Annual Report
Capital
Opportunity
Fund
December 31, 1997
T. Rowe Price
Report Highlights
Capital Opportunity Fund
o The broad stock market posted its third consecutive year of
gains in excess of 20%, and your fund enjoyed solid
performance over the second half.
o The fund's returns of 11.55% and 15.87% for the 6- and 12-
month periods, respectively, surpassed the S&P 500 and the
Lipper average in the second half, but trailed for the full
year.
o The annual return was hampered by a weak first half due to
the fund's bias toward smaller-cap stocks and growth over
value stocks.
o In mid-year, we increased the market cap of key holdings
and eliminated weak positions.
o While stock market gains are likely to be more modest in
1998, we are optimistic about the fund's long-term growth
prospects.
Fellow Shareholders
The S&P 500's annual return of 33.36%, following the index's
stellar gains in 1995 and 1996, strung together the first three
straight years of 20% or better returns in this century. The
stock market environment continued to be characterized by
moderate economic growth, declining interest rates, minimal
inflation, and solid corporate earnings growth.
Performance Comparison
Periods Ended 12/31/97 6 Months 12 Months
______________________________________________________________
Capital Opportunity Fund 11.55% 15.87%
S&P 500 10.58 33.36
Lipper Capital
Appreciation
Funds Average 8.97 20.36
Your fund posted a solid second-half performance, outperforming
both the unmanaged Standard & Poor's 500 Stock Index and the
Lipper average for similar funds. However, the year as a whole
was frustrating due to weak results in the first half. The fund
benefited from a mid-year portfolio restructuring, which
included modestly increasing the average market capitalization
of portfolio holdings and reviewing our larger investment
positions.
MARKET ENVIRONMENT
Stocks thrived as solid earnings and the expansion of
price/earnings multiples drove prices higher. Several sectors
performed particularly well, including financial services, oil
service, and large-cap blue chip stocks. Regional banks, in
particular, benefited from another wave of consolidations.
However, despite the positive backdrop, small-cap growth stocks
struggled to keep pace with the broad market as investors
preferred the stability and liquidity of larger-cap shares.
Technology stocks were volatile once again, staging a powerful
rally from their lows in early spring, then giving back most of
the gains later in the year. The technology sell-off was
precipitated largely by the collapse of Asian currencies and
concern over how the turmoil would affect demand for U.S.
exports.
During the fourth quarter, the equity market experienced
increased volatility as investors began to wonder if problems
emanating from Asia would derail the long-lived U.S. bull
market. In this increasingly defensive environment, utilities
and blue chip stocks tended to outperform other sectors as
investors focused on capital preservation versus capital
appreciation. This change in investor sentiment may prove to be
healthy in the long run, since expectations for equity returns
have become unrealistic after the strong gains of recent years.
The black cloud of the Asian crisis continued to shadow the
investment horizon in the opening weeks of 1998. Whether this
will be a fleeting event or have longer-lasting consequences
remains to be seen. As the bull market ages and the nearly
perfect environment for stocks begins to erode, 1998 is shaping
up as a year in which good stock selection will be critical.
STRATEGY REVIEW
The fund's main contributor to performance was Cendant, a
member- based consumer and business services provider. The
company resulted from a merger between two of the fund's former
holdings, HFS and CUC International. Another stock making a
strong contribution to returns was Avis Rent A Car, the
second-largest car rental company in the country. The shares
benefited from structural changes in the industry and strong
travel demand, which enabled Avis to increase prices and achieve
profitable growth for the first time in years.
Another stock making a strong contribution to returns was Avis
Rent a car, the second largest car rental company in the
country.
Two smaller-cap business services concerns, MemberWorks and
Source Services, were also solid contributors in both periods.
MemberWorks is an emerging membership services company that
appears to be positioned for a dynamic future after reporting
its first profitable quarter for the third quarter of 1997.
Source Services, a specialty staffing and consulting services
concern, has been generating strong earnings growth from the
trend toward corporate outsourcing. Several other holdings
registered good gains in the second half, including McDermott
International, a leading world-wide energy services company
highlighted in our June report, and FirstEnergy, an Ohio-based
electrical utility benefiting from the recent merger of Ohio
Edison and Centerior Energy.
