T. Rowe Price
Mid-Cap Growth Portfolio
Semiannual Report
June 30, 1998
Dear Investor
After three years of stellar gains, the stock market began 1998 with a modest
sell-off, but recovered quickly and climbed steadily to finish the first half
near record territory. Larger-capitalization, blue chip growth companies
continued to lead the market, as they have since 1995, with the S&P 500 Stock
Index gaining 17.71%.
Performance Comparison
Periods Ended 6/30/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Mid-Cap Growth Portfolio 16.84% 30.57%
S&P 400 MidCap Index 8.64 27.15
Russell Midcap
Growth Index 11.87 24.02
Lipper Variable Annuity
Underlying Mid Cap
Funds Average 13.40 24.43
Small- and mid-cap companies participated in the market's advance, but posted
more modest gains. The Mid-Cap Growth Portfolio performed relatively well during
the last 6- and 12-month periods, outperforming its two passive benchmarks as
well as a measure of other mid-cap funds, with gains of 16.84% and 30.57%,
respectively.
Market Environment
The primary concern entering the year was the extent to which the Asian economic
crisis would affect the U.S. economy and stock market. What began in July 1997
as a currency crisis in Thailand quickly enveloped the rest of Asia. Currencies
and stock markets plunged, banks were closed, brokerages failed, and real estate
prices fell. That was only the first phase of the crisis-the financial collapse.
In 1998, we have begun to witness the economic and political consequences, and
they are severe, to say the least. Many of the region's economies are
collapsing, and depressions seem to be developing in some nations. Major
political changes are occurring in others, notably Indonesia and, perhaps,
Japan. In a perverse way, Asia's miseries have helped the U.S. stock market in
1998: the economic carnage has scared investment from Asia into the seemingly
safer U.S. market; and fears of exacerbating the Asian crisis and pushing an
already strong dollar even higher dissuaded the Federal Reserve from raising
domestic interest rates to brake a surging domestic economy. The crisis has hurt
earnings at many U.S. companies, however.
The stock market's surge in the first half of 1998 reflects a continuation of
many of the conditions that have contributed to a nearly ideal investment
environment over the last several years. Most important, the U.S. inflation rate
continues to fall, driven by falling prices for commodities ranging from crude
oil to grain. Long-term interest rates resumed their decline, reaching nearly
5.6% in June, down from 7.2% in the spring of 1997. Meanwhile, in Washington,
both Republicans and Democrats have converged in the middle of the political
spectrum on most economic issues, facilitated by the probability of a federal
budget surplus this year for the first time since 1969. The unemployment rate
remains very low, consumer confidence is at its highest level in 29 years, and
the economy appears robust. Investors continued to pour money into equity mutual
funds.
Small- and mid-cap stocks lagged the broad market as investors continued to
gravitate toward blue chip companies. The merger boom continued, driven by a
perceived need for economies of scale and abetted by high public valuations for
many consolidators. Although the new issue market cooled noticeably, there was
frenzied speculative activity in many of the Internet stocks. While the Internet
has the potential to change the economic paradigm in some industries, valuations
have risen indiscriminately to astounding levels for many of these companies,
considering that most have very modest revenues and rapidly changing business
models.
Portfolio Review
Amid falling interest rates and concerns about businesses with significant
foreign exposure, it is not surprising that the financial and consumer stocks
were the best-performing stock market sectors in 1998's first half. The
Portfolio's largest contributor year-to-date was Capital One Financial, a
leading credit card issuer whose earnings greatly exceeded investor
expectations. Other top contributors included Galileo International, a leading
centralized reservation system provider, which benefited from high travel
activity and a better appreciation by investors of the company's strong business
model; Outdoor Systems, a consolidator in the outdoor advertising sector, which
profited from a torrid advertising environment and posted strong earnings gains;
and Royal Caribbean Cruises, a large cruise ship operator, which experienced
strong demand in addition to reaping the rewards of successfully integrating a
significant acquisition made in mid-1997.
