T. Rowe Price
Equity Income Portfolio
Annual Report
December 31, 1998
Dear Investor
Last year was characterized by positive economic growth, a favorable interest
rate environment, and substantial stock market volatility. A solid first half
was undermined by a severe third quarter correction, which gave way to a
near-euphoric rally in the final months. The S&P 500 Index advanced by more than
20% for a record fourth consecutive year. However, within the context of another
strong year for equities, large-cap growth stocks outpaced the value stocks in
which your fund invests.
Performance Comparison
---------------------------------------------------------------------------
Periods Ended 12/31/98 6 Months 12 Months
---------------------------------------------------------------------------
Equity Income Portfolio 2.57% 9.07%
S&P 500 9.22 28.57
Lipper Variable Annuity
Underlying Equity Income
Funds Average 5.07 16.75
For the last six months, the fund returned 2.57%, which was behind both the
Lipper universe of similarly managed funds and the unmanaged Standard &
Poor's 500 Stock Index. The second half was particularly volatile in that
the carnage of the third quarter was quickly followed by the market's
exceptionally strong rebound in the fourth. We were pleased that the fund
provided shareholders with some downside protection during the sell-off,
which is characteristic of our conservative investment approach. This
inherent defensiveness, however, made it difficult for the fund to keep up
with the strong rally during the fourth quarter.
For the year, the fund's 9.07% return was respectable but somewhat
disappointing, since performance lagged the Lipper peer group. As discussed
later in the report, it is virtually impossible for funds with conservative
programs like Equity Income Portfolio to keep up with S&P 500 stocks during
the broad market advances we have seen in recent years. In times like
these, it is helpful for shareholders to keep in mind that the purpose of
this type of fund is not to generate robust returns under all market
conditions. The fund's goal is to produce attractive returns, including
substantial dividend income, over time-and also to help cushion investment
principal when times get rough.
DIVIDEND DISTRIBUTION
Your Board of Directors declared a fourth quarter dividend of $0.10 per
share, bringing the total for 1998 to $0.39. Earlier in the month, a $0.56
per share capital gain distribution was declared, of which $0.21
represented short-term and $0.35 long-term gains. The dividend distribution
was paid on December 30, 1998, to shareholders of record on December 28,
1998, and the capital gain distribution was paid on December 17, 1998, to
shareholders of record on December 15.
PORTFOLIO STRATEGY
"It was the best of times, it was the worst of times." This opening
sentence in Charles Dickens' classic, A Tale of Two Cities, describes the
dramatic volatility in financial markets, as well as the wide range of
performance within the U.S. equity market in 1998. While the S&P 500 posted
a 28% advance, more than one-half of this return was generated by 15 of the
largest-capitalization companies in the index. Much of the market's
leadership was contained in the largest-cap growth stocks, while high-yield
and low P/E stocks-two characteristics the Equity Income Portfolio has
historically sought out-were out of favor. So, while the S&P 500 produced a
healthy return, in reality the average stock on the New York Stock Exchange
declined slightly in value.
When looking at the impact of yield and P/E within the S&P 500, the 100
highest-yielding stocks and 100 lowest P/E stocks in the market returned
7.8% and -0.6%, respectively. Stock funds with broad investment programs
had more flexibility to make different types of investments than is
permitted for your fund. For example, technology stocks produced the best
returns for the year-although they endured an extremely volatile ride along
the way. However, given the conservative nature of our investment program,
technology is not a natural sector for us to invest in, since these stocks
normally do not meet our investment criteria.
The fund was 95% invested in equities at year-end. Four of our largest
sales during the past six months were stocks of companies that were in the
process of being merged or acquired (see Major Portfolio Changes table
following the report). In each case, we were able to sell our shares at
prices higher than our original cost.
Preparing for the Year 2000
- --------------------------------------------------------------------------------
The Year 2000 draws closer every day, and it holds special meaning beyond
the arrival of a new millen-nium. The issue for investors is that many
computer programs throughout the world use two digits instead of four to
identify the year and may assume the next century starts with 1900. If
these programs are not modified, they will not be able to correctly handle
the century change when the year changes from "99" to "00" on January 1,
2000, and they will no longer be able to perform necessary functions. The
Year 2000 issue affects all companies and organizations.
