TWENTIETH CENTURY
Conservative Equity
Funds
Semiannual Report
September 30,
1996
VALUE
EQUITY INCOME
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TWENTIETH CENTURY CAPITAL PORTFOLIOS, INC.
[cover page]
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TABLE OF CONTENTS
Our Message to You . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Philosophy. . . . . . . . . . . . . . . . . . . . . . . 2
Period Overview. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Review
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Equity Income . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedules of Investments
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Equity Income . . . . . . . . . . . . . . . . . . . . . . . . 12
Statements of Assets and Liabilities . . . . . . . . . . . . . . . 15
Statements of Operations . . . . . . . . . . . . . . . . . . . . . 16
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . 17
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . 18
Financial Highlights
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Equity Income . . . . . . . . . . . . . . . . . . . . . . . . 22
INDICES USED FOR PERFORMANCE COMPARISONS
(NONE ARE INVESTMENT PRODUCTS AVAILABLE FOR PURCHASE.)
THE S&P 500 INDEX is an index created by Standard & Poor's Corporation that is
considered to represent the performance of the U.S. stock market generally.
THE S&P/BARRA VALUE INDEX is a capitalization-weighted index consisting of S&P
500 stocks that have lower price-to-book ratios and in general share other
characteristics associated with "value" stocks.
THE LIPPER EQUITY INCOME FUND INDEX is a non-weighted index of the 30 largest
equity income mutual funds. Lipper Analytical Services, Inc., is an independent
mutual fund ranking service.
SEPTEMBER 30, 1996
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OUR MESSAGE TO YOU
The six months ended September 30, 1996, provided several landmarks. The U.S.
stock market reached all-time highs in May and June, declined in July, then
rallied to record levels again in August and September. This volatility allowed
our conservative equity management team to show you the benefits of Twentieth
Century Value and Twentieth Century Equity Income, which are managed to offer
you the potential for more stability in volatile markets. The management team
discusses the funds' performance on pages 4-9.
In September, the Value fund completed its third year of operations, making it
eligible for a Morningstar rating.* Morningstar recognized the fund's consistent
performance and relative share price stability by awarding it five stars, its
top rating. Morningstar only gives five stars to the top 10% of the equity funds
it rates, based on historical returns and share price behavior over a minimum
three-year period. Morningstar compared the Value fund with 1,708 equity mutual
funds over the three-year period ended September 30, 1996. The Equity Income
fund will become eligible for a Morningstar rating on August 1, 1997.
In September we also completed the operational integration of Twentieth Century
and The Benham Group. As a result, you now have direct access to a broader
spectrum of funds and services, including the Benham family of U.S. Treasury,
government and municipal funds. Another integration landmark and benefit is the
new Twentieth Century Web site. If you use a personal computer, we've made it
easier for you to download information about Twentieth Century and Benham funds
and access your fund accounts. You can view account balances, exchange money
between existing accounts and make additional investments. The Web site address
is: http://www.twentieth-century.com. We are one of the first mutual fund
companies to offer direct on-line transactions via the Internet.
We will continue to work to provide you with useful, convenient information and
services. Thank you for investing with us.
[Photo of James E. Stowers and James E. Stowers III]
Sincerely,
[Signature of James E. Stowers]
James E. Stowers
CHAIRMAN OF THE BOARD AND FOUNDER
[Signature of James E. Stowers III]
James E. Stowers III
PRESIDENT AND CHIEF EXECUTIVE OFFICER
*Morningstar proprietary ratings reflect historical risk-adjusted performance as
of September 30, 1996. The overall rating, which may change monthly, is
calculated from the fund's three-year average total returns in excess of 90-day
Treasury bill returns. Ten percent of the funds in an investment category
receive five stars. Past performance is no guarantee of future results.
1
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INVESTMENT PHILOSOPHY
Conservative investment practices are the hallmark of Twentieth Century Value
and Twentieth Century Equity Income. Broad diversification across many
industries is stressed to prevent the performance of one sector from dominating
fund returns. The team also looks for dividend yield, since dividend income can
help offset the impact of market downturns on fund performance.
TWENTIETH CENTURY VALUE invests in the equity securities of seasoned,
established businesses that the fund's management team believes are temporarily
undervalued. This is determined by comparing a stock's share price with key
financial measures, including earnings, book value, cash flow and dividends. If
the stock's price relative to these measures is low and the company's balance
sheet is solid, its securities are candidates for purchase. The management team
may secondarily look for income when making portfolio selections.
TWENTIETH CENTURY EQUITY INCOME purchases the securities of seasoned companies
that pay steady income, with the goal of providing shareholders a higher yield
than the aggregate yield of the stocks making up the S&P 500. The team may
secondarily search out stocks whose share prices are undervalued or fairly
valued. To help increase the fund's yield and help reduce the impact of stock
market value changes, the team maintains a relatively large percentage of assets
in convertible securities. These are income-paying issues that may, at some
later date, be converted into equity securities at favorable prices. The prices
of convertibles usually do not fluctuate as much as those of common stocks, and
they generally pay higher interest and dividends than common stocks. Under
normal circumstances, the fund can be expected to have less share-price
volatility than Twentieth Century Value.
PORTFOLIO MANAGERS
Peter Zuger
Phil Davidson
2
SEPTEMBER 30, 1996
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PERIOD OVERVIEW
U.S. ECONOMIC ENVIRONMENT
Healthy economic growth and continued low inflation were two of the key factors
that characterized the U.S. economy during the six months ended September 30,
1996.
Robust employment gains, improving retail sales, strong auto sales and a
resilient housing market produced a 4.7% annualized rate of growth in the second
quarter. Seemingly undaunted by predictions of a downturn in the second half of
1996, the economy continued to expand in the third quarter. Over 450,000 new
jobs were created in July and August alone, sending the national unemployment
rate to a six-year low of 5.1% in August.
The stronger-than-anticipated economic numbers were coupled with
lower-than-expected inflation. Yet inflationary expectations triggered a
self-correcting mechanism--higher interest rates--during the spring and summer,
which helped slow the economy and kept prices down. For the first nine months of
the year, inflation, as measured by the consumer price index (CPI), grew at an
annualized rate of 3.2%. Because of this apparent lack of inflationary pressure,
the Federal Reserve held interest rates steady through September.
U.S. STOCK MARKET ENVIRONMENT
A strong correlation exists between low inflation and strong stock market
performance, and that correlation continued during the six months ended
September 30, 1996. Economic growth coupled with low inflation allowed the U.S.
stock market to override concerns about slowing corporate earnings growth, and
post positive returns for the period. The S&P 500 Index, the most
widely-accepted proxy for general U.S. stock market performance, posted a 7.7%
total return for the period and finished the third quarter at an all-time high.
This favorable six-month performance masked a sizable dip in the middle of the
period. The market hit all-time highs in late May and early June as investors
poured record amounts of money into stock mutual funds. However, an earnings
scare and higher interest rates caused a sharp decline in early July, followed
by another rally to record levels in August and September.
At the beginning of the period, small company stocks outperformed large company
stocks. A substantial portion of the record cash inflows from investors was
earmarked for growth mutual funds focusing on small company stocks. These stocks
surged in April and May on the heels of a rebound in technology stocks.
But investors became nervous about inflation, higher interest rates and earnings
as July approached. Big company noncyclical stocks outperformed small company
and cyclical stocks in June as caution took hold and investor capital flowed
toward companies with more predictable earnings trends. Some fears appeared to
be borne out in early July by two disappointing performance reports from
Motorola and Hewlett Packard. Those reports triggered a market-wide sell-off
that culminated on July 15 when the Dow Jones Industrial Average lost 161 points
(2.9% of its value), the S&P 500 lost 16 points (2.5%) and Nasdaq Composite
Index suffered its second-worst single-day correction ever--falling 43 points
(3.9%).
The market steadied itself and rallied after several big S&P 500 companies--IBM,
Microsoft, Merck, McDonald's, Ford and General Electric--reported
better-than-expected earnings. The rally gained momentum as long-term interest
rates fell in the wake of favorable inflation and economic
reports.
The best-performing stock sectors during the six-month period included energy,
retail and banks.
3
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VALUE
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MANAGEMENT Q & A
AN INTERVIEW WITH PETER ZUGER AND PHIL DAVIDSON, PORTFOLIO MANAGERS OF THE
TWENTIETH CENTURY VALUE FUND.
Q: HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED SEPTEMBER 30, 1996?
