Item 1. Report to Shareholders
DECEMBER 31, 2004
CAPITAL OPPORTUNITY FUND
Annual Report
T. ROWE PRICE
The views and opinions in this report were current as of December 31, 2004. They
are not guarantees of performance or investment results and should not be taken
as investment advice. Investment decisions reflect a variety of factors, and the
managers reserve the right to change their views about individual stocks,
sectors, and the markets at any time. As a result, the views expressed should
not be relied upon as a forecast of the fund's future investment intent. The
report is certified under the Sarbanes-Oxley Act of 2002, which requires mutual
funds and other public companies to affirm that, to the best of their knowledge,
the information in their financial reports is fairly and accurately stated in
all material respects.
REPORTS ON THE WEB
Sign up for our E-mail Program, and you can begin to receive updated fund
reports and prospectuses online rather than through the mail. Log in to your
account at troweprice.com for more information.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Fellow Shareholders
The U.S. stock market produced positive results in 2004, posting back-to-back
yearly gains for the first time since 1998-99. Stocks traded in a narrow range
for much of the year as strong corporate earnings growth was offset by a litany
of economic, financial, and political uncertainties that left the market
rudderless. However, the resolution of many of these concerns in the year's
final quarter opened the door for a year-end rally that ultimately produced
double-digit gains for the major stock indexes.
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 12/31/04 6 Months 12 Months
- --------------------------------------------------------------------------------
Capital Opportunity Fund 7.12% 11.39%
S&P 500 Stock Index 7.19 10.88
Lipper Large-Cap Core Funds Index 5.91 8.29
As the chart shows, your fund returned 7.12% and 11.39% for the 6- and 12-month
periods ended December 31, 2004, respectively. The fund outpaced its Lipper peer
group in both the 6- and 12-month periods; against the S&P 500, the fund was in
line with the index for the six months but outperformed for the full year. The
favorable results were driven by strong stock selection in economically
sensitive sectors of the market, including materials, utilities, and energy.
MARKET ENVIRONMENT
The U.S. economy continued to grow at a solid pace in 2004. Employment growth,
though erratic, began to show some improvement, particularly in the last few
months of the year. Inflation, driven by record-high oil prices, increased from
1.8% in 2003 to 3.3% in 2004. In this environment, the Federal Reserve raised
short-term interest rates five times in the last half of the year, increasing
the federal funds target rate from 1.00% to 2.25%--its highest level since
November 2001.
The robust economy provided a strong lift to corporate earnings, which grew by
almost 20% in 2004. Nonetheless, the stock market was unable to generate any
momentum through the first nine months of the year, held in check by uncertainty
about interest rates, oil prices, job growth, and the November election.
However, stocks came to life in the fourth quarter as easing oil prices,
rejuvenated job growth, and a decisive presidential election boosted investor
confidence.
The stock market's 2004 rise was broad based, extending across all market
capitalizations. Small-cap stocks were the market leaders for the fifth straight
year--the 18.33% return of the small-cap Russell 2000 Index surpassed the 10.88%
return of the large-cap S&P 500. Value stocks, which often attract the most
attention in uncertain times, outperformed growth-oriented shares during the
year.
Sector Diversification
- --------------------------------------------------------------------------------
Percent of Percent of
Net Assets Net Assets
Periods Ended 6/30/04 12/31/04
- --------------------------------------------------------------------------------
Financials 20.2% 20.7%
Information Technology 17.8 16.4
Health Care 12.8 12.0
Consumer Discretionary 10.6 11.9
Industrials and Business Services 10.9 11.3
Consumer Staples 10.3 9.9
Energy 6.5 7.0
Materials 3.7 3.5
Telecommunication Services 3.2 3.2
Utilities 2.6 3.0
Other and Reserves 1.4 1.1
- --------------------------------------------------------------------------------
Total 100.0% 100.0%
Historical weightings reflect current industry/sector classifications.
Every sector of the market gained ground. Energy stocks performed best, thanks
to a large increase in the price of oil. Other economically sensitive
sectors--including utilities and industrials--also posted strong returns, as did
telecommunication services stocks. On the downside, the health care and
information technology sectors lagged the rest of the market.
PORTFOLIO REVIEW
Utilities and materials were two of the best-performing sectors in the portfolio
in 2004. Utilities stocks posted the best absolute returns, led by electric
utility TXU, which gained 178% during the year. New management dramatically
improved earnings through the sale of non-core assets and a successful
cost-cutting program. Stock selection was most successful in the materials
sector, which benefited from higher commodity prices and increasing global
demand. Steel manufacturer Nucor, riding a sharp increase in steel prices, was
(along with TXU) among the top five contributors to 12-month portfolio
performance. (Please see our portfolio of investments for a complete listing of
the portfolio's holdings and the amount each represents of the portfolio.)
Energy and industrial stocks, which together made up 18% of assets as of
December 31, also contributed positively to results. The energy sector produced
the portfolio's top contributor to performance--ExxonMobil, the portfolio's
second-largest holding. Industrial conglomerates General Electric and Tyco
International were also among the best performers; in particular, GE--one of the
portfolio's largest overweights at year end--produced solid earnings growth as
prospects for its two largest businesses, power and aerospace, began to improve.
Results in the three largest sectors of the portfolio were mixed. Consumer
stocks comprised the fund's biggest sector weighting (22% of the portfolio) at
the end of the year. Discount retailer Target, which sold some underperforming
assets and produced better same-store sales growth than many of its competitors,
was the top performance contributor among the portfolio's consumer stocks.
Tobacco conglomerate Altria Group rebounded from legal setbacks to become one of
the best contributors during the last six months. On the downside, media
companies IAC/InterActiveCorp and Clear Channel Communications were among the
portfolio's biggest performance detractors. IAC suffered a decline in its online
travel business, while Clear Channel struggled with a slump in radio
advertising. Beverage maker Coca-Cola and auto manufacturer General Motors were
also among the worst contributors to overall results.
Portfolio Characteristics
- --------------------------------------------------------------------------------
Capital S&P 500
Opportunity Stock
As of 12/31/04 Fund Index
- --------------------------------------------------------------------------------
Market Cap
(Investment-
Weighted Median) $58.5 billion $55.7 billion
Earnings Growth
Rate Estimated
Next 5 Years* 11.8% 11.5%
P/E Ratio (Based
on Next 12 Months'
Estimated Earnings) * 17.9X 17.8X
*Source data: IBES. Forecasts are in no way indicative of future investment
returns.
Stock selection proved mildly disappointing in the financial sector, which
comprised 21% of assets at year-end. An overweight position in insurer St. Paul
Travelers detracted from relative performance as the company took a
restructuring charge related to the merger of St. Paul Companies and Travelers.
Top 10 holding American International Group, another insurance firm, weighed on
results during the last six months
when the company became embroiled in a bid-rigging investigation in the
insurance brokerage industry. We remain optimistic about both stocks' prospects
for 2005. On the positive side, Bank of America and Legg Mason posted strong
results, while U.S. Bancorp--a significant fund overweight--was a top
contributor during the second half.
