<PAGE>
Annual Report
CAPITAL
APPRECIATION
FUND
-----------------
DECEMBER 31, 1999
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[LOGO OF T. ROWE PRICE]
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REPORT HIGHLIGHTS
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Capital Appreciation Fund
. Powered by the technology sector, the stock market generated an
unprecedented fifth straight year of gains over 20%.
. The market's advance was exception-ally narrow; close to half of all stocks
in the S&P 500 Stock Index declined in 1999.
. The fund lost ground in the second half but recorded a moderate gain for
the year.
. Energy holdings performed well for the year, but rising interest rates hurt
bond holdings.
. When the current speculative stock market environment ends, as we believe
it will, the fund's emphasis on capital conservation should be rewarding
for shareholders.
UPDATES AVAILABLE
For updates on T. Rowe Price funds following the end of each calendar quarter,
please see our Web site at www.troweprice.com.
<PAGE>
FELLOW SHAREHOLDERS
Bodies in motion stay in motion. That basically sums up the continuing surge in
technology stocks in 1999. Several forces -- the economy, Y2K, the Internet, and
the IPO boom -- boosted their momentum as technology powered the market to an
unprecedented fifth straight year of gains in excess of 20%. Leadership was
exceptionally narrow, with only seven stocks providing half of the gain of the
Standard & Poor's 500 Stock Index. Minus technology, the index returned only
3.1% last year (based on Leuthold data).
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PERFORMANCE COMPARISON
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Periods Ended 12/31/99 6 Months 12 Months
- --------------------------------------------------------------------------------
Capital Appreciation Fund -1.57% 7.07%
S&P 500 7.71 21.04
Lipper Mid-Cap Value
Funds Average 0.80 9.68
Newton didn't have Wall Street in mind when he formulated his law on the
conservation of momentum, but it seemed relevant to the financial markets last
year. In crude terms, if one area has a lot of momentum, another has little.
Technology stocks enjoyed the lion's share, while income-oriented stocks, value
stocks, and bonds of any kind -- all important holdings in your fund --
languished.
The Capital Appreciation Fund, with its emphasis on risk avoidance,
diversification, and valuation, declined in the second half but rose modestly
for the year. Results paled next to funds investing in what you might call the
"velocity sector" and next to the broad market as measured by the Standard &
Poor's 500 Stock Index. Your fund's results were closer to the orbit of its new
Lipper category, introduced in this report. Previously, Lipper Inc. assigned a
fund to a category based on its objective as outlined in its prospectus. The new
categories are based on the major characteristics of each fund's actual
portfolio holdings, such as market capitalization, price/earnings ratios and
other valuation measures, earnings growth rates, and so on. While Lipper may
have reconfigured its categories, your fund's investment program and strategy
have not changed during the 13 years since its inception.
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YEAR-END DISTRIBUTIONS
On December 14, 1999, the fund's Board of Trustees declared an income dividend
of $0.50 per share, a long-term capital gain of $0.86 per share, and a short-
term gain of $0.27 per share payable to shareholders of record on that date. You
should have already received your check or statement reflecting these
distributions as well as our Form 1099-DIV reporting them for tax purposes for
taxable accounts.
MARKET ENVIRONMENT
If every action has an equal and opposite reaction, then logic and historical
precedent tells us that rising interest rates should have resulted in falling
stock prices. Well, it didn't happen in 1999. We had one of the century's worst
bond markets, with Treasury bond rates moving from approximately 5% to 6.5%, yet
equity prices were buoyant -- at least some were. Confident that today's rising
prices would be repeated tomorrow, investors poured money into a record number
of initial public offerings (IPOs) and into mutual funds focusing on growth,
technology, and indexes. The funds, in turn, bought more of the hot stocks,
perpetuating the upward spiral.
Another notable feature of the market was the uneven application of basic
investment principles. Investors severely punished many stocks of solid
companies whose earnings failed to meet expectations, while lavishly rewarding
stocks of other companies with no earnings or even prospects of earnings. A
study of companies with negative 1999 earnings found that, on average, prices of
the 31 largest doubled. Close to half of all stocks in the S&P 500 declined in
1999.
The index itself has been changed by the pattern of returns in recent years and
by its stock selection biases. Its center of gravity has shifted substantially
from mainstream blue chips to technology -- now a 30% weight. This development
brings to mind the early 1980's energy boom, when that industry had similar
dominance in the index. We observe in passing that only 5% of the money invested
in technology stocks today would pretty much buy the entire electrical utility
industry.
