Annual Report
Capital
Opportunity
Fund
December 31, 1996
T. Rowe Price
Report Highlights
o Stocks were strong during the year, but the second half
was frustrating for small-cap growth investors as market
leadership rotated to large-capitalization, blue chip
stocks.
o During the past 6- and 12-month periods, fund returns of
4.29% and 16.76%, respectively, essentially tracked the
Lipper benchmark and lagged the S&P 500.
o Most fund gains and losses were generated by a few
holdings. Given the concentrated nature of the fund, this
should not be surprising.
o During the past six months, we initiated a significant
position in PepsiCo, whose growth potential appears
promising.
o As long as the economy maintains a moderate growth path,
and interest rates and mutual fund cash inflows are
stable, we remain encouraged about the prospects for
attractive returns this year.
Fellow Shareholders
Your fund turned in reasonable results for the year ended December
31, 1996, slightly ahead of its peer group. However, the second
half was frustrating as stock market leadership rotated to the
large-capitalization, blue chip stocks such as those in the
unmanaged Standard & Poor's 500 Stock Index. The movement was
fueled by investors seeking to own stocks with predictable earnings
growth and better liquidity.
Performance Comparison
Periods Ended 12/31/96 6 Months 12 Months
_____________________________________________________________
Capital Opportunity Fund 4.29% 16.76%
S&P 500 11.68 22.96
Lipper Capital Appreciation
Funds Average 4.70 16.31
During the past 6- and 12-month periods, your fund essentially
tracked the average returns of comparable Lipper funds and lagged
the S&P 500. The type of stock market environment we encountered
during the second half of 1996 proved to be especially challenging
for many of the broader-based funds included in the Lipper Capital
Appreciation Funds Average.
MARKET ENVIRONMENT
Spurred on by 1995's impressive gains, one of the highest for the
S&P 500 in over 25 years, many investors began 1996 expecting the
stock market to pause and digest its robust performance. Although
last year's 22.96% return was more modest than 1995's 37.6%, it was
well above the market's historical average return of 10.6%. In a
nearly perfect environment for stocks, characterized by relatively
stable interest rates, moderate inflation, and solid corporate
earnings growth, record new highs were common through much of the
year.
In addition to the positive backdrop for stocks of the past few
years, the flood of money into equity mutual funds played a
significant role in the market's strong performance. Somewhat
surprisingly, overall stock market volatility on a percentage basis
has been low during the impressive bull run. The strong mutual fund
cash inflows have created a "buy on the dips" mentality among many
investors, which helped dampen potential corrections and drive
stock prices higher. As discussed in a previous report, the jury is
out on whether this infusion of liquidity is secular and long term
or merely cyclical in nature.
Earnings growth has continued to be surprisingly strong during the
second half of the year, especially with the larger capitalization
companies. Clearly, the benefits of corporate restructuring and
profitability gains from technology investments over the past few
years are helping companies leverage their operating results. This
bodes well for the outlook for corporate profitability growth as
the underlying economy appears to be carrying solid momentum into
1997.
PORTFOLIO REVIEW
Given the fund's concentrated investment focus, it should not be
surprising that the majority of fund gains were generated by a few
holdings. Since the fund's inception, several stocks have been
consistently strong contributors to performance, and this was also
true during the second half and the entire year. These stocks
include Catalina Marketing, a leader in the in-store marketing
industry; OEA, a leading supplier of automotive airbag components;
and ADT, the nation's leading security alarm concern.
...The majority of fund gains were generated by a few holdings.
Catalina Marketing and OEA continue to deliver impressive earnings
growth, which has been recognized by investors, as both companies
have seen significant expansion of their price-to-earnings
multiples in recent months. ADT has benefited from its role as the
target of acquisition offers from both Republic Industries and
Western Resources.
Several other stocks were strong contributors to performance during
the second half, including Tupperware, a global direct marketer of
Tupperware products and miscellaneous kitchen accessories, which we
highlighted in our last report; Biogen, a leading biotechnology
company, whose share price surged as investors anticipated the
future success of the company's recently approved drug for the
treatment of multiple sclerosis; and Centerior Energy, a Cleveland
utility involved in a pending merger with Ohio Edison.