A: Twentieth Century Value outperformed its benchmark index but underperformed
the S&P 500. The fund had a 6.27% total return, while its benchmark index, the
S&P/BARRA Value Index, returned 4.74%. The S&P 500 returned 7.68% for the
period.
Q: WHY DID THE FUND OUTPERFORM ITS BENCHMARK INDEX?
A: In general, value indices such as the fund's benchmark tend to have higher
weightings in cyclical stocks than general stock market indices such as the S&P
500. Cyclical stocks, whose performance is strongly tied to the broader business
cycle, include the stocks of steel and automotive manufacturers.
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AVERAGE ANNUAL TOTAL RETURNS (AS OF SEPTEMBER 30, 1996)
VALUE S&P/BARRA Value Index* S&P 500 Index
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Six months(+ ) 6.27% 4.74% 7.68%
One year 22.08% 18.64% 20.20%
Inception (9/1/93
to 9/30/96) 17.09% 14.61% 16.81%
(+)Actual
QUICK FUND FACTS
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VALUE
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STRATEGY: Long-term capital growth with income as a secondary objective through
investing in equity securities that management believes are undervalued at the
time of purchase.
INCEPTION DATE: September 1, 1993
SIZE: $1.2 billion (AS OF SEPTEMBER 30, 1996)
TICKER: TWVLX
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$10,000 OVER LIFE OF FUND (AS OF SEPTEMBER 30, 1996)
[mountain graph]
Value on 9/30/96:
VALUE S&P/BARRA Value Index* S&P 500 Index
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Sep 1, 1993 $10,000 $10,000 $10,000
Sep 30, 1993 10,000 9,996 9,978
Oct 31, 1993 10,120 10,050 10,171
Nov 30, 1993 10,000 9,870 10,040
Dec 31, 1993 10,307 10,038 10,209
Jan 31, 1994 10,649 10,506 10,540
Feb 28, 1994 10,448 10,125 10,224
Mar 31, 1994 10,083 9,709 9,825
Apr 30, 1994 10,265 9,914 9,938
May 30, 1994 10,407 10,079 10,061
Jun 30, 1994 10,270 9,799 9,867
Jul 31, 1994 10,657 10,131 10,178
Aug 31, 1994 10,983 10,417 10,560
Sep 30, 1994 10,741 10,051 10,349
Oct 31, 1994 10,844 10,270 10,565
Nov 30, 1994 10,542 9,854 10,148
Dec 31, 1994 10,718 9,975 10,347
Jan 31, 1995 11,198 10,245 10,598
Feb 28, 1995 11,677 10,643 10,981
Mar 31, 1995 11,955 10,937 11,352
Apr 30, 1995 12,283 11,296 11,669
May 31, 1995 12,611 11,799 12,093
Jun 30, 1995 12,744 11,889 12,432
Jul 31, 1995 12,987 12,299 12,827
Aug 31, 1995 13,075 12,404 12,823
Sep 30, 1995 13,307 12,835 13,417
Oct 31, 1995 13,174 12,635 13,350
Nov 30, 1996 13,795 13,297 13,898
Dec 31, 1996 14,234 13,665 14,222
Jan 31, 1996 14,475 14,074 14,685
Feb 29, 1996 14,716 14,206 14,788
Mar 31, 1996 15,295 14,539 14,984
Apr 30, 1996 15,624 14,687 15,185
May 31, 1996 15,915 14,908 15,533
Jun 30, 1996 16,121 14,837 15,654
Jul 31, 1996 15,171 14,211 14,939
Aug 31, 1996 15,707 14,603 15,220
Sep 30, 1996 16,254 15,228 16,135
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
*Source: Lipper Analytical Services, Inc.
4
SEPTEMBER 30, 1996
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VALUE
We avoided cyclical stocks because we were skeptical about their ability to
maintain their profit levels during what we expected to be a period of slowing
growth. When cyclical stocks declined during the July stock market correction
and afterward, their performance dragged down the index compared to Value.
Q: WHY DID THE FUND UNDERPERFORM THE S&P 500?
A: True to its nature, the fund actually outperformed the index during the stock
market correction but underperformed during the subsequent rally. The later
underperformance outweighed the earlier outperformance. Specifically, the index
declined 2.11% from the beginning of the period to July 16, when the market hit
bottom, while the fund gained 0.15% during the same time frame. However, from
July 16 to September 30, the index surged 10% while Value gained 6.11%. Anxiety
about weakened corporate earnings and the strength of the economy in August and
September prompted a flow of investments toward larger, quality growth stocks.
Large company growth stocks are staples of the S&P 500 but are generally outside
the Value fund's investment strategy.
Q: WHICH STOCKS IN THE PORTFOLIO PERFORMED WELL DURING THE SIX-MONTH PERIOD?
A: The best performing stock in the portfolio during the period was Dayton
Hudson Corp., owner of Target and Mervyn's discount stores and three Midwestern
department store chains. Another strong performer was Dillard Department Stores,
which also operates department stores, primarily in the Southwest and Midwest.
Expectations for retailers were very low this year following a soft Christmas
selling season. This outlook caused investors to price retail stocks at levels
which, for these two companies, proved overly pessimistic. Both companies
benefited from increased retail sales during the summer months. Similarly, we
bought several energy stocks whose prices were depressed because of low gas
prices last year. When energy prices increased over the summer, the stocks found
favor with investors and the fund benefited.
Q: WHAT WAS THE FUND'S WORST PERFORMING STOCK DURING THE PERIOD? WHY?
A: The worst performer during the period was Browning-Ferris Industries. The
waste hauling and disposal company did not deliver the growth rate in earnings
that the market expected, so its stock performed poorly. At the end of the
period, we believed the stock was still worth holding onto because it had a
large share of a market with high barriers to entry.
TOP TEN HOLDINGS (AS OF SEPTEMBER 30, 1996)
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% OF FUND
INVESTMENTS IN
% OF FUND THESE HOLDINGS
INVESTMENTS SIX MONTHS AGO
Giant Food Inc. 4.2% 4.6%
MAPCO Inc. 2.7% 2.6%
Browning-Ferris Industries, Inc. 2.7% 2.4%
Universal Foods Corp. 2.5% 0.4%
AT&T Corp. 2.3% --
Cooper Industries, Inc. 2.2% 2.3%
CNA Financial Corp. 2.1% --
Dillard Department Stores, Inc. 2.1% 1.8%
Air Products & Chemicals, Inc. 2.1% 2.2%
American Greetings Corp. Cl A 2.0% 2.4%
TOP FIVE INDUSTRIES (AS OF SEPTEMBER 30, 1996)
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% OF FUND
INVESTMENTS IN
% OF FUND THESE INDUSTRIES
INVESTMENTS SIX MONTHS AGO
Energy (Production & Marketing) 10.6% 15.8%
Utilities 10.5% 8.8%
Chemicals & Resins 10.2% 6.7%
Food & Beverage 8.8% 5.6%
Publishing 6.8% 6.1%
5
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VALUE
A gradual repricing of recycling contracts is also expected to improve the
profitability of the company's recycling business.
Q: WHAT SIGNIFICANT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE PERIOD?
WHY?
A: When the market declined in June and July, we sold some of the fund's utility
stock holdings, which had held up well during the market decline, and bought a
cross-section of stocks that were already in the portfolio. These stocks were
temporarily beaten down in the correction and, when they rebounded in September,
we took some of the gains and put them back into utility stocks, particularly
telecommunications and electric utility stocks. We also put new money coming
into the fund in September in utility stocks because of their attractive
valuations and underperformance of the market. As a result, we closed the
six-month period with a heavier emphasis on the utility sector.
Q: MORNINGSTAR, THE MUTUAL FUND-RATING COMPANY, RECENTLY GAVE ITS TOP RATING TO
THE FUND. WHAT MADE VALUE A FIVE-STAR FUND?
A: Morningstar awards five stars to the top 10% of equity funds as measured by
its dual-edged test of risk and return. The first test measures risk by
comparing a fund's returns to those of the 90-day Treasury bill. Morningstar
then compares a fund's returns to those of other funds in its investment
category--in this case, all equity funds. In receiving its five-star rating,
Twentieth Century Value was compared with 1,708 equity mutual funds over the
three-year period ended September 30, 1996.
Value only recently became eligible for this ranking after posting three years
of returns. When we created Value, we set out to provide investors with a fund
that offered attractive returns with lower risk. The Morningstar rating
indicates we have been accomplishing that goal so far.