Several factors contributed to the fund's subpar results for all
of 1997. They included poor returns from several of our larger
holdings, a portfolio positioning that had originally favored
smaller-cap over large-cap stocks, and a bias toward growth over
value stocks. As it turned out, both large-cap growth and value
stocks across the market-cap spectrum were the places to be in
1997. Two other factors constraining performance were lack of
exposure to the highflying financial sector and the dismal
performance of our gold holdings.
Given the fund's concentrated investment approach, its
performance can be heavily influenced by a few holdings, which
was the case over the past year. The fund's sluggish performance
in the first half was primarily due to our larger holdings.
Consequently, we modestly restructured the portfolio during the
summer, increasing exposure to the financial sector by buying
several bank stocks, including BankBoston and BANC ONE. We also
purchased Freddie Mac and Fannie Mae, two quasi-government
mortgage financing companies. We took advantage of price
weakness in the shares of leading drug manufacturing companies,
Merck and Warner-Lambert, and initiated positions in them.
Although the fund still has a smaller- to medium-cap bias, the
addition of these large-company shares helped boost results in
the second half. The portfolio restructuring has been
encouraging, and we are optimistic about maintaining this
momentum through 1998.
Although the fund reduced its gold exposure during the first
half, the dramatic decline in the price of gold still had a
negative impact on our gold holdings. . .
The most disappointing investment of the year was Mercury
Finance, a subprime consumer lender to used car buyers, which we
discussed in detail in our last report. We have eliminated the
position, and T. Rowe Price has initiated a lawsuit to recoup
the losses.
Several other large holdings constrained the fund's performance
in the second half, including two business services stocks,
BISYS Group and First Data. The shares of BISYS Group lagged as
a result of the company's loss of its largest customer due to an
acquisition, and First Data failed to achieve the earnings
growth expected by investors. In general, the business services
sector, an area in which your fund has had good success finding
profitable investment ideas, was a difficult place to make money
in 1997. One other large holding that did poorly was OEA, a
major component supplier to the airbag industry. The stock had
contributed well to performance for several years, but earnings
problems relating to the company's ramp-up of its inflator
business hurt the stock. Although the fund reduced its gold
exposure during the second half, the dramatic decline in the
price of gold still had a negative impact on our gold holdings,
particularly Dayton Mining, which we eliminated during the
period.
This machine responds to many of today's cost-conscious hospital
needs.
In each report we like to highlight at least one major holding
to provide shareholders with a better understanding of how the
fund implements its flexible, concentrated investment approach.
One of the fund's largest holdings is Analogic, a leading
supplier of precision medical equipment. With its experience in
manufacturing components for nearly three-quarters of the CT
scanners in use today, the company recently developed a
complete, portable scanner that can be transported around a
hospital, to military field hospitals, and to other remote
places. This machine responds to many of today's cost-conscious
hospital needs. The company is further leveraging its technology
expertise in developing a CT-based explosive detection device
currently being tested by the FAA to inspect luggage at airports
throughout the world. We believe the company has the potential
to double its earnings over the next few years if some of its
new products are successful. It has virtually no debt, $8 per
share in cash, and the shares are selling at nearly a 40%
discount to the company's long-term earnings growth potential of
about 25% a year. Since Analogic is not well followed by Wall
Street analysts, we believe the stock is currently a gem waiting
to be discovered.
OUTLOOK
While the powerful gains of recent years have heavily influenced
investor expectations for future stock market returns, it is
important to remember that the historical return generated by
stocks is approximately 11% a year. We expect the underlying
fundamentals of the domestic equity market to remain essentially
solid through 1998, but fallout from the Asian crisis is likely
to have some impact on the U.S. economy and financial markets.
In early January, several banks and technology companies warned
that earnings would be affected for the first and second
quarters of the year.
Nevertheless, we continue to believe that most of the factors
fueling the market's sharp advance will remain intact, including
continuing benign inflation, low interest rates, and moderate
economic and corporate earnings growth. The volatility seen in
recent months is likely to persist through the first half of
1998, at least, but we remain optimistic about the outlook for
stocks and your fund's long-term prospects.