During the second half, fund results were enhanced by strong
performance from the drugstore sector, which continues to generate
strong profit growth and experience rapid consolidation. The
industry was one of the performance leaders during the year, and
portfolio holdings Eckerd and Revco posted strong gains.
Unfortunately, our concentrated investment approach also results in
increased risk when a potentially attractive investment is
unsuccessful. During the second half, two health care holdings hurt
performance. The combination of a rapidly changing industry
environment and merger distractions led to disappointing earnings
for Apria Healthcare and United HealthCare, resulting in sharp
declines in their share prices. Two smaller-capitalization
companies also disappointed: Alliance Entertainment, a leading
music distributor, and Copart, a leading processor of damaged
vehicles for the insurance industry. We eliminated our positions in
United HealthCare and Alliance Entertainment but retained the
Copart and Apria Healthcare holdings. Despite the recent price
declines in Copart and Apria Healthcare shares, we continue to
believe the companies' earnings growth potential is not being
properly valued by the market and remain encouraged about the
outlook for both companies.
Our concentrated investment approach also results in increased
risk...
To give shareholders a more detailed understanding of how the
Capital Opportunity Fund implements its investment strategy, we
take a look here at one of our major purchases during the past six
months-PepsiCo, the leading beverage, snack food, and restaurant
company. PepsiCo's shares significantly underperformed the market
during the second half of 1996 as the company's restaurant and
international beverage segments generated disappointing operating
results. We believe that senior management changes made at PepsiCo
in early 1996 could serve as a catalyst for the company to review
its portfolio of businesses. We expect the investment community to
become more receptive to the PepsiCo story in 1997 and beyond, as
management's efforts to improve growth prospects become more
visible.
OUTLOOK
The stock market environment entering 1997 is encouraging as
economic growth remains solid, inflationary pressures are modest,
and the outlook for interest rates appears stable. This ideal
environment has helped produce two years of significantly
above-average equity returns, with minimal overall market
volatility. Although we remain upbeat, we are realistic. Based on
historical stock market performance, results in 1997 are not likely
to match recent stellar returns, and overall market volatility will
probably increase.
If a correction does occur in 1997, we would use your fund's
flexible investment charter to capitalize on attractive investment
opportunities, which tend to occur during such periods. With the
momentum of the economy remaining positive and the outlook for
corporate earnings growth continuing to be solid, we believe the
outlook for your fund remains encouraging.
Respectfully submitted,
John F. Wakeman
Chairman of the Investment Advisory Committee
January 23, 1997
Sticking To Your Game Plan
Chart 1 - Time Reduces Volatility of Market Returns
In our report to you one year ago, we mentioned the possibility of
a modest decline in stock prices. In fact, from May to July 1996,
the broad market (as measured by the Standard & Poor's 500 Stock
Index) fell around 7%. However, the bull market resumed its charge
to post a robust 23% gain for the year.
Some believe the market is poised for a significant downturn. We do
not expect a major drop in stock prices in 1997, although another
modest pullback is possible. On balance, we expect stocks to
advance at a much slower pace.
How should you prepare for a potential market pullback? As always,
our advice is to diversify your investments and focus on the long
term. If you've implemented a sound investment strategy, stay the
course. Stocks have historically overcome periods of volatility to
provide better returns than most other investments. Market
corrections can even have a silver lining because they result in
good buying opportunities.
Furthermore, the volatility of stock market returns has diminished
significantly over longer time frames. The chart shows the best and
worst annualized returns on stocks over various rolling time
periods between 1950 and 1996. (For instance, there were 37 rolling
10-year periods: 1950-1960, 1951-1961, etc.) Investors who held
stocks for only one year could have had as much as a 52.6% gain, or
as little as a 26.5% loss - a spread of 79 percentage points.
However, investors who held stocks for 10-year periods or longer
always overcame interim volatility to post gains for the entire
period.
In addition, a well-diversified portfolio can weather volatility
better than a more concentrated portfolio over the long term and
particularly during market corrections. For example, during last
summer's correction, small-company stocks fell nearly 16% while
large-company issues dropped 7.3%. However, a portfolio diversified
among large U.S. companies (30% of assets), small U.S. companies
(15%), foreign companies (15%), intermediate-term Treasury bonds
(30%), and Treasury bills (10%) would have lost a smaller 5.2% of
its value.1
Above all, remember that investing is a long-distance race, not a
sprint.