VALUE'S SCHEDULE OF INVESTMENTS BEGINS ON PAGE 10.
6
SEPTEMBER 30, 1996
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EQUITY INCOME
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MANAGEMENT Q & A
AN INTERVIEW WITH PETER ZUGER AND PHIL DAVIDSON, PORTFOLIO MANAGERS OF THE
TWENTIETH CENTURY EQUITY INCOME FUND.
Q: HOW DID THE FUND PERFORM?
A: For the six-month period ended September 30, 1996, Twentieth Century Equity
Income significantly outperformed its benchmark, the Lipper Equity Income Fund
Index, while nearly keeping pace with the S&P 500 Index. The fund's total return
for the period was 7.29%, compared with a 5.11% total return for the Lipper
Equity Income Fund Index and a 7.68% total return for the S&P 500.
Q: WHY DID THE FUND OUTPERFORM THE LIPPER EQUITY INCOME FUND INDEX?
A: The index contains many equity income funds that maintain large positions in
cyclical stocks
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AVERAGE ANNUAL TOTAL RETURNS (AS OF SEPTEMBER 30, 1996)
Lipper Equity Income S&P 500
EQUITY INCOME Fund Index* Index
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Six months(+) 7.29% 5.11% 7.68%
One year 20.83% 15.44% 20.20%
Inception
(8/1/94 to 9/30/96) 20.33% 17.09% 23.38%
(+)Actual
QUICK FUND FACTS
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EQUITY INCOME
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STRATEGY: Current income with capital appreciation as a secondary objective.
Seeks a yield that exceeds the aggregate yield of securities in the S&P 500
Index.
INCEPTION DATE: August 1, 1994
SIZE: $157.4 million (AS OF SEPTEMBER 30, 1996)
TICKER: TWEIX
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$10,000 OVER LIFE OF FUND (AS OF SEPTEMBER 30, 1996)
[mountain graph]
Equity Income on 9/30/96:
Lipper Equity Income S&P 500
EQUITY INCOME Fund Index* Index
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Sep 1, 1993 $10,000 $10,000 $10,000
Sep 30, 1993 10,360 10,333 10,314
Oct 31, 1993 10,248 10,137 10,108
Nov 30, 1993 10,349 10,192 10,319
Dec 31, 1993 10,038 9,810 9,911
Jan 31, 1994 10,053 9,888 10,106
Feb 28, 1994 10,499 10,064 10,351
Mar 31, 1994 10,884 10,388 10,725
Apr 30, 1994 11,069 10,632 11,087
May 30, 1994 11,417 10,886 11,397
Jun 30, 1994 11,641 11,220 11,811
Jul 31, 1994 11,809 11,369 12,142
Aug 31, 1994 12,056 11,680 12,528
Sep 30, 1994 12,097 11,824 12,524
Oct 31, 1994 12,347 12,191 13,104
Nov 30, 1994 12,285 12,018 13,039
Dec 31, 1994 12,763 12,520 13,574
Jan 31, 1995 13,031 12,827 13,890
Feb 28, 1995 13,325 13,120 14,343
Mar 31, 1995 13,506 13,218 14,443
Apr 30, 1995 13,913 13,385 14,635
May 31, 1995 14,026 13,513 14,831
Jun 30, 1995 14,345 13,713 15,171
Jul 31, 1995 14,558 13,734 15,289
Aug 31, 1995 14,029 13,285 14,591
Sep 30, 1995 14,466 13,584 14,865
Oct 31, 1995 14,927 14,075 15,759
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
*Source: Lipper Analytical Services, Inc.
7
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EQUITY INCOME
(stocks of companies whose businesses are tied to the economic cycle), which
underperformed during the period. In the middle of the period, cyclicals
declined because of market fears regarding the direction of the economy. While
the fund owned many mid- to large-sized yield-oriented stocks, we stayed away
from the stocks of very large companies, especially cyclicals. Cyclicals had
been reporting relatively high earnings, and we became concerned that in some
cases these earnings may not be sustainable.
Q: WHAT HELPED THE FUND NEARLY KEEP PACE WITH THE S&P 500?
A: Conservative equity funds often outperform the broad market during downturns
and underperform during rallies. That was true for Equity Income over the
period. The fund's best relative performance came in June and the first two
weeks of July, when the major U.S. stock market indices declined sharply. Equity
Income was helped during that time by its holdings in convertible securities,
real estate investment trusts (REITs), and other higher-yielding stocks. Each of
these types of holdings helped cushion losses by providing a relatively steady
stream of income to the fund. In the recent market recovery, however,
growth-oriented stocks outperformed more conservative, income-oriented
investments, which caused Equity Income to lose the advantage it had gained over
the S&P 500 earlier in the period.
Q: YOU MENTIONED THE CUSHIONING EFFECT OF THE INCOME STREAM FROM THE FUND'S
HOLDINGS. WHAT WAS THE FUND'S YIELD?
A: Equity Income's 30-day SEC yield remained consistently above 3.00% during the
six-month period. As of September 30, 1996, it was 3.34%.
Q: WHAT OTHER FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A: The fund maintained a substantial weighting in a variety of energy
securities. These performed well as energy prices showed sustained strength
during the period. For example, one of the fund's five best-performing holdings
over the past six months was French oil conglomerate Societe Nationale Elf
Aquitaine. In fact, performance was strong enough among our energy holdings that
we trimmed many
TOP TEN HOLDINGS (AS OF SEPTEMBER 30, 1996)
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% OF FUND
INVESTMENTS IN
% OF FUND THESE HOLDINGS
INVESTMENTS SIX MONTHS AGO
Giant Food Inc. 4.2% 4.9%
Cooper Industries, Inc., 7.05%,
1-1-15 (convertible bond) 3.2% 2.2%
Price/Costco, Inc., 5.75%,
5-15-02 (convertible bond) 2.9% --
NAC Re Corp., 5.25%,
12-15-02 (convertible bond) 2.8% --
Petrolite Corporation 2.7% 3.3%
Kansas City Power & Light Co. 2.6% --
Universal Foods Corp. 2.5% --
AT&T Corp. 2.4% --
American Brands, Inc. 2.2% --
Exxon Corp. 2.1% --
TOP FIVE INDUSTRIES (AS OF SEPTEMBER 30, 1996)
- --------------------------------------------------------------------------------
% OF FUND
INVESTMENTS IN
% OF FUND THESE INDUSTRIES
INVESTMENTS SIX MONTHS AGO
Utilities 14.9% 15.0%
Chemicals & Resins 9.9% 8.2%
Insurance 7.9% 3.6%
Energy (Production & Marketing) 7.8% 15.5%
Food & Beverage 7.6% 3.5%
8
SEPTEMBER 30, 1996
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EQUITY INCOME
of our positions in favor of better-yielding investments. Another type of
holding that benefited the fund was REITs, which not only held up well when the
market slid in the summer, but also performed well during the subsequent
rebound.
Q: WHAT SIGNIFICANT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE PERIOD?
A: We modestly refocused our utilities exposure. Electric and gas utilities were
good holdings for the fund in the early part of the period, although more
recently the fund's electric utilities had a period of flat performance.
Telecommunications utilities became relatively attractive as their valuations
became more compelling and their yields improved. One of our interests in this
area has been regional telephone companies. For example, as of the end of the
period one of our larger telecommunications holdings was BellSouth, which we
believe offers a relatively high yield and some capital appreciation potential.
Retail holdings also contributed to fund performance during the period. Good
performance in individual retail holdings led us to take profits by trimming
back some positions in this sector. However, we have carried over to the next
period a significant exposure to food retailers, like Giant Food, based on their
solid prospects.
Q: WHAT DECISIONS DID NOT WORK OUT WELL?
A: One of our weaker performing investments during the period was in Chesapeake
Corp. of Virginia. Chesapeake is a paper company that got caught in a cyclical
downturn. Its business was hurt by soft prices for paper, and when earnings fell
short of expectations, the stock price fell. However, we decided to maintain a
position in this stock because we were satisfied with its yield and its
longer-term business potential.
Q: HOW IS THE FUND MAINTAINING ITS YIELD?
A: We continued to own convertible securities, which are income-paying
instruments that can be converted to stock under certain conditions. At about
18% of assets, however, the fund's ownership of convertibles is at the low end
of its recent range. Valuations among convertibles have been relatively high
(and, therefore, yields have been relatively low) because there has been more
demand for these instruments than supply.