T. Rowe Price has been taking steps to assure that its computer systems and
processes are capable of functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are currently being executed.
Our Plan of Action
We began to address these issues several years ago by requiring that all
new systems process and store four-digit years. All critical systems have
been reprogrammed (including business applications required to service our
customers and processing infrastructure necessary to ensure the integrity
of customer data and investments), and they are currently being tested.
Because we exchange data electronically with customers and vendors, we are
working with them to assess the adequacy of their own compliance efforts.
Our goal is to ensure the continuation of the same level of service to all
our mutual fund shareholders and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be
able to modify their interface files prior to December 31, 1999. In
addition, we are scheduling tests for critical vendors and companies that
claim Year 2000 compliance to ensure that time-related data and
calculations function properly as we move into the next century.
Smooth Transition Planned
We believe our programs and initiatives will provide a smooth transition
into the next millennium. We are assessing all systems providing products
or services to our retail mutual fund shareholders, retirement plan
sponsors, and participants, and we have modified them where necessary for
the Year 2000.
The Securities Industry Association (SIA) is coordinating Year 2000 testing
to assure that securities markets, clearing corporations, depositories, and
third party service providers can send, receive, and process files and
transactions accurately. In late July 1998, the SIA completed a beta test
of Year 2000 readiness. The test was considered successful in terms of
transactions completed and will serve as the basis for the SIA's
industry-wide approach. During October 1998, T. Rowe Price completed its
beta test of Year 2000 readiness with the SIA and is ready for the
industry-wide test that is scheduled for March and April 1999.
For a more detailed discussion of our Year 2000 effort, as well as
continuing updates on our progress, please check our Web site
(www.troweprice.com).
We made significant new investments in several companies, including Baker
Hughes, Boeing, BankAmerica, and Corning, all of which we bought at prices well
below their highs for the year. Many of our holdings typically trade at
below-average valuation levels because, for many reasons, their share prices
declined before we took a position in them. Baker Hughes is a good example.
While the jury may be out on this investment for a while, we invested in this
oil service company at approximately $19 per share, down from the 1998 high of
approximately $45. In our view, the company represents reasonable value at the
price we paid for the stock and offers the potential for good returns once
investors grow less concerned about recent trends in energy prices.
This investment strategy-buying out-of-favor stocks with good long-term
potential-has served shareholders well in the past, and we believe it will in
the future when investors focus again on stocks with appealing market
valuations. The Financial Profile table below lists the valuation
characteristics found in the typical fund investment. The data demonstrate the
degree to which the companies in which we invest have below-average valuations.
The fund's yield is more than double that of the broad index, its price/book
value ratio is about half, its price/earnings ratio a lot lower, and the
historical beta of 0.66 versus 1.00 for the index means that the fund can be
expected to have about 66% of the volatility of the S&P 500.
Financial Profile
- --------------------------------------------------------------------------------
Equity Income
Portfolio S&P 500
- --------------------------------------------------------------------------------
Current Yield 2.7% 1.3%
Price/Book Ratio 3.3X 6.5X
Price/Earnings Ratio
(1999 estimated EPS) 18.3X 25.4X
Historical Beta
(based on monthly returns
for 4 years) 0.66 1.00
- --------------------------------------------------------------------------------
Among your fund's largest holdings (see Twenty-Five Largest Holdings table
following the letter) are companies from many industries, including SBC
Communications, Mellon Bank, American Home Products, Exxon, Anheuser-Busch, Dow
Chemical, GE, and others that represent a broad cross-section of the U.S.
economy.
SUMMARY AND OUTLOOK
Twelve months ago, we commented on the rapid appreciation of stock prices
compared with the growth in the underlying earnings and dividends. In 1997,
share prices increased at a much faster rate than the underlying
fundamentals, and this "delinkage" between price and value grew even more
pronounced in 1998.
We expect 1999 to be a more challenging year than the one just ended, which
could lead to more moderate returns than the robust and, in our view,
unsustainable performance of the past four years. In this environment, our
investment approach will be steady and constant. We will continue to search
for attractively valued stocks with solid long-term potential.
As always, we will strive to justify the confidence you have placed in us,
and we appreciate your continued support.