1 Ned Davis Research.
T. Rowe Price Capital Opportunity Fund
Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/96
Centerior Energy 3.4%
ADT 3.4
OEA 3.3
La Quinta Inns 3.1
Catalina Marketing 2.9
_________________________________________________
Mercury Finance 2.7
USA Waste Services 2.5
HFS 2.4
Dayton Mining 2.4
BISYS Group 2.2
_________________________________________________
Revco 2.2
General Nutrition 2.0
First Data 2.0
PepsiCo 2.0
Consolidated Cigar Holdings 2.0
_________________________________________________
Electronic Data Systems 2.0
Apria Healthcare 1.9
Tupperware 1.9
Petrolite 1.9
Great Lakes Chemical 1.9
_________________________________________________
Weatherford Enterra 1.7
American Pad & Paper 1.7
PacifiCare Health Systems 1.7
Ceridian 1.6
Columbia/HCA Healthcare 1.6
_________________________________________________
Total 56.4%
T. Rowe Price Capital Opportunity Fund
Portfolio Highlights
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/96
Ten Best Contributors
___________________________________________________________
Centerior Energy 23(cents)
Eckerd 14
Biogen** 13
Tupperware 11
Cooper Cameron 11
Revco* 10
ADT 10
Catalina Marketing 10
OEA 9
PacifiCare Health Systems 9
___________________________________________________________
Total 120(cents)
Ten Worst Contributors
___________________________________________________________
Apria Healthcare - 16(cents)
United HealthCare** 14
Alliance Entertainment** 13
Palmer Wireless 11
Continental Waste Industries** 9
Sybase** 8
Aerial Communications* 8
Copart 7
Intuit** 6
AnnTaylor Stores** 6
___________________________________________________________
Total - 98(cents)
12 Months Ended 12/31/96
Ten Best Contributors
___________________________________________________________
OEA 32(cents)
Catalina Marketing 29
National Data 22
ADT 21
ITG 21
USA Waste Services 21
Dayton Mining 19
Eckerd 16
Centerior Energy 16
Republic Industries** 16
___________________________________________________________
Total 213(cents)
Ten Worst Contributors
___________________________________________________________
Alliance Entertainment** - 23(cents)
Copart 20
Exide 18
Cadmus Communications** 18
United HealthCare** 16
Expert Software* 12
Palmer Wireless* 11
Aerial Communications* 10
Intuit** 10
Mobile Telecom. Technologies** 9
___________________________________________________________
Total - 147(cents)
*Position added
**Position eliminated
T. Rowe Price Capital Opportunity Fund
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in
the fund over the past 10 fiscal year periods or since inception
(for funds lacking 10-year records). The result is compared with a
broad-based average or index. The index return does not reflect
expenses, which have been deducted from the fund's return.
Chart 2 - Performance Comparison -
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its
actual (or cumulative) returns for the periods shown had been
earned at a constant rate.
Since Inception
Periods Ended 12/31/96 1 Year Inception Date
___________________________________________________________
Capital Opportunity Fund 16.76% 32.01% 11/30/94
Investment return and principal value represent past performance
and will vary. Shares may be worth more or less at redemption than
at original purchase.
T. Rowe Price Capital Opportunity Fund
For a share outstanding throughout each period
Financial Highlights
Year 11/30/94
Ended to
12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of period $ 14.13 $ 10.43 $ 10.00
Investment activities
Net investment income -* 0.01* 0.02*
Net realized and
unrealized gain (loss) 2.36 4.83 0.41
Total from
investment activities 2.36 4.84 0.43
Distributions
Net investment income - (0.01) -
Net realized gain (0.74) (1.13) -
Total distributions (0.74) (1.14) -
NET ASSET VALUE
End of period $ 15.75 $ 14.13 $ 10.43
___________________________________
Ratios/Supplemental
Data
Total return 16.76%* 46.51%* 4.30%*
Ratio of expenses to
average net assets 1.35%* 1.35%* 1.35%*!
Ratio of net investment
income to average
net assets 0.02%* 0.08%* 2.71%*!
