Annual Report
Capital
Opportunity
Fund
December 31, 1998
T. Rowe Price
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
Capital Opportunity Fund
o U.S. stocks as measured by the S&P 500 Stock Index posted a record
fourth consecutive year of returns over 20%.
o Small-cap stocks lagged for the fifth straight year, and the Russell
2000 Index of smaller companies declined 2.55% for the year.
o The fund's 14.70% return for the year was solid in absolute terms, but
lagged both the fund's peer average and the S&P 500.
o The economic fundamentals underpinning the stock market remain strong.
However, the market's string of outstanding gains is unprecedented, and
it is unrealistic to expect this run to continue.
Fellow Shareholders
With a 28.57% return in 1998, the S&P 500 Stock Index extended its
record-breaking string of 20% or better returns to four years. In many ways,
last year proved to be a repeat of 1997, as a select group of blue chip growth
stocks accounted for a majority of the index's return. These high-quality growth
stocks, also known as the new Nifty Fifty, are characterized by consistent
earnings growth, strong brand franchises, and large market capitalization, which
provides ample trading liquidity.
With leadership in the hands of a select group of stocks and sectors, it was a
challenging year for investors focused on value stocks or exposed to small- and
mid-cap stocks. Entering 1998, we had hoped that smaller companies would return
to favor after a long period of lagging the larger-capitalization stocks.
Unfortunately, despite excellent business fundamentals and compelling
valuations, these stocks languished in comparison with the S&P 500.
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 12/31/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Capital Opportunity Fund 0.02% 14.70%
S&P 500 9.22 28.57
Lipper Capital Appreciation
Funds Average 5.33 19.96
Although your fund recorded solid first half returns, a sluggish
November-December performance constrained six-month results and produced
disappointing performance for the year. For the 6- and 12-month periods ended
December 31, the fund gained 0.02% and 14.70%, respectively, lagging both its
peer group average and the unmanaged S&P 500. As discussed in recent shareholder
letters, we have been modestly increasing the fund's median market
capitalization over the past two years in order to participate in the
outperformance of large-cap stocks. Unfortunately, while this was obviously the
right direction, our implementation of this strategy produced mixed results. The
combination of weak performance by several of the fund's larger investments and
our ongoing exposure to small- and mid-cap stocks somewhat offset the benefits
of the fund's increased market cap.
Preparing For The Year 2000
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The Year 2000 draws closer every day, and it holds special meaning beyond the
arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations. T. Rowe Price has been taking steps to assure that its
computer systems and processes are capable of functioning in the Year 2000.
Detailed plans for remediation efforts have been developed and are currently
being executed.
OUR PLAN OF ACTION
We began to address these issues several years ago by requiring that all new
systems process and store four-digit years. All critical systems have been
reprogrammed (including business applications required to service our customers
and processing infrastructure necessary to ensure the integrity of customer data
and investments), and they are currently being tested. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999. We are asking all vendors and companies we
do business with for a Year 2000 compliance status, with the expectation that
some organizations will not be able to modify their interface files prior to
December 31, 1999. In addition, we are scheduling tests for critical vendors and
companies that claim Year 2000 compliance to ensure that time-related data and
calculations function properly as we move into the next century.
SMOOTH TRANSITION PLANNED
We believe our programs and initiatives will provide a smooth transition into
the next millennium. We are assessing all systems providing products or services
to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we have modified them where necessary for the Year 2000.
The Securities Industry Association (SIA) is coordinating Year 2000 testing to
assure that securities markets, clearing corporations, depositories, and third
party service providers can send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta test of Year 2000
readiness. The test was considered successful in terms of transactions completed
and will serve as the basis for the SIA's industry-wide approach. During October
1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA
and is ready for the industry-wide test that is scheduled for March and April
1999.
For a more detailed discussion of our Year 2000 effort, as well as continuing
updates on our progress, please check our Web site (www.troweprice.com).