Respectfully submitted,
Brian C. Rogers
President and Chairman of the Investment Advisory Committee
January 22, 1999
Portfolio Highlights
Twenty-Five Largest Holdings
- --------------------------------------------------------------------------------
Percent of
Net Assets
12/31/98
- --------------------------------------------------------------------------------
SBC Communications 2.3%
ALLTEL 1.8
Mellon Bank 1.8
American Home Products 1.7
Exxon 1.6
Amoco 1.5
Philip Morris 1.5
Pharmacia & Upjohn 1.5
Anheuser-Busch 1.4
General Mills 1.4
GTE 1.3
Norfolk Southern 1.2
GE 1.2
Dow Chemical 1.2
Mobil 1.2
Chevron 1.1
Fannie Mae 1.1
Atlantic Richfield 1.1
AT&T 1.1
Kimberly-Clark 1.1
International Flavors & Fragrances 1.0
Union Pacific 1.0
American General 1.0
Citigroup 1.0
Texaco 1.0
- --------------------------------------------------------------------------------
Total 33.1%
- --------------------------------------------------------------------------------
Major Portfolio Changes
- --------------------------------------------------------------------------------
Six Months Ended 12/31/98
Listed in descending order of size
LARGEST PURCHASES (10)
- --------------------------------------------------------------------------------
Unocal
Baker Hughes*
Telebras*
Boeing*
Toys "R" Us*
Armstrong World
Citigroup
Kellogg
3M
BankAmerica*
LARGEST SALES (10)
- --------------------------------------------------------------------------------
United States Surgical**
Bankers Trust New York**
Willis-Corroon**
BellSouth
Baxter International**
Amoco
PECO Energy
Frontier
Amgen**
Abbott Laboratories
- --------------------------------------------------------------------------------
*Position added.
**Position eliminated.
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.
Equity Income Portfolio
As of 12/31/98
Lipper Variable
Equity Annuity Underlying
Income S&P Equity Income
Portfolio 500 Funds Average
3/31/94 10,000 10,000 10,000
12/94 10,715 10,532 10,383
12/95 14,439 14,489 13,794
12/96 17,623 17,816 16,421
12/97 22,244 23,760 21,388
12/31/98 24,262 30,547 24,732
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.
Equity Income Portfolio
Periods Ended 12/31/98
Since Inception
1 Year 3 Years Inception Date
- --------------------------------------------------------------------------------
9.07% 18.89% 20.49% 3/31/94
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
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 Equity Income Portfolio
For a share outstanding throughout each period
-------------------------------------------------
Year 3/31/94
Ended Through
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of period $ 18.59 $ 15.26 $ 13.21 $ 10.42 $ 10.00
Investment activities
Net investment income 0.39 0.40 0.42 0.44 0.30
Net realized and
unrealized gain (loss) 1.27 3.94 2.13 3.05 0.41
Total from
investment activities 1.66 4.34 2.55 3.49 0.71
Distributions
Net investment income (0.39) (0.40) (0.42) (0.44) (0.29)
Net realized gain (0.61) (0.61) (0.08) (0.26) --
Total distributions (1.00) (1.01) (0.50) (0.70) (0.29)
NET ASSET VALUE
End of period $ 19.25 $ 18.59 $ 15.26 $ 13.21 $ 10.42
----------------------------------------------------
Ratios/Supplemental Data
Total return# 9.07% 28.85% 19.56% 34.76% 7.15%
Ratio of expenses to
average net assets 0.85% 0.85% 0.85% 0.85% 0.85%!
Ratio of net investment
income to average
net assets 2.15% 2.56% 2.94% 3.61% 3.88%!
Portfolio turnover rate 18.2% 20.5% 17.4% 10.1% 21.3%!