THE ECONOMY
The market's amazing run would not have occurred without another amazing run --
the economy's ninth straight year of expansion. At present, the only negative
seems to be that it's a mite too strong. The Federal Reserve, led by an aging
super hero, has signaled that further
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interest rate hikes are probably needed to avoid a buildup of inflationary
pressures. We note that Fed rate hikes risk creating an inverted or "negative"
yield curve. (The curve is a graph of yields plotted by maturity. Typically, one
must pay a higher rate to borrow for a longer period, so the resulting line
slopes "positively" from lower left to upper right.) An inverted curve means it
costs more to borrow for, say, three months than 30 years and is often
associated with financial distress. Inverted curves have often preceded a
slowdown in economic growth. Obviously, the Fed will try to walk a fine line and
not cause too much slowing or disruption, and so far, it has done just that.
For the pessimists among us, there are always a few worries. Individuals and
corporations have been busy leveraging their finances with borrowing that now
reaches a record 92% of GDP. Fiscal improvement by the federal government is
only a partial counterbalance. Other potential problems include unprecedented
holdings of our debt by foreigners as well as the trade deficit that created the
mess. Bottom line: we've got some big-picture financial problems, but unless
something unusual hinders our fiscal and monetary tools, things look fine.
A DIGRESSION ON THE "NEW ECONOMY"
Despite humiliating dependence on my son's computer skills, even I can recognize
the Internet's dramatic impact. For starters, distribution company profitability
is being squeezed, with books and similar branded products looking particularly
vulnerable. But how much can be done on the Internet? Will we use it to buy all
our groceries? Or million dollar gas turbines? Or customized chemicals? Maybe
not. More important, even if Internet use spreads far beyond my imagination, I
doubt that it has permanently raised productivity growth or that it will
permanently hold down inflation. New technologies have always had a key but
lumpy impact on productivity. Certainly, the introduction of electricity or the
automobile was more important than the Internet, and history shows that their
productivity boost gradually declined. Computers may be mankind's greatest
invention (although Einstein said it was compound interest) but won't their use
eventually reach mathematical limits? The Internet's impact on future inflation
seems similar. Yes, many distributors will be squeezed, but why, for example,
should the Internet permanently impair the pricing of primary producers of
commodities like copper and other metals? With our economy's growth, we
typically need more "stuff." Companies that produce it have to earn returns on
capital employed, and for most of the past 30 years such returns have been
barely adequate. Lower
3
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prices will simply mean shortages at cyclical demand peaks; then prices will
jump.
Admittedly, my opinion is just that. When considering the current frenzy
surrounding Internet investments, however, my skepticism is augmented by
observable "old economy" investment excesses. Internet stocks with practically
no true revenues and nothing but losses in sight are being accorded huge market
value. Of course, it's possible that one or even several of these companies will
succeed, but most will surely disappear into a black hole, from whence, as
physics teaches us, nothing returns. The faithful chant that "it's different
this time" -- and with technology that is sometimes partially true -- but much
remains the same. New as well as "old" economies are always affected by taxes
and interest rates. More important is the role of people and their emotions.
Right now, greed and the ecstasy that accompanies early success are clearly
running rampant. If this isn't a financial bubble, perhaps bubbles are
impossible to recognize.
PORTFOLIO HIGHLIGHTS
Our diversification by asset class remained largely the same over the course of
1999. The bond position (see chart) appears to have crept upward, but that is
explained by our plan to "cash in" a large Treasury holding maturing in February
2000. Despite being cautious toward equities in general, we are finding plenty
of attractive issues. In fact, as I write we are actively adding to seven
positions, and our commitment to equities may well rise in the near term.
Returns by portfolio asset class in 1999 were led by convertibles at about 10%,
with bonds and preferreds being worst at just over 1%. Given our avoidance of
tech stocks, our equity returns (about 7%) were reasonable in view of the
overall anemic performance of most non-technology stocks.
A table following this letter breaks out the best and worst individual
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SECURITY DIVERSIFICATION
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Preferred Stocks 1%
Reserves 4%
Bonds 14%
Convertibles 26%
Common Stocks 55%
Based on net assets as of 12/31/99.