To maintain the fund's yield without relying exclusively on convertibles, we
have invested in other high yielding areas. Dividend-paying utility stocks, for
example, comprised about 15% of assets at the end of the period. Specialty
chemical companies also offered higher yields and were available at attractive
valuations. We were particularly interested in chemical companies in niche areas
that were less likely to be tied to the economic cycle (and thus might better
sidestep concerns about the economy). One example is Petrolite, which makes
chemicals used in oil fields. Higher oil prices have had a positive, though
indirect, impact on Petrolite's prospects, and some recent changes in the
company put it on a better footing to take advantage of new opportunities. We
were able to buy the company's stock at a time when its yield was nearly 4%.
Over the period it was the fund's best-performing holding.
EQUITY INCOME'S SCHEDULE OF INVESTMENTS BEGINS ON PAGE 12.
9
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS SEPTEMBER 30, 1996 (UNAUDITED)
VALUE
SHARES VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCKS
<S> <C>
AEROSPACE & DEFENSE -- 0.2%
57,900 Litton Industries, Inc.(1) $ 2,851,575
-----------------------
AUTOMOBILES & AUTO PARTS -- 1.9%
159,600 Echlin Inc. 5,007,450
760,200 Superior Industries
International, Inc. 18,339,825
-----------------------
23,347,275
-----------------------
BANKING -- 3.4%
490,800 First Virginia Banks, Inc. 21,349,800
417,000 Mercantile Bancorporation Inc. 21,684,000
-----------------------
43,033,800
-----------------------
BUILDING & HOME IMPROVEMENTS -- 1.3%
197,800 Juno Lighting, Inc. 3,263,700
442,900 Masco Corp. 13,287,000
-----------------------
16,550,700
-----------------------
CHEMICALS & RESINS -- 10.2%
447,000 Air Products & Chemicals, Inc. 26,037,750
41,900 Albemarle Corp. 717,537
247,000 Dow Chemical Co. 19,821,750
1,556,000 Ethyl Corp. 14,004,000
700,000 Lubrizol Corp. 20,125,000
447,700 Nalco Chemical Co. 16,229,125
461,600 Petrolite Corporation((+)(+)) 15,059,700
250,000 Rohm & Haas Co. 16,375,000
-----------------------
128,369,862
-----------------------
COMMUNICATIONS EQUIPMENT -- 0.5%
119,000 Motorola, Inc. 6,143,375
-----------------------
COMMUNICATIONS SERVICES -- 2.4%
765,000 AT&T Corp. 28,783,125
28,700 MCI Communications Corp. 733,644
-----------------------
29,516,769
-----------------------
CONSUMER PRODUCTS -- 3.3%
151,200 Bausch & Lomb Inc. 5,556,600
443,200 Tambrands, Inc. 18,669,800
805,000 Unilever PLC ORD 17,215,507
-----------------------
41,441,907
-----------------------
ENERGY (PRODUCTION & MARKETING) -- 10.6%
342,500 Amoco Corp. $ 24,146,250
164,000 Apache Corp. 4,879,000
231,000 Exxon Corp. 19,230,750
568,500 MAPCO Inc. 33,896,812
431,000 Murphy Oil Corp. 20,795,750
648,000 Seagull Energy Corp.(1) 12,717,000
447,679 Societe Nationale Elf
Aquitaine ADR 17,627,361
-----------------------
133,292,923
-----------------------
ENVIRONMENTAL SERVICES -- 2.7%
1,341,300 Browning-Ferris Industries, Inc. 33,532,500
-----------------------
FOOD & BEVERAGE -- 8.8%
1,158,450 Archer-Daniels-Midland Co. 22,300,162
16,800 Dean Foods Co. 474,600
665,700 Hormel Foods Corp. 15,560,738
1,192,000 Hudson Foods, Inc. 17,135,000
900,000 Ralcorp Holdings, Inc.(1) 18,675,000
297,600 Savannah Foods &
Industries, Inc. 4,129,200
980,000 Universal Foods Corp. 31,850,000
-----------------------
110,124,700
-----------------------
HEALTHCARE -- 0.9%
320,000 Seafield Capital Corp.((+)(+)) 11,240,000
-----------------------
INDUSTRIAL EQUIPMENT & MACHINERY -- 4.8%
642,000 Cooper Industries, Inc. 27,766,500
896,000 Gerber Scientific, Inc. 12,768,000
970,000 Watts Industries, Inc. 19,036,250
-----------------------
59,570,750
-----------------------
INSURANCE -- 6.0%
466,800 Argonaut Group, Inc. 13,945,650
277,000 CNA Financial Corp.(1) 26,557,375
370,800 Home Beneficial Corp. 9,455,400
164,500 NAC Re Corp. 5,922,000
177,700 SAFECO Corp. 6,197,287
232,800 St. Paul Companies, Inc. (The) 12,920,400
-----------------------
74,998,112
-----------------------
METALS & MINING -- 1.0%
527,300 Ashland Coal, Inc. 13,116,588
-----------------------
SEE NOTES TO FINANCIAL STATEMENTS 10
SHARES/PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------
PACKAGING & CONTAINERS -- 2.0%
146,100 ACX Technologies, Inc.(1) $ 2,538,488
910,000 Ball Corporation 22,295,000
------------------------
24,833,488
------------------------
PAPER & FOREST PRODUCTS -- 3.5%
903,700 Chesapeake Corp. 24,851,750
212,100 Union Camp Corp. 10,366,388
313,200 Westvaco Corp. 9,278,550
------------------------
44,496,688
------------------------
PUBLISHING -- 6.8%
870,000 American Greetings Corp. Cl A 24,958,125
970,000 Banta Corp. 22,188,750
375,000 Central Newspapers, Inc. 14,296,875
833,000 McClatchy Newspapers, Inc. 23,324,000
-------------------------
84,767,750
-------------------------
RESTAURANTS -- 0.5%
700,000 Darden Restaurants, Inc. 6,037,500
-------------------------
RETAIL (FOOD & DRUG) -- 4.2%
1,558,100 Giant Food Inc. 52,975,400
-------------------------
RETAIL (GENERAL MERCHANDISE) -- 2.8%
164,000 Dayton Hudson Corp. 5,412,000
816,000 Dillard Department Stores, Inc. 26,316,000
56,500 Mercantile Stores Co., Inc. 3,051,000
-------------------------
34,779,000
-------------------------
TOBACCO PRODUCTS -- 2.2%
589,000 American Brands, Inc. 24,885,250
135,000 DiMon Inc. 2,581,875
-------------------------
27,467,125
-------------------------
TRANSPORTATION -- 2.0%
900,000 Rollins Truck Leasing Corp. 10,125,000
340,500 XTRA Corp. 14,428,687
-------------------------
24,553,687
-------------------------
UTILITIES -- 10.5%
665,000 BellSouth Corp. 24,605,000
886,800 Kansas City Power & Light Co. 23,721,900
527,000 Northern States
Power Co. (Minn.) 24,571,375
914,000 Potomac Electric Power Co. $ 23,192,750
409,000 SBC Communications Inc. 19,683,125
420,000 Union Electric Co. 15,487,500
-------------------------
131,261,650
-------------------------
TOTAL COMMON STOCKS -- 92.5% 1,158,303,124
-------------------------
(Cost $1,112,077,189)
CONVERTIBLE BONDS
COMMUNICATIONS EQUIPMENT -- 1.5%
$26,316,000 Motorola, Inc., 1.91%(*), 9-27-13 19,046,205
-------------------------
RETAIL (SPECIALTY) -- 0.2%
3,500,000 Jacobson Stores Inc.,
6.75%, 12-15-11 2,719,063
-------------------------
TOTAL CONVERTIBLE BONDS -- 1.7% 21,765,268
-------------------------
(Cost $21,944,456)
TEMPORARY CASH INVESTMENTS
Repurchase Agreement (J.P. Morgan
Securities, Inc.), 5.60%, due 10-1-96;
collateralized by $67,123,000 par value
U.S. Treasury Bonds, 7.125%-8.125%,
due 8-15-21 through 2-15-23
(Delivery value $70,660,990)(**) 70,650,000
$1,410,000 U.S. Treasury Bills, 12-19-96(**) 1,394,712
--------------------------
TOTAL TEMPORARY CASH INVESTMENTS -- 5.8% 72,044,712
--------------------------
(Cost $72,044,145)
TOTAL INVESTMENT SECURITIES -- 100.0% $1,252,113,104
==========================
(Cost $1,206,065,790)
FORWARD FOREIGN CURRENCY CONTRACTS
Contracts Settlement Unrealized
to Sell Date Value Gain
- --------------------------------------------------------------------------------
81,588,984 FRF 10-31-96 $15,832,376 $36,027
===================================
(Value on Settlement Date $15,868,403)
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Purchased Date Amount at Value Gain
- --------------------------------------------------------------------------------
102 S&P 500
Index December