The worst detractor for both the 6- and 12-month periods was Smith
International, an energy services company that had graced the top contributors
table several times over the last two years. As oil prices fell, energy stocks
were hit hard, and Smith International was not spared. We still regard the
company as well managed and a leader in its niches. Other significant detractors
included Gymboree, the children's apparel retailer, which experienced
operational woes; and Security Dynamics Technologies, a computer security
provider, which is in the midst of a product transition that has lowered
earnings expectations.
It is worth noting that the current merger boom has not entirely passed us by.
In the last six months, several of our holdings have been acquired or announced
they were being acquired, including United States Surgical, Culligan Water
Technologies, 360 Communications, Camco International, Weatherford Enterra, La
Quinta Inns, and R.P. Scherer. While the premiums we were paid varied, and only
two were top contributors, the combined effect was clearly a factor in our
recent results.
Your Portfolio remains well diversified across industry sectors. We have made
only modest changes in the last six months, as shown in the accompanying table.
Sector Diversification
12/31/97 6/30/98
- --------------------------------------------------------------------------------
Financial 9% 11%
Health Care 12 15
Consumer 20 18
Technology 10 11
Business Services 28 31
Energy 5 3
Industrial 7 5
Basic Materials 2 1
Reserves 7 5
- --------------------------------------------------------------------------------
Total 100% 100%
Investment Strategy and Outlook
One of the root causes of the Asian economic crisis was an apparent
overinvestment in productive capacity. With the setback in Asian economic
activity, worldwide supply exceeds demand in many industries. This is putting
downward pressure on product prices around the world. At this point, most
Americans have benefited from this phenomenon since it has served to dampen
inflation and interest rates at a point in the economic cycle when we would
normally expect them to be rising. In light of such good fortune-a strong
economy and falling inflation-the stock market has reacted very favorably.
However, even as consumers continue to spend freely, pressures emanating from
Asia are beginning to assert themselves: a deluge of cheaper Asian imports and a
decline in American exports to the region are causing the U.S. trade deficit to
balloon, and American manufacturers are beginning to see slowing demand for
their products. There is evidence that U.S. economic growth is ebbing, and this
could pressure corporate profits in the quarters ahead.
On an absolute basis, the stock market continues to trade in the upper reaches
of its historic valuation range, but low interest rates provide some support as
long as earnings growth continues. While small- and mid-cap stocks often lead
the stock market in the later stages of market and economic cycles, this has not
been the case this time. The market's leadership is concentrating in an
increasingly narrow group of large, blue chip companies-the New Nifty Fifty, as
some have called them. While these companies have grown their earnings nicely in
recent years, they now trade at valuations that are well in excess of small- and
mid-cap companies, even though many of the latter are expected to grow their
earnings significantly faster in the next few years. On a relative basis, small-
and mid-cap stocks are trading at historically low levels. We believe the
Mid-Cap Growth Portfolio is well positioned to achieve attractive returns over
the long run.
Respectfully submitted,
Brian W.H. Berghuis
President and
Chairman of the Investment Advisory Committee
July 17, 1998
Portfolio Highlights
Contributions to the Change in Net Asset Value Per Share
6 Months Ended 6/30/98
TEN BEST CONTRIBUTORS
- --------------------------------------------------------------------------------
Capital One Financial 16(cents)
Galileo International 10
Outdoor Systems 10
Affiliated Computer Services 9
Royal Caribbean Cruises 9
Warnaco Group 9
360 Communications** 8
Fairfax Financial 7
Biogen 7
United States Surgical 6
- --------------------------------------------------------------------------------
Total 91(cents)
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TEN WORST CONTRIBUTORS
- --------------------------------------------------------------------------------
Smith International - 6(cents)
Gymboree 6
Security Dynamics Technologies 5
Dura Pharmaceuticals* 4
Berg Electronics* 3
AMRESCO* 3
Cendant 3
Gilead Sciences 3
Security Capital Group 2
Teva Pharmaceutical Industries* 2
- --------------------------------------------------------------------------------
Total - 37(cents)
- --------------------------------------------------------------------------------
12 Months Ended 6/30/98
TEN BEST CONTRIBUTORS
- --------------------------------------------------------------------------------
Outdoor Systems 17(cents)
Capital One Financial* 16
Royal Caribbean Cruises 16
Galileo International* 11
360 Communications** 11
Cox Communications 9
Costco Companies 9
Affiliated Computer Services 9
DST Systems 9
Kohl's 9
- --------------------------------------------------------------------------------
Total 116(cents)
- --------------------------------------------------------------------------------
TEN WORST CONTRIBUTORS
- --------------------------------------------------------------------------------
Smith International - 5(cents)
OEA** 5
Security Dynamics Technologies* 4
Gymboree 4
TVX Gold 4
Vencor** 4
Dura Pharmaceuticals* 4
Cambior 4
Berg Electronics* 3
AMRESCO* 3
- --------------------------------------------------------------------------------
Total - 40(cents)
- --------------------------------------------------------------------------------
* Position added.