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contributors to performance. As mentioned six months ago, we have been extremely
pleased with our holdings of Canadian forestry stocks, MacMillan Bloedel (now
merged into Weyerhaeuser) and Domtar. We began buying these in mid-1998 and were
gratified with their quick price climb. Both positions have now been
substantially reduced. Energy stocks were another success story in 1999. Three
companies, Mitchell Energy & Development, Amerada Hess, and Murphy Oil, made the
top-10 list for 12 months. Surprisingly, the energy stocks did little over the
second half of the year. Investors and commodity traders alike expect that
today's high oil prices will fall in the next several months and, therefore,
haven't been enthusiastic. We remain a bit more optimistic about oil prices and
these holdings. Media stocks including New York Times and Chris-Craft remained
strong contributors to performance. We identified this industry over 10 years
ago as having good growth prospects and underpriced stocks.
Loews, a diversified holding company, and Philip Morris of "Marlboro" fame were
our two biggest individual stock disappointments in 1999. Don't be surprised if
we continue to modestly add to these positions, despite the pain. We have also
been adding to our electric utility holdings (among the worst contributing
industries as presented on page 9) and Rouse, a real estate investment trust
(REIT) with major exposure to shopping malls (an anti-Internet investment?).
Tennessee Valley Authority bonds with their unique terms did much better than
similar maturity government agency bonds. Furthermore, the table does not count
current interest received, which about offset the price decline. Given the
likelihood of further interest rate hikes we are pondering this position.
FUND OPERATING GUIDELINES
Since inception, we have operated the fund with seven straightforward
guidelines. We believe them to be unique and worth repeating.
. We work as hard to reduce risk as to maximize gain.
. Attractively priced value stocks (as opposed to growth stocks) are our
investment of choice.
. We will make short-term, opportunistic investments as well as more
typical long-term ones.
. No type of investment is off-limits (bonds, stocks, convertibles,
etc.) if the risk/reward characteristics are attractive.
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. Our decisions reflect case-by-case investment judgment; we have no
all-encompassing formula.
. Our asset allocations result largely 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 intensive analysis of
individual securities.
In addition, several personal investment prejudices also influence our
decisions. Briefly:
. We like "good" accounting. Pooling mergers, big extraordinary charges,
and mammoth stock options to management are not good accounting.
. We like stable businesses, particularly when investing in companies
with problems. We tend to buy oil companies, electrical utilities,
and food companies that are attractively priced.
. Companies that own assets that themselves are actively traded -- like
TV stations, forest lands, oil fields, and gold mines -- will always
be considered. We find elegance in comparing stock market values to
so-called private market values.
OUTLOOK
For short periods, a multitude of factors affect stock price changes -- investor
enthusiasm, promises by presidential candidates, and financial misrepresentation
are but a few that spring to mind these days. We believe, however, that
valuation, interest rates, and the economy are the critical vectors in any
practical force diagram. The first has a potential flywheel effect; the second
and third are more dynamic. Low valuations help support prices if there are
problems, while today's high valuations suggest greater risk. Interest rates
were a negative in 1999 and will be so again this year, we believe. The economy,
last year's big positive, looks strong but will probably decelerate. It's
important to remember, however, that interest rates and the economy are
interrelated and are being successfully manipulated by the Federal Reserve. A
natural balancing, which the Fed clearly intends to reinforce, should be more
than enough to keep financial markets reasonably stable. Which isn't to suggest
we anticipate another big year for equities -- we don't.
Bottom line, the outlook is pretty good, with no more worries than usual. What
concerns us is that investors in aggregate seem to think
6
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... THERE IS A MANIC QUALITY ABOUT TODAY'S INVESTING BOOM.
there are no worries at all. Broad stock indices went up way too much in 1999
considering the interest rate environment, and there is a manic quality about
today's investing boom. Have you noticed that whole TV programs can air with
nothing but financial services commercials? Twenty years ago (when stock prices
were low), you never saw one such ad. There is something unique about investment
purchases versus other types. Other things being equal, most goods are
considered more attractive at lower prices. Securities, on the other hand, are
considered more desirable when their prices have gone up -- the more the better.
Does this make sense? Are all your other life experiences irrelevant? We think
not.
We are optimistic about the fund's prospects. Many equities we hold have not
shot up in price. They are cheap, and the underlying companies have significant
value. Our bonds and convertibles meet rational criteria designed to maximize
fund returns versus the risks we take. Admittedly, it's disappointing that 1999
results didn't compare better with others', but we have a straightforward
strategy that makes sense. Nothing corrodes judgment like watching others get
rich quickly, but that is when common sense is most important.
We find consolation in the inevitable movement back to a more probable state.