Net assets,
end of period
(in thousands) $526,952 $344,724 $103,751 $ 14,658 $ 2,191
# 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 Equity Income Portfolio
December 31, 1998
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
Common Stocks 94.9%
FINANCIAL 15.2%
Bank and Trust 9.6%
Bank One 85,227 $ 4,352
BankAmerica 31,000 1,864
BankBoston 49,800 1,939
Chase Manhattan 56,208 3,826
Citigroup 106,499 5,272
First Union 63,310 3,850
Fleet Financial Group 92,400 4,129
J. P. Morgan 49,300 5,179
Mellon Bank 134,700 9,261
Mercantile Bankshares 71,150 2,737
National City 37,700 2,733
PNC Bank 34,700 1,878
Wells Fargo 86,660 3,461
50,481
Insurance 4.5%
American General 68,400 5,335
EXEL (Class A) 45,800 3,435
Lincoln National 33,700 2,757
SAFECO 99,800 4,288
St. Paul Companies 144,976 5,038
Transamerica 23,600 2,726
23,579
Financial Services 1.1%
Fannie Mae 78,800 5,831
5,831
Total Financial 79,891
UTILITIES 16.3%
Telephone Services 9.7%
ALLTEL 162,400 9,714
AT&T 75,100 5,651
BCE ADR 75,800 2,876
Bell Atlantic 90,700 4,807
BellSouth 48,400 2,414
Frontier 15,000 510
GTE 109,000 7,085
SBC Communications 223,968 12,010
Telebras ADR 35,900 2,609
U S West 52,050 3,364
51,040
Electric Utilities 6.6%
BGE 36,400 $ 1,124
Central and South West 36,400 999
Dominion Resources 38,950 1,821
DQE 70,712 3,107
Duke Energy 59,800 3,831
Entergy 73,600 2,291
FirstEnergy 127,820 4,162
GPU 29,200 1,290
Houston Industries 87,500 2,811
PacifiCorp 117,000 2,464
PECO Energy 34,000 1,415
Southern Company 139,200 4,046
Teco Energy 58,300 1,643
Unicom 96,100 3,706
34,710
Total Utilities 85,750
CONSUMER NONDURABLES 17.7%
Cosmetics 1.0%
International Flavors &
Fragrances 124,200 5,488
5,488
Beverages 2.1%
Anheuser-Busch 112,300 7,370
Brown-Forman (Class B) 47,900 3,625
10,995
Food Processing 4.3%
General Mills 93,800 7,293
Heinz 63,100 3,573
Kellogg 102,200 3,488
McCormick 115,800 3,912
Quaker Oats 73,700 4,385
22,651
Hospital Supplies/Hospital Management 1.3%
Abbott Laboratories 42,800 2,097
Bausch & Lomb 53,300 3,198
Smith & Nephew (GBP) 589,200 1,792
7,087
Pharmaceuticals 3.1%
American Home Products 155,800 8,773
Pharmacia & Upjohn 135,392 7,667
16,440
Miscellaneous Consumer Products 5.9%
Armstrong World 68,700 $ 4,144
Fortune Brands 101,100 3,197
Philip Morris 148,900 7,966
PPG Industries 56,600 3,297
RJR Nabisco 111,400 3,307
Stanley Works 29,100 808
Tomkins (GBP) 627,200 2,980
UST 149,000 5,196
30,895
Total Consumer Nondurables 93,556
CONSUMER SERVICES 4.6%
General Merchandisers 1.0%
J.C. Penney 63,600 2,981
May Department Stores 37,900 2,288
5,269
Specialty Merchandisers 0.6%
Toys "R" Us * 107,300 1,811
Tupperware 77,600 1,275
3,086
Entertainment and Leisure 0.8%
Hilton 102,100 1,953
Reader's Digest (Class A) 87,600 2,206
4,159
Media and Communications 2.2%
Dow Jones 54,800 2,637
Dun & Bradstreet 74,000 2,336
Knight-Ridder 77,800 3,978
R.R. Donnelley 64,300 2,817
11,768
Total Consumer Services 24,282
CONSUMER CYCLICALS 6.6%
Automobiles and Related 2.5%
Eaton 7,000 495
Genuine Parts 125,850 4,208
GM 65,700 4,702
TRW 64,100 3,601
13,006
Building and Real Estate 2.3%
Archstone Communities
Trust, REIT 51,500 1,043
Crescent Real Estate
Equities, REIT 86,700 1,994
Rouse 23,700 652
Simon DeBartolo
Group, REIT 138,636 $ 3,951
Starwood Hotels &
Resorts, REIT 149,805 3,399
Weingarten Realty
Investors, REIT 24,500 1,093
12,132
Miscellaneous Consumer Durables 1.8%
Corning 43,200 1,944
Eastman Kodak 66,500 4,788
Whirlpool 55,900 3,096
9,828