Futures 1996 $35,261,400 $159,142
===================================
SEE NOTES TO FINANCIAL STATEMENTS 11
- ------------------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1996 (UNAUDITED)
EQUITY INCOME
SHARES VALUE
- ------------------------------------------------------------------------------------------
COMMON STOCKS
BANKING -- 3.4%
62,000 First Virginia Banks, Inc. $ 2,697,000
55,095 Mercantile Bancorporation Inc. 2,864,940
---------------------------
5,561,940
---------------------------
BUILDING & HOME IMPROVEMENTS -- 0.4%
37,500 Juno Lighting, Inc. 618,750
---------------------------
CHEMICALS & RESINS -- 8.0%
30,000 Dow Chemical Co. 2,407,500
302,000 Ethyl Corp. 2,718,000
53,000 Lubrizol Corp. 1,523,750
52,000 Nalco Chemical Co. 1,885,000
135,000 Petrolite Corporation((+)(+)) 4,404,375
---------------------------
12,938,625
---------------------------
COMMUNICATIONS SERVICES -- 2.4%
103,500 AT&T Corp. 3,894,187
---------------------------
CONSUMER PRODUCTS -- 5.6%
20,600 Bausch & Lomb Inc. 757,050
86,400 Kellwood Co. 1,436,400
19,000 Lancaster Colony Corp. 719,625
80,000 National Presto Industries, Inc. 3,010,000
74,000 Tambrands, Inc. 3,117,250
---------------------------
9,040,325
---------------------------
DIVERSIFIED COMPANIES -- 1.1%
25,000 Minnesota Mining &
Manufacturing Co. 1,746,875
---------------------------
ENERGY (PRODUCTION & MARKETING) -- 6.5%
22,000 Amoco Corp. 1,551,000
41,000 Exxon Corp. 3,413,250
26,000 MAPCO Inc. 1,550,250
40,000 Murphy Oil Corp. 1,930,000
55,968 Societe Nationale Elf
Aquitaine ADR 2,203,740
---------------------------
10,648,240
---------------------------
ENVIRONMENTAL SERVICES -- 1.0%
65,600 Browning-Ferris Industries, Inc. 1,640,000
---------------------------
FOOD & BEVERAGE -- 7.6%
34,000 General Mills, Inc. 2,052,750
87,000 Hormel Foods Corp. $ 2,033,625
105,000 International Multifoods Corp. 1,706,250
75,000 McCormick & Co., Inc. 1,757,812
36,500 Ralcorp Holdings, Inc.(1) 757,375
123,300 Universal Foods Corp. 4,007,250
---------------------------
12,315,062
---------------------------
HEALTHCARE -- 2.0%
90,500 Seafield Capital Corp.((+)(+)) 3,178,813
---------------------------
INDUSTRIAL EQUIPMENT & MACHINERY -- 0.5%
43,700 Keystone International, Inc. 857,613
---------------------------
INSURANCE -- 5.2%
110,800 Argonaut Group, Inc. 3,310,150
62,000 Home Beneficial Corp. 1,581,000
50,300 SAFECO Corp. 1,754,213
32,000 St. Paul Companies, Inc. (The) 1,776,000
---------------------------
8,421,363
---------------------------
METALS & MINING -- 1.8%
120,700 Ashland Coal, Inc. 3,002,412
---------------------------
PACKAGING & CONTAINERS -- 0.5%
35,000 Ball Corporation 857,500
---------------------------
PAPER & FOREST PRODUCTS -- 3.5%
111,100 Chesapeake Corp. 3,055,250
32,400 Union Camp Corp. 1,583,550
34,000 Westvaco Corp. 1,007,250
---------------------------
5,646,050
---------------------------
PUBLISHING -- 1.7%
56,000 American Greetings Corp. Cl A 1,606,500
50,000 Banta Corp. 1,143,750
---------------------------
2,750,250
---------------------------
REAL ESTATE -- 2.2%
50,000 ROC Communities Inc. 1,218,750
42,000 Sun Communities Inc. 1,197,000
112,200 Taubman Centers, Inc. 1,248,225
---------------------------
3,663,975
---------------------------
RETAIL (FOOD & DRUG) -- 4.8%
199,000 Giant Food Inc. 6,766,000
34,200 Weis Markets, Inc. 1,077,300
---------------------------
7,843,300
---------------------------
TOBACCO PRODUCTS -- 3.2%
83,000 American Brands, Inc. 3,506,750
49,000 DiMon Inc. 937,125
SEE NOTES TO FINANCIAL STATEMENTS 12
- -----------------------------------------------------------------------------------------
SHARES/PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------
28,200 Universal Corp. $ 719,100
---------------------------
5,162,975
---------------------------
UTILITIES -- 14.9%
135,000 AGL Resources, Inc. 2,581,875
85,000 BellSouth Corp. 3,145,000
78,600 CIPSCO, Inc. 2,800,125
19,500 Florida Progress Corp. 663,000
155,600 Kansas City Power & Light Co. 4,162,300
72,000 Northern States
Power Co. (Minn.) 3,357,000
123,000 Potomac Electric Power Co. 3,121,125
49,000 SBC Communications Inc. 2,358,125
84,000 South Jersey Industries, Inc. 1,974,000
---------------------------
24,162,550
---------------------------
TOTAL COMMON STOCKS -- 76.3% 123,950,805
---------------------------
(Cost $118,661,350)
CONVERTIBLE PREFERRED STOCKS
COMMUNICATIONS EQUIPMENT -- 0.2%
6,000 Corning Inc., $3.00 339,000
---------------------------
REAL ESTATE -- 0.3%
25,000 Wellsford Residential Property
Trust $1.75 500,000
---------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS -- 0.5% 839,000
--------------------------
(Cost $784,993)
CONVERTIBLE BONDS
BUILDING & HOME IMPROVEMENT -- 1.2%
$2,000,000 Masco Corp., 5.25%, 2-15-12 1,870,000
---------------------------
CHEMICALS & RESINS -- 1.9%
7,000,000 RPM, Inc., 5.13%(*), 9-30-12 3,110,625
---------------------------
COMMUNICATIONS EQUIPMENT -- 0.9%
2,069,000 Motorola, Inc., 1.91%(*), 9-27-13 1,497,439
--------------------------
CONSUMER PRODUCTS -- 1.0%
4,000,000 Whirlpool Corp., 20.47%(*), 5-14-01 1,625,000
--------------------------
ENERGY (PRODUCTION & MARKETING) -- 1.3%
2,000,000 Ashland Inc., 6.75%, 7-1-14 2,035,000
--------------------------
ENVIRONMENTAL SERVICES -- 0.8%
1,450,000 WMX Technologies, Inc.,
2.00%, 1-24-05 1,348,500
--------------------------
INDUSTRIAL EQUIPMENT & MACHINERY -- 3.2%
$4,700,000 Cooper Industries, Inc.,
7.05%, 1-1-15 $ 5,167,062
--------------------------
INSURANCE -- 2.7%
4,800,000 NAC Re Corp., 5.25%, 12-15-02
(Acquired 5-1-96 through
5-20-96, Cost $4,634,000)(+) 4,620,000
--------------------------
RETAIL (GENERAL MERCHANDISE) -- 2.9%
5,000,000 Price/Costco, Inc., 5.75%, 5-15-02 4,659,375
--------------------------
RETAIL (SPECIALTY) -- 1.5%
3,000,000 Jacobson Stores Inc.,
6.75%, 12-15-11 2,330,625
--------------------------
TOTAL CONVERTIBLE BONDS -- 17.4% 28,263,626
--------------------------
(Cost $27,607,914)
TEMPORARY CASH INVESTMENTS
Repurchase Agreement (Goldman Sachs & Co., Inc.), 5.60%, due
10-1-96; collateralized by $7,810,000 par value U.S. Treasury
Bonds, 8.75%-11.125%, due 8-15-03 through 11-15-08
(Delivery value $9,201,431)(**) 9,200,000
$145,000 U.S. Treasury Bills, 12-19-96(**) 143,428
--------------------------
TOTAL TEMPORARY CASH INVESTMENTS -- 5.8% 9,343,428
--------------------------
(Cost $9,343,369)
TOTAL INVESTMENT SECURITIES -- 100.0% $ 162,396,859
==========================
(Cost $156,397,626)
FORWARD FOREIGN CURRENCY CONTRACTS
Contracts Settlement Unrealized
to Sell Date Value Gain
- --------------------------------------------------------------------------------
10,200,103 FRF 10-31-96 $1,979,334 $4,504
=======================================
(Value on Settlement Date $1,983,838)
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Purchased Date Amount at Value Gain
- --------------------------------------------------------------------------------
6 S&P 500
Index December
Futures 1996 $2,074,200 $12,193
=======================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 13
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1996 (UNAUDITED)
NOTES TO SCHEDULES OF INVESTMENTS
ADR = AMERICAN DEPOSITARY RECEIPT
FRF = FRENCH FRANCS
ORD = FOREIGN ORDINARY SHARE
(1) NON-INCOME PRODUCING
(*) RATE DISCLOSED FOR ZERO-COUPON BONDS IS YIELD TO MATURITY BASED ON CURRENT
MARKET VALUES AS OF SEPTEMBER 30, 1996.