After all, what could be more improbable than that the amazingly narrow market
of 1998 would get even narrower in 1999? Regardless of recent events, we remain
committed to our conservative investment approach. In closing, let me remind you
of my two investment rules: one, don't lose your money, and two, don't forget
rule number one.
Respectfully submitted,
/s/ Richard P. Howard
Richard P. Howard
President and Chairman of the Investment Advisory Committee
January 24, 2000
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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PORTFOLIO HIGHLIGHTS
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CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
Ten Best Contributors Ten Worst Contributors
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Chris-Craft 15 cents Loews -14 cents
New York Times 8 Philip Morris 9
Newmont Mining 7 Rouse 7
Murphy Oil 5 Reebok 7
Mitchell Energy & Development 4 FirstEnergy/Cleveland Electric 6
Motorola 3 Niagara Mohawk Holdings 6
Domtar 3 J.C. Penney 5
Chiron * 3 Union Pacific Capital Trust 5
Kerr-McGee 2 Hilton Hotels 4
Smith & Nephew 2 Great Lakes Chemical 3
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Total 52 cents Total -66 cents
12 Months Ended 12/31/99
Ten Best Contributors Ten Worst Contributors
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McMillan Bloedel ** 22 cents Loews -23 cents
Chris-Craft 16 Philip Morris 15
Mitchell Energy & Development 12 FirstEnergy/Cleveland Electric 10
New York Times 9 Rouse 8
Domtar 9 Tennessee Valley Authority 7
Newmont Mining 9 Niagara Mohawk Holdings 5
Amerada Hess 9 Hilton Hotels 4
Murphy Oil 9 J.C. Penney 4
Mandalay Resort Group 7 Octel 4
U.S. Cellular * 6 Reebok 4
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Total 108 cents Total -84 cents
* Position eliminated
** Acquired by another company
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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PORTFOLIO HIGHLIGHTS
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PERFORMANCE CONTRIBUTIONS
6 Months Ended 12/31/99 Cents-Per-Share Percent of
Sector Contribution Net Assets
- --------------------------------------------------------------------------------
Basic Materials 11 cents 10%
Business Services and Transportation 2 4
Capital Equipment - -
Consumer Cyclicals -14 5
Consumer Nondurables -20 4
Consumer Services 15 17
Energy 4 12
Financial -22 9
Process Industries -3 7
Technology 5 1
Utilities -22 15
U.S. Governments -8 9
Miscellaneous 2 3
Reserves and Income 26 4
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Total Portfolio -24 cents 100%
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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PORTFOLIO HIGHLIGHTS
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/99
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Tennessee Valley 6.7%
Loews 5.3
Amerada Hess 5.2
Niagara Mohawk 3.7
Chris-Craft 3.3
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Rouse 3.1
Washington Post 2.9
Newmont Mining 2.7
Homestake Mining 2.7
Inco 2.5
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Texaco 2.3
New York Times 2.3
Times Mirror 2.3
Murphy Oil 2.2
Hilton Hotels 2.1
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Union Pacific Capital Trust 1.8
FirstEnergy/Cleveland Electric 1.8
Mitchell Energy & Development 1.7
Waste Management 1.7
Lonrho 1.5
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Great Lakes Chemical 1.4
Weyerhaeuser 1.3
Mandalay Resort Group 1.3
Roche Holdings 1.3
Teck 1.2
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Total 64.3%
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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PERFORMANCE COMPARISON
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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 benchmarks, which may include a broad-
based market index and a peer group average or index. Market indexes do not
include expenses, which are deducted from fund returns as well as mutual fund
averages and indexes.