Total Consumer Cyclicals 34,966
TECHNOLOGY 2.7%
Electronic Components 0.9%
AMP 89,051 4,636
4,636
Electronic Systems 0.8%
Hewlett-Packard 57,300 3,915
3,915
Aerospace & Defense 1.0%
AlliedSignal 68,100 3,018
Boeing 75,600 2,466
5,484
Total Technology 14,035
CAPITAL EQUIPMENT 2.6%
Electrical Equipment 2.2%
GE 62,300 6,358
Hubbell (Class B) 59,600 2,265
Tyco International 35,781 2,699
11,322
Machinery 0.4%
Cooper Industries 45,267 2,159
2,159
Total Capital Equipment 13,481
BUSINESS SERVICES AND TRANSPORTATION 5.1%
Transportation Services 0.2%
Alexander & Baldwin 38,950 893
893
Miscellaneous Business Services 2.1%
Browning-Ferris 103,400 2,941
GATX 35,600 1,348
H&R Block 74,600 $ 3,357
Waste Management 77,872 3,631
11,277
Railroads 2.8%
Burlington Northern
Santa Fe 84,300 2,845
Norfolk Southern 201,200 6,376
Union Pacific 119,800 5,398
14,619
Total Business Services and Transportation 26,789
ENERGY 12.2%
Energy Services 0.8%
Baker Hughes 156,700 2,771
Witco 107,100 1,707
4,478
Integrated Petroleum - Domestic 4.1%
Amerada Hess 75,000 3,731
Atlantic Richfield 88,400 5,768
British Petroleum ADR 27,500 2,613
Occidental Petroleum 72,300 1,220
Phillips Petroleum 48,400 2,063
Unocal 136,200 3,975
USX-Marathon 68,400 2,061
21,431
Integrated Petroleum - International 7.3%
Amoco 138,400 8,166
Chevron 71,850 5,959
Exxon 113,500 8,300
Mobil 71,300 6,212
Royal Dutch Petroleum ADR 89,900 4,304
Texaco 99,600 5,266
38,207
Total Energy 64,116
PROCESS INDUSTRIES 9.9%
Diversified Chemicals 3.1%
Dow Chemical 68,500 6,229
DuPont 83,700 4,441
Hercules 131,200 3,592
Olin 76,700 2,172
16,434
Specialty Chemicals 3.3%
3M 69,800 4,964
Great Lakes Chemical 92,900 3,716
Imperial Chemical ADR 47,200 $ 1,649
Lubrizol 56,300 1,446
Nalco Chemical 78,000 2,418
Pall 133,000 3,367
17,560
Paper and Paper Products 2.6%
Consolidated Papers 99,700 2,742
Kimberly-Clark 103,300 5,630
Union Camp 77,800 5,251
13,623
Forest Products 0.9%
Georgia-Pacific 35,900 2,102
International Paper 57,300 2,568
4,670
Total Process Industries 52,287
BASIC MATERIALS 1.7%
Metals 1.4%
Inco 105,100 1,110
Phelps Dodge 51,000 2,595
Reynolds Metals 44,000 2,318
USX-U.S. Steel 52,800 1,214
7,237
Mining 0.3%
Newmont Mining 101,249 1,829
1,829
Total Basic Materials 9,066
Miscellaneous Common Stocks 0.3% 1,541
Total Common Stocks (Cost $443,662) 499,760
U.S. GOVERNMENT OBLIGATIONS 0.6%
U.S. Treasury Bonds
6.00%, 2/15/26 500,000 546
6.25%, 8/15/23 20,000 22
U.S. Treasury Notes
5.625%, 2/15/06 250,000 264
5.75%, 8/15/03 400,000 418
5.875%
1/15/99 - 2/15/04 920,000 930
6.50%, 5/31/01 700,000 730
7.00%, 7/15/06 400,000 455
Total U.S. Government Obligations
(Cost $3,114) 3,365
SHORT-TERM INVESTMENTS 4.3%
Money Market Funds 4.3%
Reserve Investment Fund
5.42% # 22,828,396 $ 22,828
Total Short-Term Investments
(Cost $22,828) 22,828
Total Investments in Securities
99.8% of Net Assets (Cost $469,604) $ 525,953
Other Assets Less Liabilities 999
NET ASSETS $ 526,952
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 98
Accumulated net realized gain/loss -
net of distributions 2,016
Net unrealized gain (loss) 56,349
Paid-in-capital applicable to 27,380,216
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
Corporation authorized 468,489
NET ASSETS $ 526,952
----------
NET ASSET VALUE PER SHARE $ 19.25
----------
# Seven-day yield
* Non-income producing
ADR American Depository Receipt
REIT Real Estate Investment Trust
GBP British sterling
The accompanying notes are an integral part of these financial
statements.