MARKET ENVIRONMENT
Despite the significant valuation premiums of the Nifty Fifty stocks,
risk-averse investors remained infatuated with them. The divergence we are
describing is illustrated by the table below comparing the returns of the S&P
500 with those of the small-cap Russell 2000 Index, which declined 2.55% for the
year. In addition to the strong performance of the large-caps, technology stocks
roared to life late in the year after an extended period of hibernation. As
measured by the Nasdaq 100, technology stocks advanced 82.68%, fueled by
investors' enthusiasm for the emerging Internet sector.
Last year was truly a roller coaster for investors, and the car one was sitting
in determined whether or not one enjoyed the ride. Investors in the large-cap or
technology cars enjoyed their rides, while investors in the small-cap cars ended
the year disappointed once again.
Comparative Index Returns
- --------------------------------------------------------------------------------
Periods Ended 12/31/98 6 Months 12 Months
- --------------------------------------------------------------------------------
S&P 500 9.22% 28.57%
Nasdaq Composite 15.72 39.63
Nasdaq 100 35.34 82.68
Russell 2000 -7.12 -2.55
Over the past year, the U.S. has increasingly become an island of growth and
tranquility in a sea of economic and financial turmoil. Whether the problems
were in Asia, Latin America, or Russia, the U.S. economy continued to shake them
off. During the late summer, the U.S. stock market did experience a significant
correction as investors became extremely risk-averse, and a "flight to quality"
ensued. Investors' fears were further exacerbated by the near-collapse of a
large U.S. hedge fund. While investors were focusing on the specter of a long
overdue bear market, the Federal Reserve moved quickly to restore confidence.
Starting September 30, the Fed reduced interest rates three times in seven weeks
in an attempt to protect the U.S. economy against recession and financial-market
disruption. Investors embraced the Fed's action and a powerful market rally
followed, driving the major indices back into record territory before year-end.
Over the past few years, many high-profile mergers have occurred as companies
have struggled to respond to the challenges of an intensely competitive world
economy in which they are unable to compensate for operating inefficiencies
through price increases. Although merger and acquisition activity was expected
to slow during the second half of 1998 given the rapid pace of recent years and
the dramatic decline in stock prices during the summer, this proved not to be
the case. In December, Exxon agreed to acquire Mobil in a deal valued at over
$75 billion, yet another example of how companies are continuing to position
themselves to compete in a new world order of constant pricing pressures.
One cannot discuss 1998 without mentioning the impact of the Internet stocks.
While the potential of the Internet to redefine many traditional business models
is intriguing, investors' willingness to bid up the share price of any company
claiming Internet exposure is troubling. It will be interesting to see if the
sector can maintain its powerful momentum, as many Internet companies now sport
lofty valuations.
Although the technology sector and the Nifty Fifty stocks were the places to be
in 1998, several other groups performed well, including pharmaceutical giants,
media companies (especially those in cable television), and telecommunications
providers. Lagging sectors included almost all industrial areas, health care
services, and most commodity-based companies, such as oil and gas, paper,
chemicals, and basic minerals. These companies struggled with weak demand and
excess global capacity due to economic difficulties in emerging markets.
INVESTMENT REVIEW
In our last letter, we discussed the fund's decision to increase its exposure to
larger-capitalization stocks in an attempt to achieve better balance and
performance. The fund's investment-weighted median market capitalization has
almost doubled over the past 12 to 18 months, from roughly $2 billion to $4
billion, but the move produced mixed results. We believe the fund's sluggish
results over both the near and intermediate term can be attributed to three
factors: 1) modest performance by the fund's largest holdings; 2) an ongoing
commitment to small- to medium-capitalization stocks; and 3) a reluctance to
abandon valuation parameters in a market where high-priced growth stocks
provided the best returns. With this backdrop, a detailed discussion of the
major contributors to fund performance follows.
When we review the key contributors over the past 6- and 12-month periods, the
list is quite similar. MCI WorldCom, a global telecommunications company, was
the fund's top contributor for the year and was our second largest holding at
year-end. We believe MCI WorldCom's valuable portfolio of global
telecommunications assets is ideally positioned for rapid growth over the next
few years given the dynamic outlook for the growth of voice and data traffic.