Information technology stocks, which represented 16% of assets as of December
31, trailed the overall market, but stock selection in this sector enhanced fund
performance. Dell was the top technology contributor in the portfolio in 2004.
The company is using its superior business model to gain market share in
printers, servers, and storage. Internet stocks also fared well--revitalized
search engine company Yahoo! was a top overall performer, while online
auctioneer eBay and newly public search company Google were strong second-half
contributors. Noteworthy detractors in the technology sector included chipmaker
Intel and network equipment manufacturer Cisco Systems, both of which struggled
with slowing demand.
Health care stocks, which comprised 12% of the portfolio at the end of 2004,
posted the worst absolute returns in the portfolio. Pharmaceutical giant Pfizer
was the biggest performance detractor during the year. Patent expirations
threatened the company's earnings growth, and a study showed that one of
Pfizer's pain relief drugs had potential cardiac-related side effects. Two other
major drug companies, Merck and Eli Lilly, were also among the worst
contributors to portfolio results. Top ten holding Johnson & Johnson and health
care provider UnitedHealth Group produced favorable returns.
OUTLOOK
We are cautiously optimistic as we begin 2005. Economic conditions remain
positive, with moderate economic growth and a reasonable inflation rate. In
addition, corporate America is flush with cash, and balance sheets continue to
improve. However, the market will face challenges in the form of slower
corporate earnings growth, higher interest rates, widening trade and budget
deficits, and the ongoing conflict in Iraq.
Regardless of the environment, our approach does not waver. We take a patient
view, utilizing comprehensive research and analysis to find companies that we
believe will provide the best results over the long term.
Respectfully submitted,
William J. Stromberg
President of the fund and chairman of its Investment Advisory Committee
January 17, 2005
The committee chairman has day-to-day responsibility for managing the portfolio
and works with committee members in developing and executing the fund's
investment program.
RISKS OF INVESTING
As with all stock mutual funds, the fund's share price can fall because of
weakness in the stock market, a particular industry, or specific holdings. Stock
markets can decline for many reasons, including adverse political or economic
developments, changes in investor psychology, or heavy institutional selling.
The prospects for an industry or company may deteriorate because of a variety of
factors, including disappointing earnings or changes in the competitive
environment.
GLOSSARY
Federal funds target rate: An overnight lending rate set by the Federal Reserve
and used by banks to meet reserve requirements. Banks also use the fed funds
rate as a benchmark for their prime lending rates.
Lipper indexes: Consist of a small number (10 to 30) of the largest mutual funds
in a particular category as tracked by Lipper Inc.
Russell 2000 Index: Tracks the stocks of 2,000 small U.S. companies.
S&P 500 Stock Index: Tracks the stocks of 500 mostly large U.S. companies.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/04
GE 4.0%
ExxonMobil 3.1
Microsoft 2.8
Citigroup 2.6
Wal-Mart 1.9
- --------------------------------------------------------------------------------
Dell 1.7
Pfizer 1.7
Johnson & Johnson 1.7
J.P. Morgan Chase 1.6
American International Group 1.6
- --------------------------------------------------------------------------------
Intel 1.6
Procter & Gamble 1.5
Altria Group 1.4
U.S. Bancorp 1.4
Bank of America 1.3
- --------------------------------------------------------------------------------
Tyco International 1.3
Cisco Systems 1.2
Verizon Communications 1.1
ChevronTexaco 1.1
IBM 1.1
- --------------------------------------------------------------------------------
Coca-Cola 1.0
Time Warner 1.0
UPS 1.0
PepsiCo 0.9
UnitedHealth Group 0.9
- --------------------------------------------------------------------------------
Total 40.5%
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE
6 Months Ended 12/31/04
Best Contributors Worst Contributors
- --------------------------------------------------------------------------------
GE 6(cents) Pfizer -7(cents)
ExxonMobil 6 Merck -4
Altria Group 3 Cisco Systems -4
Dell 3 Intel -3
UnitedHealth Group 3 Coca-Cola -3
Johnson & Johnson 3 Microsoft -3
Sprint 2 Eli Lilly -2
Nucor 2 American International Group -2
U.S. Bancorp 2 St. Paul Companies -2
eBay 2 IAC/InterActiveCorp -1
- --------------------------------------------------------------------------------
Total 32(cents) Total -31(cents)
12 Months Ended 12/31/04
Best Contributors Worst Contributors
- --------------------------------------------------------------------------------
ExxonMobil 8(cents) Pfizer -8(cents)
GE 8 Intel -6
Nucor 5 Cisco Systems -4
TXU 5 Merck -4
Dell 4 Coca-Cola -3
Johnson & Johnson 4 Eli Lilly -2
Tyco International 4 GM -2
UnitedHealth Group 4 Clear Channel Communications * -2
Yahoo! 4 St. Paul Companies -1
Target 3 IAC/InterActiveCorp -1
- --------------------------------------------------------------------------------
Total 49(cents) Total -33(cents)
* Position eliminated
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Growth of $10,000
- --------------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
[Graphic Omitted]
- --------------------------------------------------------------------------------
Capital Opportunity Fund
- --------------------------------------------------------------------------------
As of 12/31/04
Capital Opportunity Fund $ 24,178
S&P 500 Stock Index $ 31,258
Lipper Large-Cap Core Funds Index $ 26,569
Capital S&P 500 Lipper Large-Cap
Opportunity Fund Stock Index Core Funds Index
12/94 $ 10,000 $ 10,000 $ 10,000
12/95 14,651 13,758 13,176
12/96 17,106 16,917 15,790
12/97 19,820 22,561 20,404
12/98 22,735 29,008 25,900
12/99 25,349 35,112 30,911
12/00 23,746 31,915 28,633
12/01 21,346 28,122 24,959
12/02 16,596 21,907 19,659
12/03 21,705 28,190 24,535
12/04 24,178 31,258 26,569
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
This table shows how the fund and its benchmarks would have performed if their
actual (or cumulative) returns for the periods shown had been earned at a
constant rate.
Periods Ended 12/31/04 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Capital Opportunity Fund 11.39% -0.94% 9.23%
S&P 500 Stock Index 10.88 -2.30 12.07
Lipper Large-Cap Core Funds Index 8.29 -2.98 10.26
Current performance may be higher or lower than the quoted past performance,
which cannot guarantee future results. Share price, principal value, and return
will vary, and you may have a gain or loss when you sell your shares. For the
most recent month-end performance information, please visit our Web site
(troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132.
Average annual total return figures include changes in principal value,
reinvested dividends, and capital gain distributions. Returns do not reflect
taxes that the shareholder may pay on fund distributions or the redemption of
fund shares. When assessing performance, investors should consider both short-
and long-term returns.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Fund Expense Example
- --------------------------------------------------------------------------------
As a mutual fund shareholder, you may incur two types of costs: (1) transaction
costs such as redemption fees or sales loads and (2) ongoing costs, including
management fees, distribution and service (12b-1) fees, and other fund expenses.