(**) DENOTES SECURITIES WHICH HAVE BEEN PARTIALLY OR TOTALLY SEGREGATED AT THE
CUSTODIAN BANK FOR FUTURES CONTRACTS.
(+) PURCHASED UNDER RULE 144A OF THE SECURITIES ACT OF 1933 AND IS RESTRICTED
FOR SALE TO QUALIFIED INSTITUTIONAL INVESTORS. THE AGGREGATE VALUE OF RESTRICTED
SECURITIES AT SEPTEMBER 30, 1996, WAS $4,620,000, WHICH REPRESENTED 2.93% OF THE
NET ASSETS OF EQUITY INCOME.
((+)(+)) AFFILIATED COMPANY: REPRESENTS OWNERSHIP OF AT LEAST 5% OF THE VOTING
SECURITIES OF THE ISSUER AND IS, THEREFORE, AN AFFILIATE AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940. SEE NOTE 4 IN FINANCIAL STATEMENTS FOR A SUMMARY
OF TRANSACTIONS FOR EACH ISSUER WHO IS OR WAS AN AFFILIATE AT OR DURING THE SIX
MONTHS ENDED SEPTEMBER 30, 1996.
SEE NOTES TO FINANCIAL STATEMENTS 14
- --------------------------------------------------------------------------------
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
EQUITY
SEPTEMBER 30, 1996 (UNAUDITED) VALUE INCOME
- -------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investment securities, at value (identified cost of $1,206,065,790
and $156,397,626, respectively) (NOTES 3 AND 4) . . . . . . . . . . . $1,252,113,104 $162,396,859
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771,312 844,694
Receivable for investments sold . . . . . . . . . . . . . . . . . . . 3,475,238 1,342,770
Receivable for forward foreign currency exchange contracts . . . . . 36,027 4,504
Receivable for variation on futures contracts (NOTE 1) . . . . . . . -- 8,000
Dividends and interest receivable . . . . . . . . . . . . . . . . . . 2,173,584 647,155
----------------- -----------------
1,258,569,265 165,243,982
LIABILITIES ----------------- -----------------
Disbursements in excess of demand deposit cash . . . . . . . . . . . . 938,700 241,426
Payable for investments purchased. . . . . . . . . . . . . . . . . . . . 23,512,637 7,416,991
Payable for variation on futures contracts (NOTE 1) . . . . . . . . . 32,225 --
Payable for capital shares redeemed . . . . . . . . . . . . . . . . . 498,011 30,384
Accrued management fees (NOTE 2) . . . . . . . . . . . . . . . . . . 963,422 120,699
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 101,104 18,518
------------------ -----------------
26,046,099 7,828,018
------------------ -----------------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES. . . . . . . . . . . . . . . $1,232,523,166 $157,415,964
================== =================
CAPITAL SHARES, $0.01 PAR VALUE
Authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000,000 300,000,000
================== =================
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,352,517 24,407,681
================== =================
NET ASSET VALUE PER SHARE. . . . . . . . . . . . . . . . . . . . . . . . $6.65 $6.45
================== =================
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) . . . . . . . . . . . . . . . $1,074,621,493 $138,458,989
Undistributed net investment income . . . . . . . . . . . . . . . . . 408,400 53,535
Accumulated undistributed net realized gain from
investment and foreign currency transactions . . . . . . . . . . . . 110,890,398 12,842,381
Net unrealized appreciation on investments
and translation of assets and liabilities
in foreign currencies (NOTE 3) . . . . . . . . . . . . . . . . . . . 46,602,875 6,061,059
------------------ -----------------
$1,232,523,166 $157,415,964
================== =================
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) VALUE EQUITY INCOME
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Income:
Dividends (net of foreign taxes withheld
of $171,612 and $11,675, respectively). . . . . . . . . $14,346,462 $2,075,947
Interest. . . . . . . . . . . . . . . . . . . . . . . . . 1,544,486 722,618
----------------- -----------------
15,890,948 2,798,565
----------------- -----------------
Expenses:
Management fees (NOTE 2) . . . . . . . . . . . . . . . . 5,271,233 658,637
Directors' fees and expenses . . . . . . . . . . . . . . 4,647 581
----------------- -----------------
5,275,880 659,218
----------------- -----------------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . 10,615,068 2,139,347
----------------- -----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . 62,929,829 7,907,799
Foreign currency transactions . . . . . . . . . . . . . . (117,928) (39,510)
----------------- -----------------
62,811,901 7,868,289
----------------- -----------------
Change in net unrealized appreciation (depreciation) during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . (11,084,576) (690,429)
Translation of assets and liabilities
in foreign currencies . . . . . . . . . . . . . . . . . . 536,889 71,060
----------------- -----------------
(10,547,687) (619,369)
----------------- -----------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY . . . . . . . . . . . . . . 52,264,214 7,248,920
----------------- -----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . $62,879,282 $9,388,267
================= =================
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 16
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
AND YEAR ENDED MARCH 31, 1996 VALUE EQUITY INCOME
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, MARCH 31, SEPTEMBER 30, MARCH 31,
INCREASE IN NET ASSETS 1996 1996 1996 1996
-------------- ------------- -------------- ------------
OPERATIONS
Net investment income . . . . . . . . . . . ... $10,615,068 $12,842,485 $2,139,347 $2,971,057
Net realized gain on investments
and foreign currency transactions. . . . . . ... 62,811,901 93,357,747 7,868,289 11,637,71
Change in net unrealized appreciation
(depreciation) on investments and translation
of assets and liabilities in foreign currencies. (10,547,687) 42,011,788 (619,369) 4,726,626
------------ ----------- ----------- ----------
Net increase in net assets
resulting from operations . . . . . . . . . . . 62,879,282 148,212,020 9,388,267 19,335,397
------------ ----------- ----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income . . . . . . . . . ... (10,251,150) (12,842,485) (2,108,297) (2,971,057)
In excess of net investment income . . . . . ... -- (698,226) -- (99,756)
From net realized gains from
investment transactions. . . . . . . . . . ... -- (47,886,954) -- (6,912,073)
------------ ------------ ----------- -----------
Decrease in net assets from distributions . ... (10,251,150) (61,427,665) (2,108,297) (9,982,886)
------------ ------------ ----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold . . . . . . . . . ... 509,315,489 643,896,003 70,461,069 85,832,083
Proceeds from reinvestment of distributions ... 10,112,917 60,265,897 2,016,622 9,607,360
Payments for shares redeemed . . . . . . . . ...(221,418,612) (257,342,066) (39,034,055) (40,312,436)
------------- ------------- ------------ ------------
Net increase in net assets from
capital share transactions . . . . . . . ... 298,009,794 446,819,834 33,443,636 55,127,007
------------- ------------- ------------ ------------
NET INCREASE IN NET ASSETS . . . . . . . . . . ... 350,637,926 533,604,189 40,723,606 64,479,518
NET ASSETS
Beginning of period . . . . . . . . . . . . ... 881,885,240 348,281,051 116,692,358 52,212,840
-------------- ------------- ------------ ------------
End of period . . . . . . . . . . . . . . . .$1,232,523,166 $881,885,240 $157,415,964 $116,692,358
============== ============= ============ ============
Undistributed net investment income . . . . ... $408,400 $44,482 $53,535 $22,485
============== ============= ============ ============
TRANSACTIONS IN SHARES OF THE FUNDS:
Sold . . . . . . . . . . . . . . . . . . . . ... 78,688,584 108,909,750 11,230,950 14,703,393
Issued in reinvestment of distributions . . ... 1,527,542 10,332,725 316,083 1,672,244
Redeemed . . . . . . . . . . . . . . . . . . ... (34,471,817) (43,370,111) (6,282,479) (6,860,307)
-------------- ------------ ----------- -----------
Net increase . . . . . . . . . . . . . . . . ... 45,744,309 75,872,364 5,264,554 9,515,330
============== ============ =========== ===========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 17
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--
Twentieth Century Capital Portfolios, Inc. (the Corporation) is registered
under the Investment Company Act of 1940 as an open-end diversified
management investment company. Two series of funds, investing primarily in
equity securities, are currently issued as Twentieth Century Value and
Twentieth Century Equity Income (the Funds). The investment objective of
Twentieth Century Value is long-term capital growth. Income is a secondary
objective. The investment objective of Twentieth Century Equity Income is
the production of current income. Capital appreciation is a secondary
objective. On September 3, 1996, the Funds implemented a multiple class
structure whereby each Fund is authorized to issue four classes of shares:
the Investor Class, the Institutional Class, the Service Class, and the
Advisor Class. The shares outstanding prior to September 3, 1996, were
designated as Investor Class shares. The four classes of shares differ
principally in their respective shareholder servicing fees and distribution
fees. All classes of shares represent an equal pro rata interest in the
Funds and have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except for class specific expenses and
exclusive rights to vote on matters affecting only individual classes. Sale
of the Institutional, Service and Advisor classes commenced subsequent to
the report date. The following significant accounting policies related to
all classes of the Funds are in accordance with accounting policies
generally accepted in the investment company industry.