** Position eliminated.
Portfolio Highlights
Twenty-Five Largest Holdings
Percent of
Net Assets
6/30/98
- --------------------------------------------------------------------------------
Warnaco Group 2.3%
Affiliated Computer Services 1.9
Galileo International 1.9
Capital One Financial 1.9
Royal Caribbean Cruises 1.8
Biogen 1.7
Outdoor Systems 1.7
U.S. Foodservice 1.6
Circuit City Stores 1.5
Danaher 1.4
Premier Parks 1.4
DST Systems 1.4
Suiza Foods 1.4
BE Aerospace 1.3
SunGard Data Systems 1.3
AutoZone 1.3
Interim Services 1.3
Camco International 1.3
Western Wireless 1.3
Corporate Express 1.2
PartnerRe Holdings 1.2
Covance 1.2
Costco Companies 1.2
BJ's Wholesale Club 1.2
FINOVA Group 1.2
- --------------------------------------------------------------------------------
Total 36.9%
- --------------------------------------------------------------------------------
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.
Mid-Cap Growth Portfolio
As of 6/30/98
Lipper Variable
Mid-Cap S&P Annuity Underlying
Growth MidCap Mid Cap Funds
Portfolio Index Average
12/31/96 10,000 10,000 10,000
06/30/97 10,630 11,299 10,733
6/30/98 13,880 14,367 13,262
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.
Mid-Cap Growth Portfolio
Periods Ended 6/30/98
Since Inception
1 Year Inception Date
- --------------------------------------------------------------------------------
30.57% 24.53% 12/31/96
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Total returns do not include charges imposed by your insurance company's
separate account. If these were included, performance would have been lower.
Financial Highlights
T. Rowe Price Mid-Cap Growth Portfolio
(Unaudited)
For a share outstanding
throughout each period
--------------------------------
6 Months 12/31/96
Ended Through
6/30/98 12/31/97
NET ASSET VALUE
Beginning of period $ 11.88 $ 10.00
Investment activities
Net investment income (0.01) --
Net realized and unrealized gain (loss) 2.01 1.88
Total from investment activities 2.00 1.88
NET ASSET VALUE
End of period $ 13.88 $ 11.88
--------------------------------
Ratios/Supplemental Data
Total return(C) 16.84% 18.80%
Ratio of expenses to average net assets 0.85%! 0.85%
Ratio of net investment
income to average net assets (0.15)%! --
Portfolio turnover rate 23.3% 40.3%
Net assets, end of period (in thousands) $ 20,445 $ 15,272
(C) 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.
! Annualized.