The following example is intended to help you understand your ongoing costs (in
dollars) of investing in the fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The example is based on an investment
of $1,000 invested at the beginning of the most recent six-month period and held
for the entire period.
Actual Expenses
The first line of the following table ("Actual") provides information about
actual account values and actual expenses. You may use the information in this
line, together with your account balance, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information on the second line of the table ("Hypothetical") is based on
hypothetical account values and expenses derived from the fund's actual expense
ratio and an assumed 5% per year rate of return before expenses (not the fund's
actual return). You may compare the ongoing costs of investing in the fund with
other funds by contrasting this 5% hypothetical example and the 5% hypothetical
examples that appear in the shareholder reports of the other funds. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period.
Note: T. Rowe Price charges an annual small-account maintenance fee of $10,
generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is
waived for any investor whose T. Rowe Price mutual fund accounts total $25,000
or more, accounts employing automatic investing, and IRAs and other retirement
plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although
a separate custodial or administrative fee may apply to such accounts). This fee
is not included in the accompanying table. If you are subject to the fee, keep
it in mind when you are estimating the ongoing expenses of investing in the fund
and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only
your ongoing costs and do not reflect any transaction costs, such as redemption
fees or sales loads. Therefore, the second line of the table is useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. To the extent a fund charges transaction costs,
however, the total cost of owning that fund is higher.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Beginning Ending Expenses Paid
Account Value Account Value During Period*
7/1/04 12/31/04 7/1/04 to 12/31/04
- --------------------------------------------------------------------------------
Actual $1,000 $1,071.20 $5.88
Hypothetical (assumes 5%
return before expenses) 1,000 1,019.46 5.74
*Expenses are equal to the fund's annualized expense ratio for the six-month
period (1.13%), multiplied by the average account value over the period,
multiplied by the number of days in the most recent fiscal half year (184)
divided by the days in the year (366) to reflect the half-year period.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
Investor Class
Year
Ended
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
NET ASSET VALUE
Beginning of period $ 12.03 $ 9.23 $ 11.91 $ 13.26 $ 15.69
Investment activities
Net investment income (loss) 0.09 0.03 0.03 0.01 (0.01)
Net realized and
unrealized gain (loss) 1.28 2.81 (2.68) (1.35) (0.94)
Total from
investment activities 1.37 2.84 (2.65) (1.34) (0.95)
Distributions
Net investment income (0.09) (0.04) (0.03) (0.01) -
Net realized gain - - - - (1.48)
Total distributions (0.09) (0.04) (0.03) (0.01) (1.48)
NET ASSET VALUE
End of period $ 13.31 $ 12.03 $ 9.23 $ 11.91 $ 13.26
------------------------------------------------
Ratios/Supplemental Data
Total return^ 11.39% 30.78% (22.25)% (10.10)% (6.32)%
Ratio of total expenses to
average net assets 1.20% 1.41% 1.37% 1.25% 1.15%
Ratio of net investment
income (loss) to average
net assets 0.76% 0.30% 0.27% 0.08% (0.05)%
Portfolio turnover rate 44.3% 47.5% 48.2% 53.6% 64.7%
Net assets, end of period
(in thousands) $91,969 $75,835 $57,340 $76,786 $93,422
^Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
December 31, 2004
Portfolio of Investments (1) Shares/$ Par Value
- --------------------------------------------------------------------------------
(Cost and value in $ 000s)
COMMON STOCKS 98.9%
CONSUMER DISCRETIONARY 11.9%
Auto Components 0.3%
Lear 1,600 98
TRW Automotive * 8,600 178
276
Automobiles 0.3%
GM 6,600 264
Harley-Davidson 900 55
319
Hotels, Restaurants & Leisure 2.2%
Carnival 6,200 357
Fairmont Hotels 1,400 48
International Game Technology 7,600 261
Marriott, Class A 2,200 139
McDonald's 10,000 321
Panera Bread, Class A * 4,700 189
Rare Hospitality International * 4,100 131
Royal Caribbean Cruises 2,900 158
Starbucks * 3,200 200
Station Casinos 900 49
WMS Industries * 3,200 107
Yum! Brands 2,300 109
2,069
Household Durables 0.4%
Fortune Brands 1,175 91
Maytag 1,300 28
Newell Rubbermaid 6,500 157
Whirlpool 1,000 69
345
Internet & Catalog Retail 0.7%
eBay * 5,300 616
616
Leisure Equipment & Products 0.3%
Brunswick 3,500 173
Hasbro 2,200 43
Mattel 1,400 27
243
Media 3.8%
Comcast, Class A * 10,800 359
Disney 2,000 56
Dow Jones 1,400 60
Gannett 2,750 225
Liberty Media, Class A * 20,500 225
McGraw-Hill 1,500 137
Meredith 600 33
New York Times, Class A 2,200 90
News Corp., Class A * 23,700 442
Rogers Communications, Class B 8,700 227
Scripps, Class A 1,200 58
Time Warner * 46,200 898
Viacom, Class B 16,300 593
Washington Post, Class B 87 86
3,489
Multiline Retail 1.6%
Family Dollar Stores 7,470 233
Kohl's * 11,400 561
Target 14,040 729
1,523
Specialty Retail 2.3%
Best Buy 3,250 193
Home Depot 18,140 775
Hot Topic * 11,100 191
Lowes 6,680 385
O'Reilly Automotive * 1,690 76
PETsMART 1,270 45
Ross Stores 7,000 202
Staples 3,600 122
TJX 5,500 138
2,127
Total Consumer Discretionary 11,007
CONSUMER STAPLES 9.9%
Beverages 2.3%
Anheuser-Busch 4,475 227
Coca-Cola 21,840 909
Cott * 5,700 141
PepsiCo 15,665 818
2,095
Food & Staples Retailing 2.7%
CVS 4,000 180
Sysco 5,700 218
Wal-Mart 32,960 1,741
Walgreen 10,400 399
2,538
Food Products 0.9%
Campbell Soup 5,110 153
General Mills 6,055 301
Heinz 1,365 53
Hershey Foods 2,230 124
Kellogg 3,390 151
782
Household Products 2.2%
Clorox 2,735 161
Colgate-Palmolive 4,985 255
Kimberly-Clark 3,500 230
Procter & Gamble 25,390 1,399
2,045
Personal Products 0.4%
Gillette 8,150 365
365
Tobacco 1.4%
Altria Group 21,710 1,326
1,326
Total Consumer Staples 9,151
ENERGY 7.0%
Energy Equipment & Services 1.3%
Baker Hughes 4,320 184