Respectfully submitted,
John F. Wakeman
Chairman of the Investment Advisory Committee
January 23, 1998
T. Rowe Price Capital Opportunity Fund
Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/97
Cendant 6.2
%
MemberWorks 2.8
Analogic 2.6
Affiliated Computer Services 2.4
MCI 2.4
Source Services 2.3
Warnaco Group 2.3
BISYS Group 2.3
Catalina Marketing 2.2
USA Waste Services 2.2
PartnerRe Holdings 2.1
Avis Rent A Car 2.0
Tyco International 2.0
ADVO 1.9
Safeway 1.9
JP Foodservice 1.8
Corporate Express 1.8
Mid Ocean Limited 1.7
Prime Resources Group 1.7
Patriot American Hospitality 1.7
EEX 1.7
Stanley Works 1.5
Unifi 1.5
Young Broadcasting 1.4
Interim Services 1.4
Total
53.8%
T. Rowe Price Capital Opportunity Fund
Portfolio Highlights
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/97
Ten Best Contributors
____________________________________________________________
Cendant 30(cents)
Avis Rent A Car * 17
MemberWorks 11
Safeway 11
Snyder Communications 11
WaterLink ** 11
FirstEnergy 10
McDermott International 10
Source Services 10
American Pad & Paper ** 9
____________________________________________________________
Total130(cents)
Ten Worst Contributors
____________________________________________________________
First Data - 14(cents)
BISYS Group 10
OEA 10
EEX 6
American Stores 5
Great Lakes Chemical 4
La Quinta Inns 4
Dayton Mining ** 4
Reynolds Metals 4
Electromagnetic Sciences ** 4
____________________________________________________________
Total - 65(cents)
12 Months Ended 12/31/97
Ten Best Contributors
____________________________________________________________
Cendant 30(cents)
Source Services 24
General Nutrition 22
McDermott International * 22
Avis Rent A Car * 17
ADT ** 17
FirstEnergy 13
MemberWorks * 13
Cooper Cameron 12
WaterLink ** 12
____________________________________________________________
Total 182(cents)
Ten Worst Contributors
____________________________________________________________
Mercury Finance ** - 36(cents)
Dayton Mining ** 21
OEA 18
Boston Chicken ** 17
Tupperware ** 11
Scholastic** 11
3Com ** 7
EEX 7
Exide ** 6
Ikon Office Solutions 6
____________________________________________________________
Total - 140(cents)
* Position added
** Position eliminated
T. Rowe Price Capital Opportunity Fund
Performance Comparison
T. Rowe Price Capital Opportunity Fund
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Capital Opportunity Fund
As of 12/31/97
Lipper Capital
S&P 500 Appreciation Capital
Index Funds Average Opportunity Fund
11/30/94 $ 10,000 $ 10,000 $ 10,000
12/94 10,148 10,090 10,430
12/95 13,962 13,224 15,281
12/96 17,168 15,337 17,841
12/97 22,895 18,353 20,673
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Periods Ended 12/31/97 Since Inception
1 Year 3 Years Inception Date
_____________________________________________________________________
Capital Opportunity
Fund 15.87% 25.61% 26.54% 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
Financial Highlights
For a share outstanding throughout each period
Year 11/30/94
Ended Through
12/31/97 12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of
period $ 15.75 $ 14.13 $ 10.43 $ 10.00
Investment activities
Net investment
income 0.01 -* 0.01* 0.02*
Net realized
and unrealized
gain (loss) 2.45 2.36 4.83 0.41
Total from
investment
activities 2.46 2.36 4.84 0.43
Distributions
Net investment
income - - (0.01) -
Net realized
gain (1.59) (0.74) (1.13) -
Total
distributions (1.59) (0.74) (1.14) -
NET ASSET VALUE
End of period $ 16.62 $ 15.75 $ 14.13 $ 10.43
Ratios/Supplemental
Data
Total return 15.87% 16.76%* 46.51%* 4.30%*
Ratio of
expenses to
average net
assets 1.35% 1.35%* 1.35%* 1.35%*!
Ratio of net
investment
income to
average
net assets 0.04% 0.02%* 0.08%* 2.71%*!
Portfolio turnover
rate 85.0% 107.3% 136.9% 134.5%!