Statement of Operations
T. Rowe Price Equity Income Portfolio
In thousands
Year
Ended
12/31/98
Investment Income
Income
Dividend $ 11,576
Interest 1,768
Total income 13,344
Expenses
Investment management and administrative 3,775
Net investment income 9,569
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 16,729
Foreign currency transactions 8
Net realized gain (loss) 16,737
Change in net unrealized gain
or loss on securities 10,524
Net realized and unrealized gain (loss) 27,261
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 36,830
---------
The accompanying notes are an integral part of these financial
statements.
Statement of Changes in Net Assets
T. Rowe Price Equity Income Portfolio
In thousands
Year
Ended
12/31/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 9,569 $ 5,492
Net realized gain (loss) 16,737 10,082
Change in net unrealized
gain or loss 10,524 37,580
Increase (decrease) in net
assets from operations 36,830 53,154
Distributions to shareholders
Net investment income (9,471) (5,541)
Net realized gain (15,696) (9,992)
Decrease in net assets
from distributions (25,167) (15,533)
Capital share transactions*
Shares sold 201,955 206,293
Distributions reinvested 25,167 15,533
Shares redeemed (56,557) (18,474)
Increase (decrease) in
net assets from capital
share transactions 170,565 203,352
Net Assets
Increase (decrease)
during period 182,228 240,973
Beginning of period 344,724 103,751
End of period $ 526,952 $ 344,724
-----------------------
*Share information
Shares sold 10,502 11,952
Distributions reinvested 1,321 862
Shares redeemed (2,983) (1,074)
Increase (decrease) in
shares outstanding 8,840 11,740
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Equity Income Portfolio
December 31, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Equity Series, Inc. (the corporation) is registered under the
Investment Company Act of 1940. The Equity Income Portfolio (the fund), a
diversified, open-end management investment company, is one of the
portfolios established by the corporation and commenced operations on March
31, 1994. 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.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the
officers of the fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated
into U.S. dollars at the prevailing exchange rate on the dates of such
transactions. The effect of changes in foreign exchange rates on realized
and unrealized security gains and losses is reflected as a component of
such gains and losses.
Premiums and Discounts Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with federal income tax regulations and may differ from those determined in
accordance with generally accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term and U.S.
Government securities, aggregated $235,590,000 and $75,675,000,
respectively, for the year ended December 31, 1998.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
At December 31, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$469,604,000. Net unrealized gain aggregated $56,349,000 at period-end, of
which $81,557,000 related to appreciated investments and $25,208,000 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 $420,000 was payable at December 31, 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 year ended
December 31, 1998, totaled $1,549,000 and are reflected as interest income
in the accompanying Statement of Operations.
Tax Information (Unaudited) for the Tax Year Ended 12/31/98
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code. The
amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
o $5,701,000 from short-term capital gains, and
o $9,995,000 from long-term capital gains, subject to the 20% rate gains
category.
For corporate shareholders, $10,372,000 of the fund's distributed income and
short-term capital gains qualified for the dividends-received deduction.
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors of T. Rowe Price Equity Series, Inc. and
Shareholders of Equity Income Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of Equity Income Portfolio (one of the portfolios comprising T. Rowe Price
Equity Series, Inc., hereafter referred to as the "Fund") at December 31,
1998, and the results of its operations, the changes in its net assets and
the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1998, by correspondence
with custodians, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 21, 1999
Invest With Confidence(registered trademark)
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for dis-
tribution only to those who have
received a copy of the portfolio's
prospectus.
T. Rowe Price Investment Services, Inc., Distributor TRP 654 (12/98)
K15-052 12/31/98