BJ Services 1,340 62
FMC Technologies * 2,590 84
Grant Prideco * 4,800 96
Nabors Industries * 1,300 67
Schlumberger 6,940 465
Transocean * 5,740 243
1,201
Oil & Gas 5.7%
Anadarko Petroleum 2,154 140
ChevronTexaco 19,372 1,017
ConocoPhillips 6,470 562
Devon Energy 1,700 66
EOG Resources 1,170 84
ExxonMobil 55,228 2,831
Murphy Oil 2,650 213
Occidental Petroleum 1,630 95
Total ADR 1,930 212
Williams Companies 1,600 26
5,246
Total Energy 6,447
FINANCIALS 20.7%
Capital Markets 3.7%
AmeriTrade * 30,200 429
Charles Schwab 16,200 194
Franklin Resources 2,900 202
Goldman Sachs 4,100 427
Investors Financial Services 4,400 220
Legg Mason 1,350 99
Lehman Brothers 2,600 227
Merrill Lynch 9,000 538
Morgan Stanley 8,700 483
State Street 11,800 580
3,399
Commercial Banks 4.9%
Bank of America 25,396 1,193
Comerica 10,900 665
First Horizon National 1,600 69
SunTrust 2,500 185
Synovus Financial 4,600 132
U.S. Bancorp 42,200 1,322
Wachovia 9,400 494
Wells Fargo 8,100 503
4,563
Consumer Finance 1.3%
American Express 10,500 592
MBNA 6,200 175
Providian Financial * 2,300 38
SLM Corporation 7,000 373
1,178
Diversified Financial Services 4.5%
CapitalSource * 7,000 180
Citigroup 49,800 2,399
J.P. Morgan Chase 38,056 1,484
Moody's 1,400 122
4,185
Insurance 4.8%
Allstate 1,400 72
American International Group 22,600 1,484
Assurant 2,700 83
Axis Capital Holdings 6,200 170
Genworth Financial, Class A 5,700 154
Hartford Financial Services 4,600 319
Marsh & McLennan 11,200 368
Progressive Corporation 2,500 212
Prudential 5,800 319
SAFECO 3,900 204
St. Paul Companies 21,259 788
XL Capital 3,300 256
4,429
Real Estate 0.4%
Equity Office Properties, REIT 4,900 143
Equity Residential, REIT 3,500 126
Simon Property Group, REIT 1,500 97
366
Thrifts & Mortgage Finance 1.1%
Countrywide Credit 2,800 104
Fannie Mae 5,400 384
Freddie Mac 3,800 280
MGIC Investment 2,000 138
Radian 2,800 149
1,055
Total Financials 19,175
HEALTH CARE 12.0%
Biotechnology 1.6%
Amgen * 11,800 757
Biogen Idec * 3,770 251
Cephalon * 1,100 56
Chiron * 1,300 43
Genentech * 1,890 103
Gilead Sciences * 5,380 188
MedImmune * 2,060 56
1,454
Health Care Equipment & Supplies 2.0%
Bausch & Lomb 400 26
Baxter International 5,100 176
Becton, Dickinson 2,000 114
Biomet 2,300 100
Boston Scientific * 7,000 249
C R Bard 1,200 77
Guidant 2,300 166
Medtronic 10,100 502
St. Jude Medical * 3,400 142
Stryker 3,800 183
Zimmer Holdings * 1,900 152
1,887
Health Care Providers & Services 2.3%
Advisory Board * 5,900 218
AmerisourceBergen 1,200 70
Cardinal Health 4,400 256
Caremark RX * 3,700 146
Community Health System * 4,600 128
HCA 2,300 92
Laboratory Corporation of America * 1,800 90
Medco * 1,342 56
UnitedHealth Group 9,100 801
WellPoint * 2,100 241
2,098
Pharmaceuticals 6.1%
Abbott Laboratories 11,100 518
Elan ADR * 2,800 76
Eli Lilly 9,900 562
Forest Laboratories * 3,000 134
Johnson & Johnson 24,400 1,547
Merck 16,800 540
Pfizer 58,600 1,576
Schering-Plough 7,500 157
Watson Pharmaceuticals * 1,700 56
Wyeth 12,200 520
5,686
Total Health Care 11,125
INDUSTRIALS & BUSINESS SERVICES 11.3%
Aerospace & Defense 2.2%
Boeing 6,100 316
General Dynamics 2,400 251
Goodrich 900 29
Honeywell International 15,200 538
Lockheed Martin 3,500 195
Raytheon 2,800 109
Rockwell Collins 5,100 201
United Technologies 3,400 351
1,990
Air Freight & Logistics 1.0%
UPS, Class B 10,300 880
880
Airlines 0.1%
Southwest Airlines 7,100 116
116
Building Products 0.1%
American Standard * 1,800 74
74
Commercial Services & Supplies 0.8%
Apollo Group, Class A * 1,500 121
Cendant 7,900 185
Cintas 1,400 61
Manpower 1,400 68
Pitney Bowes 1,900 88
Republic Services 2,300 77
Robert Half International 2,240 66
Waste Management 3,100 93
759
Industrial Conglomerates 5.4%
GE 101,800 3,716
Roper Industries 900 55
Teleflex 1,800 93
Tyco International 32,500 1,161
5,025
Machinery 1.2%
Danaher 3,700 213
Deere 5,700 424
Illinois Tool Works 700 65
ITT Industries 1,400 118
PACCAR 2,000 161
Pall 3,800 110
1,091
Road & Rail 0.5%
CSX 7,300 292
Union Pacific 3,000 202
494
Total Industrials & Business Services 10,429
INFORMATION TECHNOLOGY 16.4%
Communications Equipment 2.8%
Andrew * 500 7
Avaya * 1,100 19
Cisco Systems * 55,100 1,063
Comverse Technology * 2,900 71
Corning * 15,400 181
Juniper Networks * 2,500 68
Lucent Technologies * 30,300 114
Motorola 20,100 346
QUALCOMM 13,900 589
Research In Motion * 1,100 91
2,549
Computers & Peripherals 3.5%
Dell * 37,900 1,597
Gateway * 5,900 35
Hewlett-Packard 12,300 258
IBM 10,100 996
Lexmark International * 1,700 145
QLogic * 6,400 235
3,266
Electronic Equipment & Instruments 0.6%
CDW 3,200 212
Digital Theater Systems * 3,200 65
Flextronics * 7,000 97
Jabil Circuit * 5,800 148
522
Internet Software & Services 1.1%
CNET Networks * 9,800 110
Google, Class A * 700 135
IAC/InterActiveCorp * 7,800 215
MatrixOne * 11,700 77
Monster Worldwide * 2,050 69
Yahoo! * 10,700 403
1,009
IT Services 0.9%
Accenture, Class A * 3,800 103
Automatic Data Processing 8,400 373
First Data 6,900 293
Fiserv * 1,500 60
829
Semiconductor & Semiconductor Equipment 3.2%
Analog Devices 9,300 343
Applied Materials * 14,000 240
Intel 62,700 1,467
KLA-Tencor * 2,990 139
Linear Technology 4,700 182
National Semiconductor 13,500 242
Novellus Systems * 2,700 75
Xilinx 9,100 270
2,958
Software 4.3%
Electronic Arts * 1,900 117
Intuit * 4,800 211
Mercury Interactive * 1,200 55
Microsoft 95,900 2,562
NetIQ * 9,700 118
Oracle * 50,700 696
Red Hat * 11,100 148
Verity * 7,600 100
4,007
Total Information Technology 15,140
MATERIALS 3.5%
Chemicals 1.6%
Agrium 1,000 17
Cabot 2,400 93
Dow Chemical 9,690 480
DuPont 8,600 422
Ferro 2,100 49
Great Lakes Chemical 800 23
Lyondell Chemical 1,770 51
Minerals Technologies 600 40
Mosaic * 5,100 83
Potash Corp./Saskatchewan 2,700 224
1,482
Metals & Mining 1.3%
Alcoa 7,200 226
BHP Billiton (AUD) 16,900 202
Newmont Mining 5,300 236
Nucor 9,500 497
1,161
Paper & Forest Products 0.6%
Bowater 1,200 53
International Paper 6,000 252
MeadWestvaco 3,400 115
Potlatch 1,800 91
Weyerhaeuser 1,300 87
598
Total Materials 3,241
TELECOMMUNICATION SERVICES 3.2%
Diversified Telecommunication Services 2.5%
SBC Communications 10,600 273
Sprint 23,500 584
Telus (CAD) 3,100 93
Telus 12,600 364
Verizon Communications 25,300 1,025