Two other strong contributors were grocery store chains Safeway and Fred Meyer.
The grocery industry has been going through a period of rapid consolidation as
operators look for economies of scale to lower their cost structures and improve
operating efficiency. During the second half, the fund benefited from its
position in Fred Meyer as the company announced plans to merge with Kroger.
We increased our technology exposure during the late summer correction but, in
retrospect, were not aggressive enough. Several of the technology stocks that we
purchased during this period proved to be solid contributors to second half
results. These included Xilinx, a specialty chip manufacturer, Network
Associates, a computer network solutions provider, and Parametric Technology,
which makes computer-assisted design and manufacturing software.
During the second half, the fund established a new position in Univision
Communications, the largest Spanish language television group in the country. We
believe this company is well positioned for solid growth over the next few years
as it leverages its valuable franchise. With the Spanish-speaking segment of the
U.S. population projected to experience rapid growth over the next decade, we
believe advertisers will increasingly target this group. The shares of Univision
ended the year with strong momentum and proved to be one of the fund's largest
winners during the last six months.
When we review the list of negative contributors for 1998, two issues are
readily apparent: the fund's exposure to small-cap stocks and the impact of
Cendant's accounting problems. Small-cap stocks have been out of favor for
several years. During the second half, several of our smaller-cap stocks
encountered earnings problems, resulting in very disappointing performance.
Included on this list were: General Nutrition, a leading specialty retailer of
vitamins; Corporate Express, a major provider of office supplies and services;
and Concentra Managed Care, a hybrid physician-practice management concern. Each
of these suffered from both increasingly competitive industry environments and
poor execution by management, which hurt their business models and growth
prospects.
Historically, the business services sector has been our most successful area.
This sector once again provided several significant winners in 1998, but most of
these gains came in the first half. During the second half, many of the fund's
business services holdings produced disappointing results. Concerns about a
slowing economy and the impact of the Year 2000 bug on technology companies put
pressure on information technology staffing companies. The fund's holdings in
this area, Renaissance Worldwide, Romac International, and Interim Services, all
suffered as investors became concerned about slowing earnings growth.
As we discussed in our midyear letter, the fund was a large holder of Cendant, a
leading business services franchiser and membership concern. In April, Cendant
encountered serious accounting problems, which resulted in a high-profile
scandal and a dramatic decline in its share price. Although the fund had begun
to reduce its exposure to Cendant before this problem surfaced, it was the
biggest drag on our performance for the year, nonetheless.
OUTLOOK
There is a long-standing belief on Wall Street that "The market can't stand
uncertainty." Clearly, the stock market's volatility has increased over the past
year, but the strong results lead us to question that statement. With the new
millennium fast approaching, we believe the adage will again be put to the test
in 1999. Uncertainties currently hanging over the market include the potential
of a slowing U.S. economy, an ongoing presidential impeachment trial, military
action in Iraq, continuing financial and economic turmoil in emerging markets,
and the specter of economic problems related to the Year 2000 bug.
Although the current environment is not ideal, the market's ability to overcome
adversity over the past four years has been most impressive. Even with these
challenges, the U.S. economy remains the envy of the world with its solid
fundamentals: modest economic growth, low inflation, and stable-to-falling
interest rates. With U.S. employment historically high and with the robust stock
market gains of recent years, consumers continue to drive the economy, helping
offset sluggishness in the industrial sector. As long as these fundamentals
remain in place, the stock market is likely to produce satisfactory returns.
Nevertheless, we believe it is prudent for investors to lower their expectations
for market returns entering the new millennium. The four-year run of better than
20% annual returns is unprecedented, and it is unrealistic to expect this run to
continue. That said, we continue to be optimistic about the outlook for your
fund and equity investments in general as we approach the next century.