CAPITAL APPRECIATION FUND
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[GRAPH]
S&P 500 Index Capital Appreciation Fund
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12/31/89 10,000 10,000
12/31/90 9,690 9,875
12/31/91 12,642 12,007
12/31/92 13,605 13,131
12/31/93 14,976 15,188
12/31/94 15,174 15,764
12/31/95 20,876 19,322
12/31/96 25,669 22,572
12/31/97 34,233 26,229
12/31/98 44,017 27,743
12/31/99 53,278 29,704
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AVERAGE ANNUAL COMPOUND TOTAL RETURN
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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 12/31/99 1 Year 3 Years 5 Years 10 Years
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Capital Appreciation Fund 7.07% 9.59% 13.51% 11.50%
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
11
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
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<TABLE>
<CAPTION>
Year
Ended
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
NET ASSET VALUE
<S> <C> <C> <C> <C> <C>
Beginning of period $ 13.22 $ 14.71 $ 14.47 $ 13.67 $ 12.10
Investment activities
Net investment income (loss) 0.51 0.49 0.50 0.60 0.43
Net realized and
unrealized gain (loss) 0.41 0.34 1.82 1.70 2.30
Total from
investment activities 0.92 0.83 2.32 2.30 2.73
Distributions
Net investment income (0.50) (0.50) (0.50) (0.60) (0.44)
Net realized gain (1.13) (1.82) (1.58) (0.90) (0.72)
Total distributions (1.63) (2.32) (2.08) (1.50) (1.16)
NET ASSET VALUE
End of period $ 12.51 $ 13.22 $ 14.71 $ 14.47 $ 13.67
--------------------------------------------------------------
Ratios/Supplemental Data
Total return* 7.07% 5.77% 16.20% 16.82% 22.57%
Ratio of total expenses to
average net assets 0.88% 0.62% 0.64% 0.76% 0.97%
Ratio of net investment
income (loss) to average
net assets 3.44% 3.04% 3.17% 4.07% 3.28%
Portfolio turnover rate 28.3% 52.6% 48.3% 44.2% 47.0%
Net assets, end of period
(in millions) $ 856 $ 1,004 $ 1,060 $ 960 $ 864
</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.
The accompanying notes are an integral part of these financial statements.
12
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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December 31, 1999
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STATEMENT OF NET ASSETS Shares/Par Value
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In thousands
COMMON STOCKS 54.7%
FINANCIAL 6.4%
Bank and Trust 0.2%
Bank fuer International Zahlung (CHF) 330 $ 1,865
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1,865
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Insurance 4.3%
Loews 536,000 32,529
Unitrin 100,000 3,769
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36,298
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Financial Services 1.9%
Homefed * 240,618 214
Leucadia National 395,000 9,134
White Mountains Insurance Group 59,000 7,110
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16,458
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Total Financial 54,621
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UTILITIES 7.1%
Electric Utilities 7.1%
FirstEnergy 600,000 13,612
Kansas City Power & Light 340,000 7,501
Niagara Mohawk * 2,210,000 30,802
Unisource Energy * 830,000 9,286
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Total Utilities 61,201
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CONSUMER NONDURABLES 3.2%
Food Processing 0.4%
McCormick 121,000 3,600
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3,600
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Hospital Supplies/Hospital Management 1.1%
Smith & Nephew (GBP) 2,850,000 9,575
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9,575
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Health Care Services 0.2%
Aetna 38,000 2,121
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2,121
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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Shares/Par Value
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In thousands
Miscellaneous Consumer Products 1.5%
Philip Morris 360,000 $ 8,347
Reebok * 500,000 4,094
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12,441
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Total Consumer Nondurables 27,737
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CONSUMER SERVICES 12.4%
General Merchandisers 0.3%
J.C. Penney 125,000 2,492
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2,492
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Specialty Merchandisers 1.5%
Petrie Stores Liquidation Trust * 2,585,000 6,462
Toys "R" Us * 440,000 6,298
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12,760
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Entertainment and Leisure 1.4%
Mandalay Resort Group * 560,000 11,270
Reader's Digest (Class B) 29,000 768
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12,038
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Media and Communications 9.2%
Chris-Craft 388,000 27,984
Meredith 135,000 5,628
New York Times (Class A) 405,000 19,896
Washington Post (Class B) 44,900 24,959