2,339
Wireless Telecommunication Services 0.7%
Nextel Communications, Class A * 10,800 324
Nextel Partners, Class A * 11,100 217
Spectrasite * 1,400 81
622
Total Telecommunication Services 2,961
UTILITIES 3.0%
Electric Utilities 2.2%
American Electric Power 3,100 106
Black Hills 900 28
Edison International 3,900 125
El Paso Electric * 4,300 81
Entergy 2,300 155
Exelon 5,800 256
FirstEnergy 7,100 281
PG&E * 5,400 180
Pinnacle West Capital 2,800 124
PPL 4,200 224
Southern Company 3,300 111
Teco Energy 5,100 78
TXU 4,800 310
2,059
Gas Utilities 0.2%
NiSource 6,100 139
139
Multi-Utilities & Unregulated Power 0.6%
CMS Energy * 3,700 39
Constellation Energy Group 1,900 83
Duke Energy 14,600 370
Dynegy, Class A * 10,400 48
Sempra Energy 1,100 40
580
Total Utilities 2,778
Total Common Stocks (Cost $77,102) 91,454
SHORT-TERM INVESTMENTS 0.8%
Money Market Fund 0.7%
T. Rowe Price Government Reserve
Investment Fund, 1.85% #! 644,945 645
645
U.S. Treasury Obligations 0.1%
U.S. Treasury Bills, 1.70%, 1/27/05++ 100,000 100
100
Total Short-Term Investments (Cost $745) 745
FUTURES CONTRACTS 0.0%
Variation margin receivable (payable) on
open futures contracts (2) (1)
Total Futures Contracts (1)
Total Investments in Securities
99.7% of Net Assets (Cost $77,847) $92,198
-------
(1) Denominated in U.S. dollars unless otherwise noted
# Seven-day yield
* Non-income producing
++ All or a portion of this security is pledged to cover margin
requirements on futures contracts at December 31, 2004.
! Affiliated company - See Note 4
ADR American Depository Receipts
AUD Australian dollar
CAD Canadian dollar
REIT Real Estate Investment Trust
(2) Open Futures Contracts at December 31, 2004 were as follows:
- --------------------------------------------------------------------------------
($ 000s)
Contract Unrealized
Expiration Value Gain (Loss)
---------- --------- -----------
Long, 10 S&P 500 MINI Index contracts,
$55 par of 1.70% U.S. Treasury Bills
pledged as initial margin 3/05 $ 607 $ 18
Net payments (receipts) of variation
margin to date (19)
Variation margin receivable (payable)
on open futures contracts $ (1)
------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
December 31, 2004
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
(In thousands except shares and per share amounts)
Assets
Investments in securities, at value
Affiliated companies (cost $645) $ 645
Other companies (cost $77,202) 91,553
Total investments in securities 92,198
Other assets 1,402
Total assets 93,600
Liabilities
Total liabilities 1,131
NET ASSETS $ 92,469
--------------
Net Assets Consist of:
Undistributed net investment income (loss) $ 4
Undistributed net realized gain (loss) (14,815)
Net unrealized gain (loss) 14,370
Paid-in-capital applicable to 6,948,166 shares of
$0.0001 par value capital stock outstanding;
1,000,000,000 shares authorized 92,910
NET ASSETS $ 92,469
--------------
NET ASSET VALUE PER SHARE
Investor Class
($91,968,940/6,910,600 shares outstanding) $ 13.31
--------------
Advisor Class
($250,000/18,783 shares outstanding) $ 13.31
--------------
R Class
($250,000/18,783 shares outstanding) $ 13.31
--------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04
Investment Income (Loss)
Income
Dividend $ 1,609
Interest 1
Total income 1,610
Expenses
Investment management 492
Shareholder servicing 242
Custody and accounting 140
Prospectus and shareholder reports 46
Registration 43
Legal and audit 13
Directors 5
Miscellaneous 6
Total expenses 987
Net investment income (loss) 623
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 3,290
Futures 74
Net realized gain (loss) 3,364
Change in net unrealized gain (loss)
Securities 5,269
Futures (13)
Change in net unrealized gain (loss) 5,256
Net realized and unrealized gain (loss) 8,620
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 9,243
--------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04 12/31/03
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 623 $ 197
Net realized gain (loss) 3,364 (1,982)
Change in net unrealized gain (loss) 5,256 19,537
Increase (decrease) in net assets
from operations 9,243 17,752
Distributions to shareholders
Net investment income (619) (251)
Capital share transactions *
Shares sold
Investor Class 19,601 12,654
Advisor Class 250 -
R Class 250 -
Distributions reinvested
Investor Class 568 244
Shares redeemed
Investor Class (12,659) (11,904)
Increase (decrease) in net assets from
capital share transactions 8,010 994
Net Assets
Increase (decrease) during period 16,634 18,495
Beginning of period 75,835 57,340
End of period $ 92,469 $ 75,835
--------- ---------
(Including undistributed net investment income
of $4 at 12/31/04 and $0 at 12/31/03)
*Share information
Shares sold
Investor Class 1,588 1,227
Advisor Class 19 -
R Class 19 -
Distributions reinvested
Investor Class 43 21
Shares redeemed
Investor Class (1,023) (1,156)
Increase (decrease) in shares outstanding 646 92
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
December 31, 2004
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 (the 1940 Act) as a diversified, open-end
management investment company. The fund seeks superior capital appreciation over
time by investing primarily in U.S. common stocks. The fund has three classes of
shares: the Capital Opportunity Fund original share class, referred to in this
report as the Investor Class, offered since November 30, 1994, Capital
Opportunity Fund--Advisor Class (Advisor Class), offered since December 31,
2004, and Capital Opportunity Fund--R Class (R Class), offered since December
31, 2004. Advisor Class shares are sold only through unaffiliated brokers and
other unaffiliated financial intermediaries, and R Class shares are available to
retirement plans serviced by intermediaries. The Advisor Class and R Class each
operate under separate Board-approved Rule 12b-1 plans, pursuant to which each
class compensates financial intermediaries for distribution, shareholder
servicing, and/or certain administrative services. Each class has exclusive
voting rights on matters related solely to that class, separate voting rights on
matters that relate to all classes, and, in all other respects, the same rights
and obligations as the other classes.