Respectfully submitted,
John F. Wakeman
Chairman of the Investment Advisory Committee
January 26, 1999
T. Rowe Price Capital Opportunity Fund
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Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/98
- --------------------------------------------------------------------------------
Tyco International 2.9%
MCI WorldCom 2.9
Parametric Technology 2.6
Affiliated Computer Services 2.3
Warner-Lambert 2.3
- --------------------------------------------------------------------------------
Waste Management 2.2
Romac International 2.2
EXEL 2.1
Safeway 2.1
Fred Meyer 2.1
- --------------------------------------------------------------------------------
The Learning Company 2.1
United HealthCare 2.1
Warnaco Group 2.0
Analogic 2.0
PartnerRe Holdings 2.0
- --------------------------------------------------------------------------------
U.S. Foodservice 2.0
Imax 1.9
Xilinx 1.8
PepsiCo 1.8
Homestake Mining 1.6
- --------------------------------------------------------------------------------
Infinity Broadcasting 1.6
National Data 1.6
News Corporation 1.5
Synopsys 1.5
Univision Communications 1.4
- --------------------------------------------------------------------------------
Total 50.6%
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/98
Ten Best Contributors
- --------------------------------------------------------------------------------
MCI WorldCom 20(cents)
Xilinx 16
Fred Meyer 16
Safeway 14
Imax 14
U.S. Foodservice 13
Univision Communications* 11
Network Associates* 10
Parametric Technology* 9
Tyco International 9
- --------------------------------------------------------------------------------
Total 132(cents)
Ten Worst Contributors
- --------------------------------------------------------------------------------
Warnaco Group -20(cents)
General Nutrition 20
International Specialty Products** 17
Concentra Managed Care** 15
Citigroup** 13
Corporate Express** 12
BE Aerospace 11
Renaissance Worldwide** 11
Romac International 10
Interim Services 9
- --------------------------------------------------------------------------------
Total -138(cents)
12 Months Ended 12/31/98
Ten Best Contributors
- --------------------------------------------------------------------------------
MCI WorldCom 34(cents)
Affiliated Computer Services 24
Fred Meyer* 24
Safeway 23
Tyco International 22
Warner-Lambert 19
Xilinx 16
BISYS Group 16
Memberworks** 15
ADVO 15
- --------------------------------------------------------------------------------
Total 208(cents)
Ten Worst Contributors
- --------------------------------------------------------------------------------
Cendant -20(cents)
General Nutrition 17
Concentra Managed Care** 16
International Specialty Products** 14
Citigroup** 13
Security Dynamics Technologies** 13
Corporate Express** 12
Stanley Works** 11
Smith International** 9
Corrections Corp of America** 8
- --------------------------------------------------------------------------------
Total -133(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.
CAPITAL OPPORTUNITY FUND
- --------------------------------------------------------------------------------
As of 12/31/98
Lipper Capital Capital
S&P 500 Appreciation Opportunity
Index Funds Average Fund
11/30/94 10,000 10,000 10,000
12/94 10,148 10,091 10,430
12/95 13,962 13,258 15,281
12/96 17,168 15,351 17,841
12/97 22,895 18,514 20,673
12/98 29,435 20,901 23,712
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 12/31/98 1 Year 3 Years Inception Date
- --------------------------------------------------------------------------------
Capital Opportunity Fund 14.70% 15.77% 23.54% 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
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of period $ 16.62 $ 15.75 $ 14.13 $ 10.43 $ 10.00
Investment activities
Net investment income (0.07) 0.01 -* 0.01* 0.02*
Net realized and
unrealized gain (loss) 2.44 2.45 2.36 4.83 0.41
Total from
investment activities 2.37 2.46 2.36 4.84 0.43
Distributions
Net investment income -- -- -- (0.01) --
Net realized gain (0.88) (1.59) (0.74) (1.13) --
Total distributions (0.88) (1.59) (0.74) (1.14) --
NET ASSET VALUE
End of period $ 18.11 $ 16.62 $ 15.75 $ 14.13 $ 10.43
----------------------------------------------------
Ratios/Supplemental Data
Total return# 14.70% 15.87% 16.76%* 46.51%* 4.30%*
Ratio of expenses to
average net assets 1.35% 1.35% 1.35%* 1.35%* 1.35%*!
