953
Shareholder servicing 1,204
Custody and accounting 70
Registration 55
Prospectus and shareholder reports 46
Legal and audit 6
Directors 5
Miscellaneous 3
........
Total expenses 3,342
........
Net investment income 16,424
........
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 71,475
Foreign currency transactions (192)
........
Net realized gain (loss) 71,283
........
Change in net unrealized gain or loss
Securities (25,691)
Other assets and liabilities
denominated in foreign currencies 4
........
Change in net unrealized gain or loss (25,687)
........
Net realized and unrealized gain (loss) 45,596
........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 62,020
--------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Unaudited
- ----------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
6/30/98 12/31/97
<S> <C> <C>
Increase (Decrease) In Net Assets
Operations
Net investment income $ 16,424 $ 32,081
Net realized gain (loss) 71,283 91,200
Change in net unrealized gain or loss (25,687) 29,451
..............................
Increase (decrease) in net assets from operations 62,020 152,732
..............................
Distributions to shareholders
Net investment income -- (31,906)
Net realized gain -- (100,813)
..............................
Decrease in net assets from distributions -- (132,719)
..............................
Capital share transactions *
Shares sold 142,982 233,817
Distributions reinvested -- 129,454
Shares redeemed (175,274) (283,344)
..............................
Increase (decrease) in net assets from capital
share transactions (32,292) 79,927
..............................
Net Assets
Increase (decrease) during period 29,728 99,940
Beginning of period 1,059,882 959,942
..............................
End of period $ 1,089,610 $ 1,059,882
------------------------------
* Share information
Shares sold 9,357 15,107
Distributions reinvested -- 8,903
Shares redeemed (11,434) (18,316)
..............................
Increase (decrease) in shares outstanding (2,077) 5,694
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
T. Rowe Price Capital Appreciation Fund
- --------------------------------------------------------------------------------
Unaudited June 30, 1998
- -----------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Capital Appreciation Fund, Inc. (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.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
VALUATION Equity securities listed or regularly traded on a securities
exchange 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. 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.
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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation. 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.
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
21
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
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.
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.
OTHER Purchases and sales of portfolio securities, other than short-term
securities, aggregated $281,808,000 and $296,490,000, respectively, for the
six months ended June 30, 1998.
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.
22
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
At June 30, 1998, the aggregate cost of investments for federal income tax
and financial reporting purposes was $935,104,000, and net unrealized gain
aggregated $153,143,000, of which $180,768,000 related to appreciated
investments and $27,625,000 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 $316,000 was payable at June 30, 1998. 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, 1998, and for the six months then ended,
the effective annual group fee rate was 0.32%. 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, through October 31, 1998, 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, 1998, decreased
management fees by $1,390,000.
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 $1,062,000 for the six months ended June 30, 1998, of which
$202,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
23
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the six months ended
June 30, 1998, totaled $2,968,000 and are reflected as interest income in
the accompanying Statement of Operations.
24
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE 1-800-225-5132 Available Monday through Friday from 8
a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
IN PERSON Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
CHECKING Available on most fixed income funds ($500 minimum).
AUTOMATIC INVESTING From your bank account or paycheck.
AUTOMATIC WITHDRAWAL Scheduled, automatic redemptions.
DISTRIBUTION OPTIONS Reinvest all, some, or none of your
distributions.
AUTOMATED 24-HOUR SERVICES Including Tele*Access(R) and the T.
Rowe Price Web site on the Internet. Address: www.troweprice.com
DISCOUNT BROKERAGE*
INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
INVESTMENT INFORMATION
COMBINED STATEMENT Overview of all your accounts with T. Rowe
Price.
SHAREHOLDER REPORTS Fund managers' reviews of their strategies
and results.
T. ROWE PRICE REPORT Quarterly investment newsletter discussing
markets and financial strategies.
PERFORMANCE UPDATE Quarterly review of all T. Rowe Price fund
results.
INSIGHTS Educational reports on investment strategies and
financial markets.
INVESTMENT GUIDES Asset Mix Worksheet, College Planning Kit,
Diversifying Overseas: A Guide to International Investing,
Personal Strategy Planner, Retirees Financial Guide, and
Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member
NASD/SIPC.
25
<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
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
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F72-051 6/30/98