Portfolio turnover rate 107.3% 136.9% 134.5%!
Average commission
rate paid $ 0.0619 - -
Net assets, end
of period
(in thousands) $125,077 $61,923 $ 2,437
* Excludes expenses in excess of a 1.35% voluntary expense
limitation in effect through 12/31/96.
! Annualized.
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Capital Opportunity Fund
December 31, 1996
T. Rowe Price Capital Opportunity Fund
Statement of Net Assets
Shares/Par Value
In thousands
_________________________________________________________________
Common Stocks 89.8%
FINANCIAL 6.2%
Insurance 2.5%
Harleysville Group5 1,140 $ 1,547
Mid Ocean Limited 30,000 1,575
3,122
Financial Services 3.7%
ITG * 65,000 1,235
Mercury Finance 275,000 3,369
4,604
Total Financial 7,726
UTILITIES 5.6%
Telephone 2.2%
Aerial Communications * 225,000 1,800
Palmer Wireless * 90,000 950
2,750
Electric Utilities 3.4%
Centerior Energy 400,000 4,300
4,300
Total Utilities 7,050
CONSUMER NONDURABLES 12.8%
Beverages 2.0%
PepsiCo 85,000 2,486
2,486
Hospital Supplies/Hospital
Management 1.6%
Columbia/HCA Healthcare 50,000 2,038
2,038
Pharmaceuticals 0.7%
Global Pharmaceutical * 120,000 825
825
Health Care Services 3.6%
Apria Healthcare * 130,000 2,438
PacifiCare Health Systems
(Class B) * 25,000 2,128
4,566
Miscellaneous Consumer Products 4.9%
Consolidated Cigar Holdings * 100,000 $ 2,475
CUC International * 75,000 1,781
Richfood Holdings 74,850 1,815
6,071
Total Consumer Nondurables 15,986
CONSUMER SERVICES 22.3%
General Merchandisers 1.2%
Warnaco Group 50,000 1,481
1,481
Specialty Merchandisers 8.1%
American Stores 40,000 1,635
Eckerd * 26,830 859
General Nutrition * 150,000 2,550
Revco * 73,000 2,701
Tupperware 45,000 2,413
10,158
Entertainment and Leisure 7.9%
Boston Chicken * 50,000 1,794
HFS * 50,000 2,987
La Quinta Inns 204,700 3,915
Red Roof Inns * 75,000 1,163
9,859
Media and Communications 5.1%
ADVO 112,000 1,568
Catalina Marketing * 65,800 3,627
Scholastic * 17,000 1,137
6,332
Total Consumer Services 27,830
TECHNOLOGY 9.7%
Electronic Systems 3.4%
ADT * 185,900 4,252
4,252
Office Automation 1.6%
Ceridian * 50,400 2,041
2,041
Telecommunications Equipment 1.4%
Cisco Systems * 28,000 $ 1,783
1,783
Aerospace and Defense 3.3%
OEA 90,000 4,118
4,118
Total Technology 12,194
CAPITAL EQUIPMENT 1.9%
Electrical Equipment 1.9%
ESCO Electronics 122,100 1,221
Exide 50,000 1,150
Total Capital Equipment 2,371
BUSINESS SERVICES AND
TRANSPORTATION 14.0%
Computer Service and Software 5.2%
Electronic Data Systems 57,000 2,465
Expert Software * 63,500 218
First Data 69,000 2,519
National Data 30,800 1,340
6,542
Distribution Services 1.6%
Alco Standard 39,000 2,013
2,013
Environmental 2.6%
USA Waste Services * 100,000 3,188
3,188
Miscellaneous Business Services 4.6%
BISYS Group * 75,000 2,780
Copart * 147,500 1,917
Interim Services * 30,000 1,065
5,762
Total Business Services and
Transportation 17,505
ENERGY 3.0%
Energy Services 1.2%
Cooper Cameron * 20,000 $ 1,530
1,530
Exploration and Production 1.8%
Weatherford Enterra * 72,500 2,175
2,175
Total Energy 3,705
PROCESS INDUSTRIES 5.5%
Specialty Chemicals 3.8%
Great Lakes Chemical 50,000 2,338
Petrolite 50,300 2,364
4,702
Paper and Paper Products 1.7%
American Pad & Paper * 95,000 2,149
2,149
Total Process Industries 6,851
BASIC MATERIALS 4.2%
Metals 1.3%
Reynolds Metals 30,000 1,691
1,691
Mining 2.9%
Dayton Mining * 443,000 2,963
Durban Roodepoort Deep ADR * 10,000 74
Highlands Gold (AUD) * 117,520 69
Prime Resources Group (CAD) 67,500 477
3,583
Total Basic Materials 5,274
Miscellaneous Common Stocks 4.6% 5,795
Total Common Stocks (Cost
$97,459) 112,287
Short-Term Investments 17.1%