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
T. Rowe Price Mid-Cap Growth Portfolio
June 30, 1998 (Unaudited)
Shares/Par Value
In thousands
- --------------------------------------------------------------------------------
COMMON STOCKS 94.8%
FINANCIAL 11.3%
Insurance 4.4%
ACE Limited 5,150 $ 201
Fairfax Financial (CAD) * 600 234
PartnerRe Holdings 4,900 250
Protective Life 5,800 212
897
Financial Services 6.9%
AMRESCO * 6,300 183
Capital One Financial 3,100 385
FINOVA Group 4,300 244
Franklin Resources 3,900 211
Heller Financial * 1,000 30
INMC Mortgage Holdings 7,400 168
Waddell & Reed (Class A) 8,200 196
1,417
Total Financial 2,314
HEALTH CARE 14.6%
Pharmaceuticals 3.6%
ALZA * 5,000 216
Dura Pharmaceuticals * 8,600 193
R.P. Scherer * 1,700 150
Teva Pharmaceutical Industries ADR 5,200 183
742
Biotechnology 4.6%
Agouron Pharmaceuticals * 2,300 70
Biogen * 7,300 358
Centocor * 5,200 189
Gilead Sciences * 5,900 189
MedImmune * 2,000 125
931
Medical Instruments and Devices 1.9%
Sybron International * 8,400 212
United States Surgical 3,700 169
381
Health Care Services 4.5%
Covance * 11,100 250
Omnicare 5,800 221
Quorum Health Group * 8,400 222
Total Renal Care Holdings * 6,600 228
921
Total Health Care 2,975
CONSUMER 18.0%
Soft Goods Retailers 1.5%
Gymboree * 5,400 $ 82
Kohl's * 4,200 218
300
Hard Goods Retailers 8.2%
AutoZone * 8,400 268
BJ's Wholesale Club * 6,000 244
Circuit City Stores 6,600 309
Costco Companies * 3,900 246
Fred Meyer * 5,100 217
General Nutrition * 6,200 193
ShopKo Stores * 5,900 201
1,678
Consumer Non-Durables 2.3%
Warnaco Group (Class A) 11,300 480
480
Restaurants 1.1%
Outback Steakhouse * 5,600 218
218
Food and Beverages 1.4%
Suiza Foods * 4,700 280
280
Entertainment 3.2%
Premier Parks * 4,400 293
Royal Caribbean Cruises 4,700 374
667
Consumer Services 0.3%
Cendant * 2,900 61
61
Total Consumer 3,684
TECHNOLOGY 11.0%
Computer Software 3.8%
BMC Software * 3,600 187
The Learning Company * 2,100 62
Network Associates * 4,050 194
Security Dynamics Technologies * 5,100 92
Synopsys * 5,300 242
777
Semiconductors and Components 4.8%
Analog Devices * 7,900 194
Berg Electronics * 8,600 168
Maxim Integrated Products * 6,000 190
Microchip Technology * 5,100 $ 134
PMC-Sierra * 3,300 155
Xilinx * 4,500 153
994
Networking and Telecom Equipment 0.5%
Anixter International * 5,300 101
101
E-Commerce 1.9%
Checkfree Holdings * 5,000 147
Sterling Commerce * 4,900 238
385
Total Technology 2,257
BUSINESS SERVICES 29.9%
Telecom Services 5.8%
Comcast (Class A Special) 5,400 219
Cox Communications (Class A) * 4,300 208
Omnipoint * 9,300 214
Paging Network * 16,800 235
Vanguard Cellular (Class A) * 2,600 49
Western Wireless * 13,300 265
1,190
Computer Services 8.0%
Acxiom * 2,000 50
Affiliated Computer Services
(Class A) * 10,300 396
DST Systems * 5,050 283
Galileo International 8,800 396
National Data 5,300 232
SunGard Data Systems * 7,000 269
1,626
Distribution 5.3%
Corporate Express * 20,000 253
Henry Schein * 4,900 225
MSC (Class A)* 7,200 205
Richfood Holdings 2,900 60
U.S. Foodservice * 9,500 333
1,076
Media and Advertising 4.5%
ADVO * 1,500 42
Catalina Marketing * 3,200 166
Jacor Communications * 3,300 195
Outdoor Systems * 12,700 $ 356
Univision Communications
(Class A)* 4,400 164
923
Real Estate Services 1.0%
Security Capital Group
(Class B) * 7,900 210
210
Environmental 0.9%
USA Waste Services * 3,700 183
183
Miscellaneous Business Services 4.4%
AccuStaff * 700 22
Interim Services * 8,300 267
NOVA * 5,500 196
Renaissance Worldwide * 8,400 183
Romac International * 3,500 107
Sodexho Marriott * 4,200 122
897
Total Business Services 6,105
ENERGY 3.5%
Exploration and Production 0.8%
Ocean Energy * 8,580 168
168
Energy Services 2.7%
Camco International 3,400 265
Cooper Cameron * 2,300 117
Smith International * 4,500 157
539
Total Energy 707
INDUSTRIAL 4.6%
Defense and Aerospace 1.3%
BE Aerospace * 9,200 270
270
Specialty Chemicals 0.8%
Great Lakes Chemical 4,100 162
162
Machinery 2.5%
Danaher 8,000 293
Teleflex 5,500 209
502
Total Industrial 934
BASIC MATERIALS 1.2%
Mining 1.2%
Battle Mountain Gold 21,400 $ 127
Cambior 8,600 51
TVX Gold * 22,600 69
Total Basic Materials 247
Miscellaneous Common Stocks 0.7% 146
Total Common Stocks (Cost $15,577) 19,369
SHORT-TERM INVESTMENTS 5.9%