Security Valuations--
Portfolio securities traded primarily on a principal securities exchange
are valued at the last reported sales price, or the mean between the latest
bid and asked prices where no last sales price is available. Securities
traded over-the-counter are valued at the mean of the latest bid and asked
prices or, in the case of certain foreign securities, at the last reported
sales price. Debt securities not traded on a principal securities exchange
are valued through valuations obtained from a commercial pricing service or
at the mean of the most recent bid and asked prices. When valuations are
not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the board of directors.
Security Transactions--
Security transactions are accounted for on the date purchased or sold. Net
realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
Investment Income--
Dividend income less foreign taxes withheld (if any) is recorded as of the
ex-dividend date or upon receipt of ex-dividend notification in the case of
certain foreign securities. Interest income is recognized on the accrual
basis and includes amortization of discounts and premiums.
Foreign Currency Transactions--
The accounting records of the Funds are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at prevailing exchange rates. Purchases and
sales of investment securities, dividend and interest income, and certain
expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in the foreign exchange rates on investments from
the fluctuations arising from changes in the market prices of securities
held. Such fluctuations are included with the net realized and unrealized
gain or loss on investments.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the
amounts actually received or paid. Net unrealized foreign currency exchange
gains or losses arise from changes in the value of assets and liabilities
other than portfolio securities at the end of the reporting period,
resulting from changes in the exchange rates.
18
- --------------------------------------------------------------------------------
Forward Foreign Currency Exchange Contracts--
The Funds may enter into forward foreign currency exchange contracts for
the purpose of settling specific purchases or sales of securities
denominated in a foreign currency or to hedge the Funds' exposure to
foreign currency exchange rate fluctuations. The net U.S. dollar value of
foreign currency underlying all contractual commitments held by the Funds
and the resulting unrealized appreciation or depreciation are determined
daily using prevailing exchange rates. Forward contracts involve elements
of market risk in excess of the amount reflected in the Statements of
Assets and Liabilities. The Funds bear the risk of an unfavorable change in
the foreign currency exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under
the contract terms.
Futures Contracts--
The Funds may buy and sell stock index futures contracts in order to manage
each Fund's exposure to changes in market conditions. One of the risks of
entering into futures contracts may include the possibility that the change
in value of the contract may not correlate with the changes in value of the
underlying securities. Upon entering into a futures contract, the Fund is
required to deposit either cash or securities in an amount equal to a
certain percentage of the contract value (initial margin). Subsequent
payments (variation margin) are made or received daily, in cash, by the
Fund. The variation margin is equal to the daily change in the contract
value and is recorded as unrealized gains and losses. The Fund recognizes a
realized gain or loss when the contract is closed or expires.
Repurchase Agreements--
The Funds may enter into repurchase agreements with institutions that the
Funds' investment manager has determined are creditworthy pursuant to
criteria adopted by the board of directors. Each repurchase agreement is
recorded at cost. The Funds require that the securities purchased in a
repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Funds to obtain those securities in the event of a
default under the repurchase agreement. The Funds' investment manager
monitors, on a daily basis, the value of the securities transferred to
ensure that the value, including accrued interest, of the securities under
each repurchase agreement is equal to or greater than amounts owed to the
Funds under each repurchase agreement.
Income Tax Status--
It is the policy of the Funds to distribute all taxable income and capital
gains to shareholders and to otherwise qualify as a regulated investment
company under provisions of the Internal Revenue Code. Accordingly, no
provision has been made for federal income taxes.
Distributions to Shareholders--
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are declared and paid quarterly.
Distributions from net realized gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences are
primarily due to differing treatments for foreign currency transactions and
wash sales.
Supplementary Information--
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of Twentieth Century
Companies, Inc., the parent of the Corporation's investment manager,
Investors Research Corporation (IRC).
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of increases and decreases
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
19
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 (UNAUDITED)
2. MANAGEMENT AGREEMENT
The Management Agreement with IRC provides for a monthly management fee
computed by multiplying the applicable fee for each Fund by the average
daily closing value of such Fund's net assets during the previous month.
The Agreement further provides that all expenses of the Funds, except
brokerage commissions, taxes, interest, expenses of those directors who are
not considered "interested persons" as defined in the Investment Company
Act of 1940 (including counsel fees) and extraordinary expenses, will be
paid by IRC. The Agreement may be terminated by either party upon 60 days'
written notice. The current annual management fee for the Investor Class of
each Fund is 1%.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the six
months ended September 30, 1996, were as follows:
<TABLE>
PURCHASES PROCEEDS FROM SALES
------------------------------------------- ----------------------------------------------
COMMON PREFERRED OTHER DEBT COMMON PREFERRED OTHER DEBT
STOCKS STOCKS OBLIGATIONS STOCKS STOCKS OBLIGATIONS
------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VALUE $912,633,158 -- $9,305,640 $597,562,209 -- $15,404,623
EQUITY INCOME 103,734,332 $4,298,410 28,812,748 75,938,256 $11,146,893 17,927,627
</TABLE>
On September 30, 1996, the composition of unrealized appreciation and
(depreciation) of investment securities based on the aggregate cost of
investments for federal income tax purposes was as follows:
<TABLE>
APPRECIATION (DEPRECIATION) NET FEDERAL TAX COST
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VALUE $65,126,538 $(21,459,246) $43,667,292 $1,208,445,812
EQUITY INCOME 7,620,464 (1,818,330) 5,802,134 156,594,725
</TABLE>
4. AFFILIATED COMPANY TRANSACTIONS
A summary of transactions for each issuer who is or was an affiliate at or
during the six months ended September 30, 1996, follows:
<TABLE>
SEPTEMBER 30, 1996
SHARE ------------------------
BALANCE PURCHASE SALES REALIZED SHARE MARKET
FUND/ISSUER 3/31/96 COST COST GAIN INCOME BALANCE VALUE
- ------------------------------------------------------------------------------------------------------
VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
Petrolite Corporation 461,600 -- -- -- $258,496 461,600 $15,059,700
Seafield Capital Corp. 320,000 -- -- -- 192,000 320,000 11,240,000
--------- ------- -------- -------- -----------
-- -- -- $450,496 $26,299,700
========= ======= ======== ======== ===========
EQUITY INCOME
Petrolite Corporation 127,500 $790,531 $58,225 $6,750 $66,500 135,000 $4,404,375
Seafield Capital Corp. 72,300 649,400 -- -- 47,790 90,500 3,178,813
---------- ------- ------ -------- ----------
$1,439,931 $58,225 $6,750 $114,290 $7,583,188
========== ======= ====== ======== ==========
</TABLE>
20
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
VALUE
------------------------------------------------------------------------
SIX MONTHS YEARS ENDED MARCH 31, SEPTEMBER 1, 1993
ENDED SEPTEMBER 30, --------------------------- (INCEPTION) THROUGH
1996 (UNAUDITED) 1996 1995 MARCH 31, 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD. . . . . $6.32 $5.46 $4.98 $5.01
------- ------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment
Income . . . . . . . . . . .06 .13(1) .12(1) .08(1)
Net Realized
and Unrealized
Gains (Losses) . . . . . . .33 1.34 .75 (.04)
------- ------- ------- -------
Total from
Investment Operations. . . .39 1.47 .87 .04
------- ------- ------- -------
DISTRIBUTIONS
From Net Investment
Income . . . . . . . . . . (.06) (.12) (.12) (.07)
In Excess of Net
Investment Income. . . . . -- (.01) -- --
From Net Realized Gains on
Investment Transactions . . -- (.48) (.27) --
------- ------- ------- -------
Total Distributions . . . . (.06) (.61) (.39) (.07)
------- ------- ------- -------
NET ASSET VALUE,
END OF PERIOD . . . . . . . . $6.65 $6.32 $5.46 $4.98
======= ======= ======= =======
TOTAL RETURN(2) . . . . . . 6.27% 28.06% 18.56% .83%
RATIOS/SUPPLEMENTAL DATA
Ratio of Expenses to
Average Net Assets . . . . .98%(3) .97% 1.00% 1.00%(3)
Ratio of Net Investment
Income to Average
Net Assets . . . . . . . . 1.96%(3) 2.17% 2.65% 3.37%(3)
Portfolio Turnover Rate . . 61% 145% 94% 79%
Average Commission
Paid per Share Traded . . . $.0460 $.0409 --(4) --(4)
Net Assets, End
of Period (in thousands). . $1,232,523 $881,885 $348,281 $87,798
- -------------------------------------------------------------------------------------------------------
(1) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE PERIOD.