Government Agency Obligations 12.0%
Federal Home Loan Mortgage
Discount Notes 5.33%,
1/30/97 $ 5,000,000 $ 4,979
5.45%, 1/17/97 5,000,000 4,988
Federal National Mortgage
Assn. Discount Notes 5.22%,
1/13/97 5,000,000 4,991
14,958
Repurchase Agreements 5.1%
Investments in Repurchase
Agreements through a
joint account, 6.52%, 1/2/97 6,406,979 6,407
6,407
Total Short-Term Investments
(Cost $21,365) 21,365
Total Investments in Securities
106.9% of Net Assets
(Cost $118,824) $ 133,652
Other Assets Less Liabilities (8,575)
NET ASSETS $ 125,077
___________
Net Assets Consist of:
Accumulated net realized gain/
loss - net of distributions $ 1,018
Net unrealized gain (loss) 14,828
Paid-in-capital applicable to
7,938,883 shares of $0.0001 par
value capital stock outstanding;
1,000,000,000 shares authorized 109,231
NET ASSETS $ 125,077
___________
NET ASSET VALUE PER SHARE $ 15.75
___________
* Non-income producing
AUD Australian dollar
CAD Canadian dollar
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Capital Opportunity Fund
Statement of Operations
In thousands
Year
Ended
12/31/96
Investment Income
Income
Interest $ 826
Dividend 735
Total income 1,561
Expenses
Investment management 890
Shareholder servicing 406
Custody and accounting 97
Registration 79
Prospectus and shareholder reports 32
Legal and audit 16
Directors 8
Miscellaneous 14
Total expenses 1,542
Net investment income 19
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 4,575
Change in net unrealized gain or loss
on securities 8,698
Net realized and unrealized gain (loss) 13,273
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 13,292
___________
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Capital Opportunity Fund
Statement of Changes in Net Assets
In thousands
Year
Ended
12/31/96 12/31/95
Increase (Decrease) in Net Assets
Operations
Net investment income $ 19 $ 28
Net realized gain (loss) 4,575 6,420
Change in net unrealized gain
or loss 8,698 6,035
Increase (decrease) in net
assets from operations 13,292 12,483
Distributions to shareholders
Net investment income - (39)
Net realized gain (5,624) (4,384)
Decrease in net assets from
distributions (5,624) (4,423)
Capital share transactions*
Shares sold 109,851 65,826
Distributions reinvested 5,285 4,286
Shares redeemed (59,650) (18,686)
Increase (decrease) in net assets
from capital share transactions 55,486 51,426
Net Assets
Increase (decrease) during period 63,154 59,486
Beginning of period 61,923 2,437
End of period $125,077 $ 61,923
___________________
*Share information
Shares sold 7,015 5,243
Distributions reinvested 339 306
Shares redeemed (3,798) (1,400)
Increase (decrease) in shares
outstanding 3,556 4,149
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Capital Opportunity Fund
December 31, 1996
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Capital Opportunity Fund, Inc. (the fund) is
registered under the Investment Company Act of 1940 as a
nondiversified, open-end management investment company and
commenced operations on November 30, 1994.
Valuation Equity securities listed or regularly traded on a
securities exchange are valued at the last quoted sales price at
the time the valuations are made. A security which is listed or
traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security.
Listed securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the
mean of the latest bid and asked prices. Other equity securities
are valued at a price within the limits of the latest bid and asked
prices deemed by the Board of Directors, or by persons delegated by
the Board, best to reflect fair value.