Average
commission
rate paid $ 0.0471 $ 0.0338 - -
Net assets, end
of period
(in thousands) $ 109,055 $ 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, 1997
Statement of Net Assets
Shares/Par Value
In thousands
Common Stocks 90.7%
FINANCIAL 8.9%
Bank and Trust 3.0%
BANC ONE 20,000 $ 1,086
BankBoston 10,000 939
Washington Mutual 20,000 1,276
3,301
Insurance 3.9%
Mid Ocean Limited 35,000 1,899
PartnerRe Holdings ADR 50,000 2,318
4,217
Financial Services 2.0%
Fannie Mae 20,000 1,141
Freddie Mac 25,000 1,049
2,190
Total Financial 9,708
UTILITIES 2.3%
Telephone 1.1%
Cincinnati Bell 40,000 1,240
1,240
Electric Utilities 1.2%
FirstEnergy 44,750 1,298
1,298
Total Utilities 2,538
CONSUMER NONDURABLES 11.7%
Beverages 1.4%
PepsiCo 42,500 1,549
1,549
Pharmaceuticals 2.6%
Merck 12,000 1,275
Warner-Lambert 12,500 1,550
2,825
Miscellaneous Consumer
Products 7.7%
Culligan Water Technologies * 25,000 $ 1,256
Mattel 30,000 1,118
Newell 30,000 1,275
Service Corp. International * 40,000 1,477
Stanley Works 35,000 1,652
Unifi 40,000 1,627
8,405
Total Consumer Nondurables 12,779
CONSUMER SERVICES 14.0%
General Merchandisers 3.2%
Neiman-Marcus * 30,600 926
Warnaco Group (Class A) 80,000 2,510
3,436
Specialty Merchandisers 2.8%
General Nutrition * 31,500 1,069
Safeway * 32,000 2,024
3,093
Entertainment and Leisure 1.3%
La Quinta Inns 75,000 1,448
1,448
Media and Communications 6.7%
ADVO * 107,000 2,086
Catalina Marketing * 52,500 2,428
Sinclair Broadcast Group (Class A) 25,000 1,158
Young Broadcasting (Class A) * 40,000 1,568
7,240
Total Consumer Services 15,217
CONSUMER CYCLICALS 1.7%
Building and Real Estate 1.7%
Patriot American Hospitality, REIT 65,000 1,873
Total Consumer Cyclicals 1,873
TECHNOLOGY 9.5%
Electronic Components 5.0%
Analog Devices * 50,000 $ 1,384
Analogic 75,000 2,831
Xilinx * 35,000 1,225
5,440
Telecommunications 2.3%
MCI 60,000 2,571
2,571
Aerospace and Defense 2.2%
AlliedSignal 35,000 1,363
OEA 34,400 996
2,359
Total Technology 10,370
CAPITAL EQUIPMENT 2.0%
Electrical Equipment 2.0%
Tyco International 48,132 2,169
Total Capital Equipment 2,169
BUSINESS SERVICES AND
TRANSPORTATION 29.6%
Computer Service and Software 3.7%
Affiliated Computer Services
(Class A) * 100,000 2,632
First Data 49,000 1,433
4,065
Distribution Services 3.2%
Ikon Office Solutions 52,600 1,479
JP Foodservice * 53,250 1,967
3,446
Environmental 2.1%
USA Waste Services * 60,000 2,355
2,355
Transportation Services 2.8%
Avis Rent A Car * 68,300 2,182
BE Aerospace * 31,600 846
3,028
Miscellaneous Business Services 17.8%
BISYS Group * 75,000 $ 2,503
Cendant * 195,155 6,708
Corporate Express * 150,000 1,936
Interim Services * 60,000 1,553
MemberWorks * 145,000 3,063
Snyder Communications * 30,500 1,113
Source Services * 117,500 2,519
19,395
Total Business Services
and Transportation 32,289
ENERGY 4.5%
Energy Services 1.8%
Cooper Cameron * 15,000 915
McDermott International 30,000 1,099
2,014
Exploration and Production 2.7%
EEX * 200,000 1,812
Weatherford Enterra * 25,000 1,094
2,906
Total Energy 4,920
PROCESS INDUSTRIES 1.3%
Specialty Chemicals 1.3%
Great Lakes Chemical 30,000 1,346
Total Process Industries 1,346
BASIC MATERIALS 3.6%
Metals 0.8%
Reynolds Metals 15,000 900
900
Mining 2.8%
Battle Mountain Gold (Class A) 200,000 1,175
Prime Resources Group 275,000 1,873
3,048
Total Basic Materials 3,948
Miscellaneous Common Stocks 1.6% $ 1,775
Total Common Stocks (Cost $79,463) 98,932
Convertible Bonds 0.4%
Enserch, Sub. Deb., 6.375%, 4/1/02 $ 400,000 406
Total Convertible Bonds (Cost $399) 406
Short-Term Investments 9.9%
Money Market Funds 9.9%
Government Reserve Investment
Fund, 5.55% # 10,855,529 10,855
Total Short-Term Investments
(Cost $10,855) 10,855
Total Investments in Securities
101.0% of Net Assets (Cost $90,717) $ 110,193
Other Assets Less Liabilities (1,138)
NET ASSETS $ 109,055
____________
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 56
Accumulated net realized gain/loss -
net of distributions 2,236
Net unrealized gain (loss) 19,476
Paid-in-capital applicable to 6,560,853
shares of $0.0001 par value capital
stock outstanding; 1,000,000,000
shares authorized 87,287
NET ASSETS $ 109,055
____________
NET ASSET VALUE PER SHARE $ 16.62
____________
* Non-income producing
# Seven-day yield
ADR American Depository Receipt
REIT Real Estate Investment Trust
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
Statement of Operations
In thousands
Year
Ended
12/31/97
Investment Income
Income
Dividend $ 872
Interest 636
Total income 1,508
Expenses
Investment management 899
Shareholder servicing 355
Custody and accounting 86
Registration 41
Prospectus and shareholder reports 40
Legal and audit 14
Directors 7
Miscellaneous 14