(2) TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. TOTAL RETURN
ASSUMES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS, IF ANY.
(3) ANNUALIZED
(4) NOT COMPUTED FOR PERIOD INDICATED.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 21
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED) (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
EQUITY INCOME
------------------------------------------------------------------
SIX MONTHS ENDED AUGUST 1, 1994
SEPTEMBER 30, 1996 YEAR ENDED (INCEPTION) THROUGH
(UNAUDITED) MARCH 31, 1996 MARCH 31, 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD. . . . . . $6.10 $5.42 $5.00
------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment
Income . . . . . . . . . . . .09 .20(1) .09(1)
Net Realized
and Unrealized Gains. . . . .35 1.13 .44
------- ------- -------
Total from
Investment Operations. . . . .44 1.33 .53
------- ------- -------
DISTRIBUTIONS
From Net Investment
Income. . . . . . . . . . . (.09) (.19) (.09)
In Excess of Net
Investment Income . . . . . -- (.01) --
From Net Realized Gains on
Investment Transactions . . -- (.45) (.02)
------- ------- -------
Total Distributions . . . . (.09) (.65) (.11)
------- ------- -------
NET ASSET VALUE,
END OF PERIOD . . . . . . . . $6.45 $6.10 $5.42
======= ======= =======
TOTAL RETURN(2) . . . . . . 7.29% 25.67% 10.69%
RATIOS/SUPPLEMENTAL DATA
Ratio of Expenses to
Average Net Assets . . . . . .98%(3) .98% 1.00%(3)
Ratio of Net Investment
Income to Average Net Assets . . 3.17%(3) 3.51% 4.04%(3)
Portfolio Turnover Rate . . . . . 81% 170% 45%
Average Commission
Paid per Share Traded. . . $.0420 $.0378 --(4)
Net Assets, End
of Period (in thousands). . $157,416 $116,692 $52,213
- --------------------------------------------------------------------------------------------------------
(1) COMPUTED USING AVERAGE SHARES OUTSTANDING THROUGHOUT THE PERIOD.
(2) TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. TOTAL RETURN
ASSUMES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS, IF ANY.
(3) ANNUALIZED
(4) NOT COMPUTED FOR PERIOD INDICATED.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 22
- --------------------------------------------------------------------------------
IMPORTANT NOTICE FOR ALL IRA AND 403(B) SHAREHOLDERS
AS REQUIRED BY LAW, ANY DISTRIBUTIONS YOU RECEIVE FROM AN IRA AND CERTAIN 403(B)
DISTRIBUTIONS [NOT ELIGIBLE FOR ROLLOVER TO AN IRA OR TO ANOTHER 403(B)] ARE
SUBJECT TO FEDERAL INCOME TAX WITHHOLDING AT THE RATE OF 10% OF THE TOTAL AMOUNT
WITHDRAWN, UNLESS YOU ELECT NOT TO HAVE WITHHOLDING APPLY. IF YOU DON'T WANT US
TO WITHHOLD ON THIS AMOUNT, YOU MAY SEND US A WRITTEN NOTICE NOT TO HAVE THE
FEDERAL INCOME TAX WITHHELD. YOUR WRITTEN NOTICE IS VALID FOR SIX MONTHS FROM
THE DATE OF RECEIPT AT TWENTIETH CENTURY. EVEN IF YOU PLAN TO ROLL OVER THE
AMOUNT YOU WITHDRAW TO ANOTHER TAX-DEFERRED ACCOUNT, THE WITHHOLDING RATE STILL
APPLIES TO THE WITHDRAWN AMOUNT, UNLESS WE HAVE RECEIVED A WRITTEN NOTICE NOT TO
WITHHOLD FEDERAL INCOME TAX WITHIN SIX MONTHS PRIOR TO THE WITHDRAWAL.
WHEN YOU PLAN TO WITHDRAW, YOU MAY MAKE YOUR ELECTION BY COMPLETING OUR
CONVERSIONS/REDEMPTIONS FORM OR AN IRS FORM W-4P. CALL TWENTIETH CENTURY FOR
EITHER FORM. YOUR WRITTEN ELECTION IS VALID FOR ONLY SIX MONTHS FROM THE DATE OF
RECEIPT AT TWENTIETH CENTURY. YOU MAY REVOKE YOUR ELECTION AT ANY TIME BY
SENDING A WRITTEN NOTICE TO US.
REMEMBER, EVEN IF YOU ELECT NOT TO HAVE INCOME TAX WITHHELD, YOU ARE LIABLE FOR
PAYING INCOME TAX ON THE TAXABLE PORTION OF YOUR WITHDRAWAL. IF YOU ELECT NOT TO
HAVE INCOME TAX WITHHELD OR YOU DON'T HAVE ENOUGH INCOME TAX WITHHELD, YOU MAY
BE RESPONSIBLE FOR PAYMENT OF ESTIMATED TAX. YOU MAY INCUR PENALTIES UNDER THE
ESTIMATED TAX RULES IF YOUR WITHHOLDING AND ESTIMATED TAX PAYMENTS ARE NOT
SUFFICIENT.
- --------------------------------------------------------------------------------
23
THIS PAGE HAS BEEN LEFT BLANK FOR YOUR NOTES.
TWENTIETH CENTURY
CONSERVATIVE EQUITY FUNDS
INVESTMENT MANAGER
INVESTORS RESEARCH CORPORATION
KANSAS CITY, MISSOURI
THIS REPORT AND THE FINANCIAL STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
TWENTIETH CENTURY MUTUAL FUNDS
and THE BENHAM GROUP
- ------------------------------
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
- ------------------------------
PERSON-TO-PERSON ASSISTANCE:
1-800-345-2021 OR 816-531-5575
- ------------------------------
AUTOMATED INFORMATION LINE:
1-800-345-8765
- ------------------------------
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-753-1865
- ------------------------------
FAX: 816-340-7962
- ------------------------------
INTERNET: http://www.twentieth-century.com
- ------------------------------
SH-BKT-6019 [Recycled logo]
9610 Recycled
TWENTIETH CENTURY
Conservative Equity
Funds
Semiannual Report
September 30, 1996
VALUE
EQUITY INCOME
------------------------------------------
TWENTIETH CENTURY
CAPITAL PORTFOLIOS, INC.
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