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78,467
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Total Consumer Services 105,757
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CONSUMER CYCLICALS 1.5%
Building and Real Estate 1.0%
Rouse 410,000 8,712
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8,712
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Miscellaneous Consumer Durables 0.5%
Polaroid 210,000 3,951
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3,951
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Total Consumer Cyclicals 12,663
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14
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
BUSINESS SERVICES AND TRANSPORTATION 1.7%
Transportation Services 0.9%
Overseas Shipholding Group 550,000 $ 8,147
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8,147
-------------
Railroads 0.8%
Canadian Pacific 300,000 6,469
-------------
6,469
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Total Business Services and Transportation 14,616
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ENERGY 11.6%
Exploration and Production 1.7%
Mitchell Energy & Development (Class A) 5,000 110
Mitchell Energy & Development (Class B) 672,000 14,490
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14,600
-------------
Integrated Petroleum - Domestic 7.8%
Amerada Hess 780,000 44,265
Kerr-McGee 53,000 3,286
Murphy Oil 333,000 19,106
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66,657
-------------
Integrated Petroleum - International 2.1%
Texaco 325,000 17,652
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17,652
-------------
Total Energy 98,909
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PROCESS INDUSTRIES 6.9%
Diversified Chemicals 1.0%
Cabot 430,000 8,761
-------------
8,761
-------------
Specialty Chemicals 3.5%
Great Lakes Chemical 313,000 11,953
Imperial Chemical ADR 215,000 9,151
Octel *+ 835,000 8,663
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29,767
-------------
Forest Products 1.6%
Domtar 187,000 2,197
Weyerhaeuser 160,000 11,490
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13,687
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15
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Building and Construction 0.8%
Johns Manville 505,000 $ 7,070
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7,070
-------------
Total Process Industries 59,285
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BASIC MATERIALS 3.4%
Mining 3.4%
Homestake Mining 675,000 5,273
Lonrho Africa (GBP) 575,000 297
Newmont Mining 955,000 23,398
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Total Basic Materials 28,968
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Total Miscellaneous Common Stocks 0.5% 4,622
-------------
Total Common Stocks (Cost $414,499) 468,379
-------------
PREFERRED STOCKS 1.3%
Cleveland Electric, (Series L) 19,000 1,905
Entergy-GSU (Series B) 23,000 1,144
Kemper, (Series E), (144a) 150,000 7,800
Niagara Mohawk (Series A) 14,000 350
Niagara Mohawk (Series B) 9,000 221
Niagara Mohawk (Series C) 5,000 124
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Total Preferred Stocks (Cost $9,964) 11,544
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CONVERTIBLE PREFERRED STOCKS 4.3%
Reckson Associates Realty, Cv. Pfd., (Series A), 7.625% 36,000 720
Rouse, Cv. Pfd., 6.00% 535,000 17,454
Union Pacific Capital Trust, 6.25% 370,000 15,402
Miscellaneous Convertible Preferred Stocks 3,163
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Total Convertible Preferred Stocks (Cost $46,619) 36,739
-------------
CORPORATE BONDS 0.8%
Bellsouth Telecommunications, Deb. Notes
5.85%, 11/15/45 $7,000,000 6,954
-------------
Total Corporate Bonds (Cost $6,996) 6,954
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T. ROWE PRICE CAPITAL APPRECIATION FUND
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Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
CONVERTIBLE BONDS 21.4%
Exide, (144a), 2.90%, 12/15/05 $ 2,300,000 $ 1,185
Healthsouth, 3.25%, 4/1/03 11,000,000 8,527
Hilton Hotels, 5.00%, 5/15/06 23,500,000 17,919
Homestake Mining
5.50%, 6/23/00 4,025,000 3,897
Sub. Deb., (144a), 5.50%, 6/23/00 14,020,000 13,573
Inco, Deb. Notes
5.75%, 7/1/04 21,000,000 20,134
7.75%, 3/15/16 1,500,000 1,292
Kerr- McGee, Zero Coupon, 5/15/14 1,000,000 936
Loews, 3.125%, 9/15/07 15,500,000 12,758
LONMIN Finance, 6.00%, 2/27/04 (GBP) 7,400,000 12,155
McKesson, Sub. Deb. Notes, 4.50%, 3/1/04 3,000,000 2,625
Motorola, LYONs, Zero Coupon, 9/27/13 2,900,000 4,789
Ogden, Sub. Deb. Notes, 5.75%, 10/20/02 500,000 426
Pep Boys, Sub. Notes, Zero Coupon, 9/20/11 10,200,000 5,151
Phycor, 4.50%, 2/15/03 5,900,000 3,098
Potomac Electric Power, Deb. Notes, 5.00%, 9/1/02 5,000,000 4,687
Roche Holdings, LYONs, (144a), Zero Coupon, 5/6/12 22,000,000 11,192
Teck, 3.75%, 7/15/06 13,300,000 9,842
Times Mirror, Zero Coupon, 4/15/17 39,000,000 19,256
Waste Management, 4.00%, 2/1/02 16,500,000 14,449
Miscellaneous Convertible Bonds 14,906
-------------
Total Convertible Bonds (Cost $188,069) 182,797
-------------
U.S. GOVERNMENT OBLIGATIONS/
AGENCIES 12.9%
Federal National Mortgage Assn.