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates made by fund management.
Valuation
The fund values its investments and computes its net asset value per share at
the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day
that the NYSE is open for business. Equity securities listed or regularly traded
on a securities exchange or in the over-the-counter market are valued at the
last quoted sale price or, for certain markets, the official closing price at
the time the valuations are made, except for OTC Bulletin Board securities,
which are valued at the mean of the latest bid and asked prices. A security that
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 are valued at the mean of the latest
bid and asked prices for domestic securities and the last quoted sale price for
international securities.
Debt securities with original maturities of less than one year are valued at
amortized cost in local currency, which approximates fair value when combined
with accrued interest.
Investments in mutual funds are valued at the mutual fund's closing net asset
value per share on the day of valuation. Financial futures contracts are valued
at closing settlement prices.
Other investments, including restricted securities, and those 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 the T. Rowe Price
Valuation Committee, established by the fund's Board of Directors.
Most foreign markets close before the close of trading on the NYSE. If the fund
determines that developments between the close of a foreign market and the close
of the NYSE will, in its judgment, materially affect the value of some or all of
its portfolio securities, which in turn will affect the fund's share price, the
fund will adjust the previous closing prices to reflect the fair value of the
securities as of the close of the NYSE, as determined in good faith by the T.
Rowe Price Valuation Committee, established by the fund's Board of Directors. A
fund may also fair value securities in other situations, such as when a
particular foreign market is closed but the fund is open. In deciding whether to
make fair value adjustments, the fund reviews a variety of factors, including
developments in foreign markets, the performance of U.S. securities markets, and
the performance of instruments trading in U. S. markets that represent foreign
securities and baskets of foreign securities. The fund uses outside pricing
services to provide it with closing market prices and information used for
adjusting those prices. The fund cannot predict how often it will use closing
prices and how often it will adjust those prices. As a means of evaluating its
fair value process, the fund routinely compares closing market prices, the next
day's opening prices in the same markets, and adjusted prices.
Currency Translation
Assets, including investments, and liabilities denominated in foreign currencies
are translated into U.S. dollar values each day at the prevailing exchange rate,
using the mean of the bid and asked prices of such currencies against U.S.
dollars as quoted by a major bank. Purchases and sales of securities, income,
and expenses are translated into U.S. dollars at the prevailing exchange rate on
the date of the transaction. The effect of changes in foreign currency exchange
rates on realized and unrealized security gains and losses is reflected as a
component of security gains and losses.
Class Accounting
The Advisor Class and R Class each pay distribution, shareholder servicing,
and/or certain administrative expenses in the form of Rule 12b-1 fees, in an
amount not exceeding 0.25% and 0.50%, respectively, of the class's average daily
net assets; no such fees were incurred by the Advisor or R Class
during the period ended December 31, 2004. Shareholder servicing, prospectus,
and shareholder report expenses incurred by each class are charged directly to
the class to which they relate. Expenses common to all classes, investment
income, and realized and unrealized gains and losses are allocated to the
classes based upon the relative daily net assets of each class.
Rebates
Subject to best execution, the fund may direct certain security trades to
brokers who have agreed to rebate a portion of the related brokerage commission
to the fund in cash. Commission rebates are included in realized gain on
securities in the accompanying financial statements and totaled $6,000 for the
year ended December 31, 2004.
Investment Transactions, Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Premiums and discounts on
debt securities are amortized for financial reporting purposes. Dividends
received from mutual fund investments are reflected as dividend income; capital
gain distributions are reflected as realized gain/loss. Dividend income and
capital gain distributions are recorded on the ex-dividend date. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Payments ("variation margin") made or
received to settle the daily fluctuations in the value of futures contracts are
recorded as unrealized gains or losses until the contracts are closed. Unsettled
variation margin on futures contracts is included in investments in securities,
and unrealized gains and losses on futures contracts are included in the change
in net unrealized gain or loss in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income
distributions are declared and paid by each class on an annual basis. Capital
gain distributions, if any, are declared and paid by the fund, typically on an
annual basis.
During the year ended December 31, 2004, the fund received a one-time dividend
on a security held in its portfolio (Microsoft Corp.). The dividend, which
totaled $285,000, represents 18% of dividend income reflected in the
accompanying financial statements and is not expected to recur.
Other
In the normal course of business, the fund enters into contracts that provide
general indemnifications. The fund's maximum exposure under these arrangements
is dependent on claims that may be made against the fund in the future and,
therefore, cannot be estimated; however, based on experience, the risk of
material loss from such claims is considered remote.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Futures Contracts
During the year ended December 31, 2004, the fund was a party to futures
contracts, which provide for the future sale by one party and purchase by
another of a specified amount of a specific financial instrument at an agreed
upon price, date, time, and place. Risks arise from possible illiquidity of the
futures market and from movements in security values.
Other
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $44,120,000 and $36,097,000, respectively, for the year ended
December 31, 2004.
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 under Subchapter M of the
Internal Revenue Code and distribute to shareholders all of its taxable income
and gains. Federal income tax regulations differ from generally accepted
accounting principles; therefore, distributions determined in accordance with
tax regulations may differ significantly in amount or character from net
investment income and realized gains for financial reporting purposes. Financial
reporting records are adjusted for permanent book/tax differences to reflect tax
character. Financial records are not adjusted for temporary differences.
Distributions during the year ended December 31, 2004 totaled $619,000 and were
characterized as ordinary income for tax purposes. At December 31, 2004, the
tax-basis components of net assets were as follows:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 17,518,000
Unrealized depreciation (3,167,000)
Net unrealized appreciation (depreciation) 14,351,000
Undistributed ordinary income 4,000
Capital loss carryforwards (14,796,000)
Paid-in capital 92,910,000
Net assets $ 92,469,000
---------------
The fund intends to retain realized gains to the extent of available capital
loss carryforwards for federal income tax purposes. During the year ended
December 31, 2004, the fund utilized $3,301,000 of capital loss carryforwards.
As of December 31, 2004, the fund had $5,072,000 of capital loss carryforwards
that expire in 2009, $6,883,000 that expire in 2010, and $2,841,000 that expire
in 2011.
At December 31, 2004, the cost of investments for federal income tax purposes
was $77,866,000.