Reimbursed to manager 6
Total expenses 1,462
Net investment income 46
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 10,748
Foreign currency transactions (13)
Net realized gain (loss) 10,735
Change in net unrealized gain or loss on securities 4,648
Net realized and unrealized gain (loss) 15,383
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 15,429
____________
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
12/31/97 12/31/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ 46 $ 19
Net realized gain (loss) 10,735 4,575
Change in net unrealized
gain or loss 4,648 8,698
Increase (decrease) in net
assets from operations 15,429 13,292
Distributions to shareholders
Net realized gain (9,517) (5,624)
Capital share transactions*
Shares sold 25,621 109,851
Distributions reinvested 9,489 5,285
Shares redeemed (57,044) (59,650)
Increase (decrease) in net
assets from capital
share transactions (21,934) 55,486
Net Assets
Increase (decrease) during
period (16,022) 63,154
Beginning of period 125,077 61,923
End of period $ 109,055 $ 125,077
___________________________
*Share information
Shares sold 1,600 7,015
Distributions reinvested 586 339
Shares redeemed (3,564) (3,798)
Increase (decrease) in
shares outstanding (1,378) 3,556
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
December 31, 1997
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.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
Valuation Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price on the day the valuations
are made. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market
for such security. Listed securities not traded on a particular day and
securities regularly traded in the over-the-counter market are valued at the
mean of the latest bid and asked prices. Other equity securities are valued
at a price within the limits of the latest bid and asked prices deemed by the
Board of Directors, or by persons delegated by the Board, to best reflect
fair value.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $82,882,000 and $111,227,000, respectively, for the
year ended December 31, 1997.
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, 1997. The
results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
Undistributed net investment
income $ 10,000
Paid-in-capital (10,000)
At December 31, 1997, the aggregate cost of investments for federal income
tax and financial reporting purposes was $90,717,000, and net unrealized gain
aggregated $19,476,000, of which $20,826,000 related to appreciated
investments and $1,350,000 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 $76,000 was payable at December 31, 1997. 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 0.30% for assets in excess of $80
billion. The effective annual group fee rate was 0.32% at December 31, 1997,
and 0.33% for the year then ended. 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 was
required to bear any expenses through December 31, 1996, which would have
caused 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, $63,000 of unaccrued 1994-1995 fees and expenses were
repaid during the year ended December 31, 1997, and $94,000 remains 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.,
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 $331,000 for the
year ended December 31, 1997, of which $36,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended December
31, 1997, totaled $196,000 and are reflected as interest income in the
accompanying Statement of Operations.
T. Rowe Price Capital Opportunity Fund
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, 1997, 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 three years in the period then ended and
the period from November 30, 1994 (commencement of operations) through
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, 1997, by correspondence with the
custodian and brokers. 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, 1997, 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 21, 1998
T. Rowe Price Capital Opportunity Fund
December 31, 1997
Tax Information (Unaudited) for the Tax Year Ended 12/31/97
We are providing this information as required by the Internal Revenue Code.
The amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
o $359,000 from short-term capital gains, and
o $9,157,000 from long-term capital gains; of which $1,722,000 was
subject to the 20% rate gains category.
For corporate shareholders, 100% of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
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
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Capital 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.
F08-050 12/31/97