MTN, 5.37%, 2/7/01 5,000,000 4,942
6.375%, 1/16/02 5,000,000 4,979
Tennessee Valley Authority
5.88%, 4/1/36 32,000,000 30,041
5.98%, 4/1/36 10,000,000 9,361
6.235%, 7/15/45 18,400,000 18,337
17
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
U.S. Treasury Notes
5.875%, 2/15/00 - 9/30/02 $ 32,900,000 $ 32,833
6.125%, 7/31/00 2,000,000 2,003
6.25%, 4/30 - 10/31/01 8,000,000 8,004
-------------
Total U.S. Government Obligations/Agencies
(Cost $114,420) 110,500
-------------
MUNICIPAL BONDS 0.7%
California State, 5.25%, 10/1/11 5,450,000 5,488
-------------
Total Municipal Bonds (Cost $6,041) 5,488
-------------
OPTIONS WRITTEN (0.0)%
Weyerhaeuser, Call, 1/22/00 @ $65.00 (260) (202)
-------------
Total Options Written (Cost $(175)) (202)
-------------
OPTIONS PURCHASED 0.0%
Motorola, Put, 1/21/00 @ $95.00 255 3
Motorola, Put, 1/22/00 @ $110.00 255 11
Motorola, Put, 4/22/00 @ $130.00 120 98
Weyerhaeuser, Put, 1/22/00 @ $75.00 250 108
-------------
Total Options Purchased (Cost $1,408) 220
-------------
SHORT-TERM INVESTMENTS 4.2%
Money Market Funds 4.2%
Reserve Investment Fund, 6.16% # 35,957,063 35,957
-------------
Total Short-Term Investments (Cost $35,957) 35,957
-------------
18
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Value
- --------------------------------------------------------------------------------
In thousands
Total Investments in Securities
100.3% of Net Assets (Cost $823,798) $ 858,376
Other Assets Less Liabilities (2,610)
-------------
NET ASSETS $ 855,766
-------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 561
Accumulated net realized gain/loss - net of distributions 22,282
Net unrealized gain (loss) 34,578
Paid-in-capital applicable to 68,380,827 shares of no par
value capital stock outstanding; unlimited shares authorized 798,345
-------------
NET ASSETS $ 855,766
-------------
NET ASSET VALUE PER SHARE $ 12.51
-------------
# Seven-day yield
+ Affiliated company
* Non-income producing
GO Government Obligation
LYONs Liquid Yield Option Notes
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
3.9% of net assets.
CHF Swiss franc
GBP British sterling
ADR American Depository Receipt
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- -----------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/99
Investment Income (Loss)
Income
Interest $ 23,006
Dividend 17,436
-------------
Total income 40,442
-------------
Expenses
Investment management 5,793
Shareholder servicing 2,083
Custody and accounting 165
Prospectus and shareholder reports 144
Registration 52
Legal and audit 15
Trustees 8
Miscellaneous 6
-------------
Total expenses 8,266
Expenses paid indirectly (6)
-------------
Net expenses 8,260
-------------
Net investment income (loss) 32,182
-------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 78,692
Foreign currency transactions (43)
-------------
Net realized gain (loss) 78,649
-------------
Change in net unrealized gain or loss
Securities (47,161)
Written options (28)
-------------
Change in net unrealized gain or loss (47,189)
-------------
Net realized and unrealized gain (loss) 31,460
-------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 63,642
-------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- ----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 32,182 $ 32,032
Net realized gain (loss) 78,649 124,608
Change in net unrealized gain or loss (47,189) (97,066)
------------------------
Increase (decrease) in net assets from operations 63,642 59,574
------------------------
Distributions to shareholders
Net investment income (31,320) (32,873)
Net realized gain (70,780) (119,687)
------------------------
Decrease in net assets from distributions (102,100) (152,560)
------------------------
Capital share transactions*
Shares sold 143,841 250,691
Distributions reinvested 99,709 148,934
Shares redeemed (353,024) (362,823)
------------------------
Increase (decrease) in net assets from capital
share transactions (109,474) 36,802
------------------------
Net Assets
Increase (decrease) during period (147,932) (56,184)
Beginning of period 1,003,698 1,059,882
------------------------
End of period $ 855,766 $ 1,003,698
------------------------
*Share information
Shares sold 10,394 16,549
Distributions reinvested 8,041 11,361
Shares redeemed (25,956) (24,044)
------------------------
Increase (decrease) in shares outstanding (7,521) 3,866
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
December 31, 1999
- -----------------------------
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.
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.
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.
Affiliated Companies As defined by the Investment Company Act of 1940, an
affiliated company is one in which the fund owns at least 5% of the
outstanding voting securities.