Ratio of net investment
income to average
net assets (0.44)% 0.04% 0.02%* 0.08%* 2.71%*!
Portfolio turnover rate 73.8% 85.0% 107.3% 136.9% 134.5%!
Net assets, end of period
(in thousands) $124,812 $109,055 $125,077 $ 61,923 $ 2,437
# Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
* 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, 1998
Statement of Net Assets Shares Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 92.1%
FINANCIAL 9.8%
Bank and Trust 3.2%
Bank of New York 40,000 $ 1,610
Bank One 22,000 1,123
BankAmerica 20,000 1,203
3,936
Insurance 4.1%
EXEL (Class A) 35,752 2,681
PartnerRe Holdings 54,600 2,498
5,179
Financial Services 2.5%
Fannie Mae 20,000 1,480
Freddie Mac 25,000 1,611
3,091
Total Financial 12,206
UTILITIES 0.9%
Telephone Services 0.9%
Telebras ADR * 15,000 1,090
Total Utilities 1,090
CONSUMER NONDURABLES 9.4%
Beverages 1.8%
PepsiCo 55,000 2,251
2,251
Pharmaceuticals 4.1%
Alkermes * 50,000 1,106
Gilead Sciences * 30,000 1,231
Warner-Lambert 37,500 2,820
5,157
Health Care Services 2.3%
Health Management Systems * 35,000 282
United HealthCare 60,000 2,584
2,866
Miscellaneous Consumer Products 1.2%
Mattel 30,000 $ 684
Newell 20,000 825
1,509
Total Consumer Nondurables 11,783
CONSUMER SERVICES 18.7%
General Merchandisers 4.7%
Fred Meyer * 43,200 2,603
Neiman-Marcus * 30,600 763
Warnaco Group (Class A) 100,000 2,525
5,891
Specialty Merchandisers 5.2%
General Nutrition * 60,000 973
Rite Aid 27,000 1,338
Safeway * 44,000 2,681
Whole Foods Market * 30,000 1,455
6,447
Entertainment and Leisure 1.9%
Imax * 75,000 2,377
2,377
Media and Communications 6.9%
ADVO * 65,500 1,728
Catalina Marketing * 17,500 1,197
Infinity Broadcasting * 74,000 2,026
News Corporation ADR 75,000 1,851
Univision Communications * 50,000 1,809
8,611
Total Consumer Services 23,326
CONSUMER CYCLICALS 1.3%
Automobiles and Related 1.3%
AutoZone * 50,000 1,647
Total Consumer Cyclicals 1,647
TECHNOLOGY 8.7%
Electronic Components 4.6%
Analog Devices * 30,000 $ 941
Analogic 66,600 2,506
Xilinx * 35,000 2,278
5,725
Telecommunications 2.9%
MCI WorldCom * 49,756 3,572
3,572
Aerospace and Defense 1.2%
AlliedSignal 35,000 1,551
1,551
Total Technology 10,848
CAPITAL EQUIPMENT 2.9%
Electrical Equipment 2.9%
Tyco International 48,132 3,631
Total Capital Equipment 3,631
BUSINESS SERVICES AND
TRANSPORTATION 32.9%
Computer Service and Software 15.4%
Affiliated Computer Services
(Class A) * 65,000 2,925
BISYS Group * 35,000 1,805
Galileo International 35,000 1,523
Gartner Group (Class A) * 34,700 737
National Data 40,000 1,947
Network Associates * 25,000 1,659
Parametric Technology * 200,000 3,250
Saville Systems ADR * 52,900 1,003
Synopsys * 33,600 1,821
The Learning Company * 100,000 2,594
19,264
Distribution Services 2.0%
U.S. Foodservice * 50,000 2,450
2,450
Environmental 1.1%
Allied Waste Industries * 55,000 $ 1,299
1,299
Transportation Services 2.4%
Avis Rent A Car * 50,000 1,210
BE Aerospace * 86,000 1,803
3,013
Miscellaneous Business Services 12.0%
Acxiom * 51,000 1,578
Cendant * 85,000 1,620
Interim Services * 70,000 1,636
M/A/R/C 88,000 968
Pharmaceutical Marketing
Services * 78,200 1,127
Romac International * 125,900 2,793
Snyder Communications * 30,000 1,013
United Road Services * 80,000 1,475
Waste Management 60,000 2,797
15,007
Total Business Services and Transportation 41,033
PROCESS INDUSTRIES 1.0%
Specialty Chemicals 1.0%
Great Lakes Chemical 30,000 1,200
Total Process Industries 1,200
BASIC MATERIALS 1.6%
Mining 1.6%
Homestake Mining 222,000 2,040
Total Basic Materials 2,040
Total Miscellaneous Common Stocks 4.9% 6,147