NOTE 4 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price
Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The
investment management agreement between the fund and the manager provides for an
annual investment management fee, which is computed daily and paid monthly. The
fee consists of an individual fund fee and the fund's pro-rata share of a group
fee. The individual fund fee is equal to 0.20% of the fund's average daily net
assets; previously, through August 1, 2004, the rate had been 0.35%. The group
fee is calculated based on the combined net assets of certain mutual funds
sponsored by Price Associates (the group) applied to a graduated fee schedule,
with rates ranging from 0.48% for the first $1 billion of assets to 0.295% for
assets in excess of $120 billion. The fund's portion of the group fee is
determined by the ratio of its average daily net assets to those of the group.
At December 31, 2004, the effective annual group fee rate was 0.31%, and
investment management fee payable totaled $39,000.
The Investor Class is also subject to a contractual expense limitation. During
the limitation period, the manager is required to waive its management fee and
reimburse the class for any expenses, excluding interest, taxes, brokerage
commissions, and extraordinary expenses, that would otherwise cause the class's
ratio of total expenses to average net assets (expense ratio) to exceed its
expense limitation of 1.15%. The Investor Class's expense limitation was 1.35%
through April 30, 2004 and lowered to 1.15% effective May 1, 2004 through April
30, 2006. Through April 30, 2008, the class is required to repay the manager for
expenses previously reimbursed and management fees waived to the extent its net
assets have grown or expenses have declined sufficiently to allow repayment
without causing the class's expense ratio to exceed its expense limitation.
Pursuant to this agreement, at December 31, 2004, there were no amounts subject
to repayment.
In addition, the fund has entered into service agreements with Price Associates
and two wholly owned subsidiaries of Price Associates (collectively, Price).
Price Associates computes the daily share prices and maintains the financial
records of the fund. T. Rowe Price Services, Inc., provides shareholder and
administrative services in its capacity as the fund's transfer and dividend
disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides
subaccounting and recordkeeping services for certain retirement accounts
invested in the Investor Class. For the year ended December 31, 2004, expenses
incurred pursuant to these service agreements were $84,000 for Price Associates,
$155,000 for T. Rowe Price Services, Inc., and $20,000 for T. Rowe Price
Retirement Plan Services, Inc. At period-end, a total of $32,000 of these
expenses was payable.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe
Price Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by Price Associates and
affiliates of the fund. The Reserve Funds are offered as cash management options
to mutual funds, trusts, and other accounts managed by Price Associates and/or
its affiliates, and are not available for direct purchase by members of the
public. The Reserve Funds pay no investment management fees. During the year
ended December 31, 2004, dividend income from the Reserve Funds totaled $12,000,
and the value of shares of the Reserve Funds held at December 31, 2004 and
December 31, 2003 was $645,000 and $635,000, respectively.
As of December 31, 2004, T. Rowe Price Group, Inc. and/or its wholly owned
subsidiaries owned 406,835 shares of the Investor Class, 18,783 shares of the
Advisor class, and 18,783 shares of the R Class, aggregating 6% of the fund's
net assets.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Capital Opportunity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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, 2004, and the results of its operations,
the changes in its net assets and the financial highlights for each of the
fiscal periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 the auditing standards
of the Public Company Accounting Oversight Board (United States). Those
standards 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, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 11, 2005
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 12/31/04
- --------------------------------------------------------------------------------
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.
For taxable non-corporate shareholders, $623,000 of the fund's income represents
qualified dividend income subject to the 15% rate category.
For corporate shareholders, $623,000 of the fund's income qualifies for the
dividends-received deduction.
Information on Proxy Voting Policies, Procedures, and Records
- --------------------------------------------------------------------------------
A description of the policies and procedures used by T. Rowe Price funds and
portfolios to determine how to vote proxies relating to portfolio securities is
available in each fund's Statement of Additional Information, which you may
request by calling 1-800-225-5132 or by accessing the SEC's Web site,
www.sec.gov. The description of our proxy voting policies and procedures is also
available on our Web site, www.troweprice.com. To access it, click on the words
"Company Info" at the top of our homepage for individual investors. Then, in the
window that appears, click on the "Proxy Voting Policy" navigation button in the
top left corner.
Each fund's most recent annual proxy voting record is available on our Web site
and through the SEC's Web site. To access it through our Web site, follow the
directions above, then click on the words "Proxy Voting Record" at the bottom of
the Proxy Voting Policy page.
How to Obtain Quarterly Portfolio Holdings
- --------------------------------------------------------------------------------
The fund files a complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year on Form
N-Q. The fund's Form N-Q is available electronically on the SEC's Web site
(www.sec.gov); hard copies may be reviewed and copied at the SEC's Public
Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information
on the Public Reference Room, call 1-800-SEC-0330.
T. Rowe Price Capital Opportunity Fund
- --------------------------------------------------------------------------------
About the Fund's Directors and Officers
- --------------------------------------------------------------------------------
Your fund is governed by a Board of Directors that meets regularly to review
investments, performance, compliance matters, advisory fees, expenses, and other
business affairs, and is responsible for protecting the interests of
shareholders. The majority of the fund's directors are independent of T. Rowe
Price Associates, Inc. (T. Rowe Price); "inside" directors are officers of T.
Rowe Price. The Board of Directors elects the fund's officers, who are listed in
the final table. The business address of each director and officer is 100 East
Pratt Street, Baltimore, MD 21202. The Statement of Additional Information
includes additional information about the fund directors and is available
without charge by calling a T. Rowe Price representative at 1-800-225-5132.
Independent Directors
Name
(Year of Birth) Principal Occupation(s) During Past 5 Years
Year Elected * and Directorships of Other Public Companies
Anthony W. Deering Director, Chairman of the Board, President, and
(1945) Chief Executive Officer, The Rouse Company, real
2001 estate developers; Director, Mercantile Bank
(4/03 to present)
Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an
(1943) acquisition and management advisory firm
1994
David K. Fagin Director, Golden Star Resources Ltd., Canyon
(1938) Resources Corp. (5/00 to present), and Pacific
1994 Rim Mining Corp. (2/02 to present); Chairman and
President, Nye Corp.
Karen N. Horn Managing Director and President, Global Private
(1943) Client Services, Marsh Inc. (1999-2003); Managing
2003 Director and Head of International Private
Banking, Bankers Trust (1996-1999); Director, Eli
Lilly and Company and Georgia Pacific
(5/04 to present)
F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates, Inc.
(1934) consulting environmental and civil engineers
2001
John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a
(1946) real estate investment company; Partner,
2001 Blackstone Real Estate Advisors, L.P.; Director,
AMLI Residential Properties Trust and The Rouse
Company, real estate developers
*Each independent director oversees 112 T. Rowe Price portfolios and serves
until retirement, resignation, or election of a successor.
Inside Directors
Name
(Year of Birth)
Year Elected *
[Number of T. Rowe Price Principal Occupation(s) During Past 5 Years
Portfolios Overseen] and Directorships of Other Public Companies
John H. Laporte, CFA Vice President, T. Rowe Price and T. Rowe Price
(1945) Group, Inc.