Money Market Funds 5.9%
Government Reserve Investment Fund
5.48% # 1,213,355 1,213
Total Short-Term
Investments (Cost $1,213) 1,213
Total Investments in Securities
100.7% of Net Assets (Cost $16,790) $ 20,582
Other Assets Less Liabilities (137)
NET ASSETS $ 20,445
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (13)
Accumulated net realized gain/loss -
net of distributions 832
Net unrealized gain (loss) 3,792
Paid-in-capital applicable to 1,473,195
shares of $0.0001 par value capital
capital stock outstanding; 1,000,000,000 shares
of the corporation authorized 15,834
NET ASSETS $ 20,445
----------
NET ASSET VALUE PER SHARE $ 13.88
----------
# Seven-day yield
* Non-income producing
ADR American Depository Receipt
CAD Canadian dollar
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Mid-Cap Growth Portfolio
(Unaudited)
In thousands
6 Months
Ended
6/30/98
Investment Income
Income
Interest $ 39
Dividend 24
Total income 63
Expenses
Investment management and administrative 76
Net investment income (13)
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 749
Change in net unrealized gain or loss on securities 1,967
Net realized and unrealized gain (loss) 2,716
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 2,703
---------
Statement of Changes in Net Assets
T. Rowe Price Mid-Cap Growth Portfolio
(Unaudited)
In thousands
6 Months 12/31/96
Ended Through
6/30/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ (13) $ --
Net realized gain (loss) 749 83
Change in net
unrealized gain or loss 1,967 1,825
Increase (decrease) in
net assets from operations 2,703 1,908
Capital share transactions*
Shares sold 7,837 17,090
Shares redeemed (5,367) (3,726)
Increase (decrease) in
net assets from capital
share transactions 2,470 13,364
Net Assets
Increase (decrease) during period 5,173 15,272
Beginning of period 15,272 --
End of period $ 20,445 $ 15,272
---------------------------------
*Share information
Shares sold 596 1,637
Shares redeemed (409) (351)
Increase (decrease)
in shares outstanding 187 1,286
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Mid-Cap Growth Portfolio
June 30, 1998 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Equity Series, Inc. (the corporation) is registered under the
Investment Company Act of 1940. The Mid-Cap Growth Portfolio (the fund), a
diversified, open-end management investment company, is one of the portfolios
established by the corporation and commenced operations on December 31, 1996.
The shares of the fund are currently being offered only to separate accounts of
certain insurance companies as an investment medium for both variable annuity
contracts and variable life insurance policies.
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.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S. dollars at
the prevailing exchange rate at the end of the reporting period. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
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 $6,396,000 and $3,920,000, respectively, for the six months ended
June 30, 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.
At June 30, 1998, the aggregate cost of investments or federal income tax and
financial reporting purposes was $16,790,000, and net unrealized gain aggregated
$3,792,000, of which $4,528,000 related to appreciated investments and $736,000
to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management and administrative agreement between the fund and T.
Rowe Price Associates, Inc. (the manager) provides for an all-inclusive annual
fee, of which $1,000 was payable at June 30, 1998. The fee, computed daily and
paid monthly, is equal to 0.85% of the fund's average daily net assets. Pursuant
to the agreement, investment management, shareholder servicing, transfer agency,
accounting, and custody services are provided to the fund, and interest, taxes,
brokerage commissions, and extraordinary expenses are paid directly by the fund.
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 six months ended June 30, 1998, totaled
$39,000 and are reflected as interest income in the accompanying Statement of
Operations.
Invest With Confidence(registered trademark)
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP657 (6/98) K15-071 6/30/98