22
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Currency Translation Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated
into U.S. dollars at the prevailing exchange rate on the dates of such
transactions. The effect of changes in foreign exchange rates on realized
and unrealized security gains and losses is reflected as a component of
such gains and losses.
Premiums and Discounts Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with federal income tax regulations and may differ from those determined in
accordance with generally accepted accounting principles. Expenses paid
indirectly reflect credits earned on daily uninvested cash balances at the
custodian and are used to reduce the fund's custody charges.
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 until a certain date. Risks
arise from possible illiquidity of the options market and from movements in
security values. Options are reflected in the accompanying Statement of Net
Assets at market value. Transactions in options written and related
premiums received during the year ended December 31, 1999, were as follows:
---------------------------------------------------------------------------
Number of
Contracts Premiums
Outstanding at beginning of period -- $ --
Written 260 175,000
---------------------------
Outstanding at end of period 260 $ 175,000
23
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $248,698,000 and $420,007,000, respectively, for the
year ended December 31, 1999.
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, 1999, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$823,798,000. Net unrealized gain aggregated $34,578,000 at period-end, of
which $103,706,000 related to appreciated investments and $69,128,000 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 $461,000 was payable at December 31, 1999. 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 0.295% for
assets in excess of $120 billion. At December 31, 1999, and for the year
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.
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 $1,869,000 for the year ended December 31, 1999, of which
$190,000 was payable at period-end.
24
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
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
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 year ended
December 31, 1999, totaled $2,481,000 and are reflected as interest income
in the accompanying Statement of Operations.
During the year ended December 31, 1999, the fund, in the ordinary course
of business, placed security purchase and sale orders aggregating $536,000
with certain affiliates of the manager and paid commissions of $1,000
related thereto.
25
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- ---------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
T. Rowe Price Capital Appreciation Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of T. Rowe Price Capital Appreciation Fund (the "Fund") at December 31,
1999, and the results of its operations, the changes in its net assets and
the financial highlights for each of the fiscal periods presented, in
conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1999 by correspondence with
custodians and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 20, 2000
26
<PAGE>
T. ROWE PRICE CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
- -----------------------------------------------------------
TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/99
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
. $16,912,000 from short-term capital gains,
. $53,868,000 from long-term capital gains, subject to the 20% rate gains
category,
For corporate shareholders, $14,463,000 of the fund's distributed income
and short-term capital gains qualified for the dividends-received
deductions.
27
<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
BROKERAGE SERVICES*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over full-service 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.
* T. Rowe Price Brokerage is a division of T. Rowe Price Investment
Services, Inc., Member NASD/SIPC.
** Based on a September 1999 survey for representative-assisted stock
trades. Services vary by firm, and commissions may vary depending on
size of order.
28
<PAGE>
T. ROWE PRICE MUTUAL FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value
Spectrum Growth
Tax-Efficient Growth
Total Equity Market Index
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Growth & Income
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 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 Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Bond
International Bond
MONEY MARKET FUNDS+
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 FUNDS
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
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.
+ Investments in the funds are not insured or guaranteed by the FDIC or any
other government agency. Although the funds seek to preserve the value of
your investment at $1.00 per share, it is possible to lose money by
investing in the funds.
Please call for a prospectus. Read it carefully before investing.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY. T.
Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
29
<PAGE>
For fund and account information Walk-In Investor Centers:
or to conduct transactions, For directions, call 1-800-225-5132
24 hours, 7 days a week or visit our Web site
By touch-tone telephone
Tele*Access 1-800-638-2587 Baltimore Area
By Account Access on the Internet Downtown
www.troweprice.com/access 101 East Lombard Street
Owings Mills
For assistance Three Financial Center
with your existing 4515 Painters Mill Road
fund account, call:
Shareholder Service Center Boston Area
1-800-225-5132 386 Washington Street
Wellesley
To open a brokerage account
or obtain information, call: Colorado Springs
1-800-638-5660 4410 ArrowsWest Drive
Internet address: Los Angeles Area
www.troweprice.com Warner Center
21800 Oxnard Street, Suite 270
Plan Account Lines for retirement Woodland Hills
plan participants:
The appropriate 800 number appears Tampa
on your retirement account statement. 4200 West Cypress Street
10th Floor
T. Rowe Price Associates
100 East Pratt Street Washington, D.C.
Baltimore, Maryland 21202 900 17th Street N.W.
Farragut Square
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
[LOGO OF T. ROWE PRICE]
T. Rowe Price Investment Services, Inc., Distributor. F72-050 12/31/99