Total Common Stocks (Cost $84,384) 114,951
Short-Term Investments 8.8%
Money Market Funds 8.8%
Government Reserve
Investment Fund, 4.76% # 11,028,381 11,028
Total Short-Term Investments (Cost $11,028) 11,028
Total Investments in Securities
100.9% of Net Assets (Cost $95,412) $ 125,979
Other Assets Less Liabilities (1,167)
NET ASSETS $ 124,812
----------
Net Assets Consist of:
Accumulated net realized gain/loss -
net of distributions $ 1,242
Net unrealized gain (loss) 30,567
Paid-in-capital applicable to 6,890,385
shares of $0.0001 par value capital
stock outstanding; 1,000,000,000
shares authorized 93,003
NET ASSETS $ 124,812
----------
NET ASSET VALUE PER SHARE $ 18.11
----------
# Seven-day yield
* Non-income producing
ADR American Depository Receipt
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
12/31/98
Investment Income
Income
Dividend $ 596
Interest 494
Total income 1,090
Expenses
Investment management 991
Shareholder servicing 397
Custody and accounting 89
Prospectus and shareholder reports 64
Registration 28
Legal and audit 12
Directors 7
Miscellaneous 22
Total expenses 1,610
Net investment income (520)
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on
securities 5,258
Change in net unrealized gain or
loss on securities 11,091
Net realized and unrealized gain (loss) 16,349
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 15,829
---------
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
12/31/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ (520) $ 46
Net realized gain (loss) 5,258 10,735
Change in net unrealized
gain or loss 11,091 4,648
Increase (decrease) in net
assets from operations 15,829 15,429
Distributions to shareholders
Net realized gain (5,807) (9,517)
Capital share transactions*
Shares sold 41,118 25,621
Distributions reinvested 5,668 9,489
Shares redeemed (41,051) (57,044)
Increase (decrease) in net
assets from capital
share transactions 5,735 (21,934)
Net Assets
Increase (decrease) during period 15,757 (16,022)
Beginning of period 109,055 125,077
End of period $124,812 $109,055
---------------------
*Share information
Shares sold 2,323 1,600
Distributions reinvested 339 586
Shares redeemed (2,333) (3,564)
Increase (decrease) in shares
outstanding 329 (1,378)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
December 31, 1998
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, best to reflect fair value.
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.
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 $80,213,000 and $80,915,000, respectively, for the
year ended December 31, 1998.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
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, 1998. The
results of operations and net assets were not affected by the
increases/(decreases) to these accounts.
- --------------------------------------------------------------------------------
Undistributed net investment income $ 464,000
Undistributed net realized gain (445,000)
Paid-in-capital (19,000)
At December 31, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$95,412,000. Net unrealized gain aggregated $30,567,000 at period-end, of
which $32,678,000 related to appreciated investments and $2,111,000 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 $89,000 was payable at December 31, 1998. 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. At December 31, 1998, and for the year then ended,
the effective annual group fee rate was 0.32%. The fund pays a pro-rata
share of the group fee based on the ratio of its net assets to those of the
group.