Short-term debt securities are valued at their amortized cost
which, when combined with accrued interest, approximates fair
value.
For purposes of determining the fund's net asset value per share,
the U.S. dollar value of all assets and liabilities initially
expressed in foreign currencies is determined by using the mean of
the bid and offer prices of such currencies against U.S. dollars
quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at
fair value as determined in good faith by or under the supervision
of the officers of the fund, as authorized by the Board of
Directors.
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.
Note 2 - Investment Transactions
Repurchase Agreements The fund, and other affiliated funds, may
transfer uninvested cash into a joint account, the daily aggregate
balance of which is invested in one or more overnight repurchase
agreements collaterallized by U.S. government securities.
Collateral is in the possession of the fund's custodian and is
evaluated daily by the fund to ensure that its market value exceeds
the delivery value of the repurchase agreements at maturity. All
repurchase agreements purchased by the joint account satisfy the
fund's criteria as to quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than
short-term securities, aggregated $151,605,000 and $107,126,000,
respectively, for the year ended December 31, 1996.
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.
In order for the fund's capital accounts and distributions to
shareholders to reflect the tax character of certain transactions,
the following reclassifications were made during the year ended
December 31, 1996. The results of operations and net assets were
not affected by the reclassifications.
Undistributed net investment income $ (24,000)
Undistributed net realized gain 34,000
Paid-in-capital (10,000)
At December 31, 1996, the aggregate cost of investments for federal
income tax and financial reporting purposes was $118,824,000, and
net unrealized gain aggregated $14,828,000, of which $19,727,000
related to appreciated investments and $4,899,000 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 $92,000 was payable at December
31, 1996. The fee is computed daily and paid monthly, and consists
of an individual fund fee equal to 0.45% of average daily net
assets and a group fee. The group fee is based on the combined
assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate
ranges from 0.48% for the first $1 billion of assets to 0.305% for
assets in excess of $50 billion. At December 31, 1996, and for the
year then ended, the effective annual group fee rate was 0.33%. The
fund pays a pro-rata share of the group fee based on the ratio of
its net assets to those of the group.
Under the terms of the investment management agreement, the manager
is required to bear any expenses through December 31, 1996, which
would cause the fund's ratio of expenses to average net assets to
exceed 1.35%. Thereafter, through December 31, 1998, the fund is
required to reimburse the manager for these expenses, provided that
average net assets have grown or expenses have declined
sufficiently to allow reimbursement without causing the fund's
ratio of expenses to average net assets to exceed 1.35%. Pursuant
to this agreement, $1,000 of management fees were not accrued by
the fund for the year ended December 31, 1996. Additionally,
$156,000 of unaccrued 1994-1995 fees and expenses remain subject to
reimbursement through December 31, 1998.
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. (TRPS) 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 $354,000 for the year ended December 31,
1996, of which $45,000 was payable at period-end.
T. Rowe Price Capital Opportunity Fund
T. Rowe Price Shareholder Services
Report of Independent Accountants
To the Shareholders and Board of Directors of
T. Rowe Price Capital Opportunity Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe
Price Capital Opportunity Fund, Inc. as of December 31, 1996, and
the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the two
years in the period then ended and the period from November 30,
1994 (commencement of operations) to December 31, 1994. These
financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts, and disclosures in the financial
statements. Our procedures included confirmation of investments
owned as of December 31, 1996, by correspondence with the
custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of T. Rowe Price Capital Opportunity Fund, Inc.
as of December 31, 1996, the results of its operations, the changes
in its net assets and financial highlights for each of the
respective periods stated in the first paragraph, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
January 20, 1997
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.
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(registered
trademark) and
T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
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,
Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning
Kit.
*A division of T. Rowe Price Investment Services, Inc. Member
NASD/SIPC.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Capital Opportunity Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor.
RPRTCOF 12/31/96
Chart 1 - Time Reduces Volatility of Market Returns - An 8-bar
chart showing best and worst annualized total returns of stocks for
various rolling time periods between 1950 and 1996.
Chart 2 - Performance Comparison - SEC Graph: a line chart showing
the cumulative growth of $10,000 invested in the Capital
Opportunity Fund from inception compared with $10,000 invested in
a broad-based index or average over the same period.