1994
[15]
James S. Riepe Director and Vice President, T. Rowe Price; Vice
(1943) Chairman of the Board, Director, and Vice
1994 President, T. Rowe Price Group, Inc.; Chairman of
[112] the Board and Director, T. Rowe Price Global Asset
Management Limited, T. Rowe Price Global
Investment Services Limited, T. Rowe Price
Investment Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price
Services, Inc.; Chairman of the Board, Director,
President, and Trust Officer, T. Rowe Price Trust
Company; Director, T. Rowe Price International,
Inc.; Chairman of the Board, Capital Opportunity
Fund
*Each inside director serves until retirement, resignation, or election of a
successor.
Officers
Name (Year of Birth)
Title and Fund(s) Served Principal Occupation(s)
Jeffrey W. Arricale, CPA (1971) Vice President, T. Rowe Price and
Vice President, Capital Opportunity Fund T. Rowe Price Group, Inc.; formerly
student, the Wharton School,
University of Pennsylvania
(to 2001); Manager, Assurance, KPMG
LLP (to 1999)
Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price,
Vice President, Capital Opportunity Fund T. Rowe Price Group, Inc., and
T. Rowe Price Trust Company
Joseph A. Carrier (1960) Vice President, T. Rowe Price,
Treasurer, Capital Opportunity Fund T. Rowe Price Group, Inc., T. Rowe
Price Investment Services, Inc.,
and T. Rowe Price Trust Company
Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price,
Vice President, Capital Opportunity Fund T. Rowe Price Group, Inc., T. Rowe
Price International, Inc., and
T. Rowe Price Trust Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
John R. Gilner (1961) Chief Compliance Officer and Vice
Chief Compliance Officer, President, T. Rowe Price; Vice
Capital Opportunity Fund President, T. Rowe Price Investment
Services, Inc., and T. Rowe Price
Group, Inc.
David R. Giroux, CFA (1975) Vice President, T. Rowe Price and
Vice President, Capital Opportunity Fund T. Rowe Price Group, Inc.
Gregory S. Golczewski (1966) Vice President, T. Rowe Price and
Vice President, Capital Opportunity Fund T. Rowe Price Trust Company
Jill L. Hauser (1958) Vice President, T. Rowe Price and
Vice President, Capital Opportunity Fund T. Rowe Price Group, Inc.
Michael W. Holton (1968) Vice President, T. Rowe Price and
Vice President, Capital Opportunity Fund
T. Rowe Price Group, Inc.
Henry H. Hopkins (1942) Director and Vice President,
Vice President, Capital Opportunity Fund T. Rowe Price Investment Services,
Inc., T. Rowe Price Services, Inc.,
and T. Rowe Price Trust Company;
Vice President, T. Rowe Price,
T. Rowe Price Group, Inc., T. Rowe
Price International, Inc., and
T. Rowe Price Retirement Plan
Services, Inc.
Patricia B. Lippert (1953) Assistant Vice President, T. Rowe
Secretary, Capital Opportunity Fund Price and T. Rowe Price Investment
Services, Inc.
Philip A. Nestico (1976) Vice President, T. Rowe Price
Vice President, Capital Opportunity Fund
Jeffrey Rottinghaus, CPA (1970) Vice President, T. Rowe Price and
Vice President, Capital Opportunity Fund T. Rowe Price Group, Inc.; formerly
student, the Wharton School,
University of Pennsylvania
(to 2001); Information Technology
Consultant, Kelly-Lewey &
Associates (to 1999)
William J. Stromberg, CFA (1960) Vice President, T. Rowe Price,
President, Capital Opportunity Fund T. Rowe Price Group, Inc., and
T. Rowe Price Trust Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Julie L. Waples (1970)
Vice President, Capital Opportunity Fund Vice President, T. Rowe Price
Richard T. Whitney, CFA (1958) Vice President, T. Rowe Price,
Vice President, Capital Opportunity Fund T. Rowe Price Group, Inc., T. Rowe
Price International, Inc., and
T. Rowe Price Trust Company
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe
Price International for at least five years.
Item 2. Code of Ethics.
The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR,
applicable to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. A copy of this code of ethics is filed as an exhibit to this Form
N-CSR. No substantive amendments were approved or waivers were granted to this
code of ethics during the period covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Directors/Trustees has determined that Mr. David K.
Fagin qualifies as an audit committee financial expert, as defined in Item 3 of
Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form
N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal years
for professional services rendered by the registrant's principal accountant were
as follows:
2004 2003
Audit Fees $6,897 $7,582
Audit-Related Fees 968 452
Tax Fees 1,871 1,969
All Other Fees - 124
Audit fees include amounts related to the audit of the registrant's annual
financial statements and services normally provided by the accountant in
connection with statutory and regulatory filings. Audit-related fees include
amounts reasonably related to the performance of the audit of the registrant's
financial statements, specifically the issuance of a report on internal
controls. Tax fees include amounts related to tax compliance, tax planning, and
tax advice. Other fees include the registrant's pro-rata share of amounts for
agreed-upon procedures in conjunction with service contract approvals by the
registrant's Board of Directors/Trustees.
(e)(1) The registrant's audit committee has adopted a policy whereby audit and
non-audit services performed by the registrant's principal accountant for the
registrant, its investment adviser, and any entity controlling, controlled by,
or under common control with the investment adviser that provides ongoing
services to the registrant require pre-approval in advance at regularly
scheduled audit committee meetings. If such a service is required between
regularly scheduled audit committee meetings, pre-approval may be authorized by
one audit committee member with ratification at the next scheduled audit
committee meeting. Waiver of pre-approval for audit or non-audit services
requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) - (d) above were approved pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50 percent of the hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees.
(g) The aggregate fees billed for the most recent fiscal year and the preceding
fiscal year by the registrant's principal accountant for non-audit services
rendered to the registrant, its investment adviser, and any entity controlling,
controlled by, or under common control with the investment adviser that provides
ongoing services to the registrant were $903,000 and $821,000, respectively, and
were less than the aggregate fees billed for those same periods by the
registrant's principal accountant for audit services rendered to the T. Rowe
Price Funds.
(h) All non-audit services rendered in (g) above were pre-approved by the
registrant's audit committee. Accordingly, these services were considered by the
registrant's audit committee in maintaining the principal accountant's
independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of
this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have evaluated the registrant's disclosure controls and procedures within 90
days of this filing and have concluded that the registrant's disclosure controls
and procedures were effective, as of that date, in ensuring that information
required to be disclosed by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) The registrant's principal executive officer and principal financial officer
are aware of no change in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal quarter covered by
this report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is
attached.
(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end
companies: not applicable.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940,
is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price Capital Opportunity Fund, Inc.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
By /s/ Joseph A. Carrier
-----------------------------------
Joseph A. Carrier
Principal Financial Officer
Date February 18, 2005