Under the terms of the investment management agreement, the manager was
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 was required to reimburse
the manager for these expenses, provided that average net assets had grown
or expenses had 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, $72,000 of unaccrued 1997 fees were repaid
during the year ended 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 $375,000 for the year ended December 31, 1998, of which
$40,000 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, 1998, totaled $488,000 and are reflected as interest income in
the accompanying Statement of Operations.
T. Rowe Price Capital Opportunity Fund
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Report of Independent Accountants
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To the Board of Directors and Shareholders of
T. Rowe Price Capital Opportunity Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of T. Rowe Price Capital Opportunity Fund, Inc. (the "Fund") at December
31, 1998, and the results of its operations, the changes in its net assets
and the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1998, by correspondence
with custodians, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 21, 1999
T. Rowe Price Capital Opportunity Fund
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Tax Information (Unaudited) for the Tax Year Ended 12/31/98
- --------------------------------------------------------------------------------
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 $990,000 from short-term capital gains,
o $4,817,000 from long-term capital gains, subject to the 20% rate gains
category.
For corporate shareholders, $197,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
- --------------------------------------------------------------------------------
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
Investment Services And Information
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone Shareholder service representatives are available from 8 a.m. to
10 p.m. ET Monday through Friday and from 8:30 a.m. to 5 p.m. ET on
weekends. Call 1-800-225-5132 to speak directly with a representative who
will be able to assist you with your accounts.
In Person Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. You can
also drop off applications or obtain prospectuses and other literature at
these centers.
AUTOMATED 24-HOUR SERVICES
Tele*Access(registered trademark) Call 1-800-638-2587 to obtain information
such as account balance, date and amount of your last transaction, latest
dividend payment, fund prices, and yields. Additionally, you have the
ability to request prospectuses, statements, and account and tax forms; to
reorder checks; and to initiate purchase, redemption, and exchange orders
for identically registered accounts.
Internet. T. Rowe Price Web site: www.troweprice.com All the information
and services available on Tele*Access are available on our Web site,
including transactions in your fund and brokerage accounts (with
preauthorized access).
ACCOUNT SERVICES
Checking Write checks for $500 or more on any money market and most bond
fund accounts (except the High Yield and Emerging Markets Bond Funds).
Automatic Investing Build your account over time by investing directly from
your bank account or paycheck with Automatic AssetBuilder. Additionally,
Automatic Exchange enables you to set up systematic investments from one
fund account into another, such as from a money fund into a stock fund. A
$50 minimum makes it easy to get started.
Automatic Withdrawal If you need money from your fund account on a regular
basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility
and convenience.
BROKERAGE SERVICES*
Investments Available You can trade stocks, bonds, options, precious
metals, and other securities at a savings over full-service
commission rates.
To Open an Account Call a shareholder service representative for
more information.
INVESTMENT INFORMATION
Combined Statement A comprehensive overview of your T. Rowe Price accounts
is provided. The summary page gives you earnings by tax category, provides
total portfolio value, and lists your investments by type. Detail pages
itemize account transactions. Shareholder Reports Portfolio managers review
the performance of the funds in plain language and discuss T. Rowe Price's
economic outlook.
T. Rowe Price Report This is a quarterly newsletter with relevant
articles on market trends, personal financial planning, and T. Rowe
Price's economic perspective.
Performance Update This quarterly report reviews recent market
developments and provides comprehensive performance information for every
T. Rowe Price fund.
Insights This library of information includes reports on mutual fund
tax issues, investment strategies, and financial markets.
Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Diversifying Overseas: A Guide to International
Investing, Retirees Financial Guide, and Retirement Planning Kit (also
available on disk or CD-ROM for PC use) can help you determine and reach
your investment goals.
* T. Rowe Price Brokerage is 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
410-625-6500 Baltimore area
To open a 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 12/31/98
