Semiannual Report
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June 30, 2000
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Equity Income Portfolio
Invest With Confidence(registered trademark)
T. Rowe Price
This report is authorized for distribu- tion only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price InvestmentServices, Inc.,
Distributor
Dear Investor
The stock market soared, dove, then rose again during the first six months of
the year, creating significant volatility among various sectors and individual
stocks. By the time the dust settled at the end of June, most major market
indices posted slight losses for the six-month period. In a generally poor
environment for equities, the low-P/E and higher-yielding stocks that compose
the universe of value stocks your fund inhabits posted small losses for the
first half of 2000.
Performance Comparison
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Periods Ended 6/30/00 6 Months 12 Months
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Equity Income Portfolio -2.74% -10.22%
S&P 500 -0.43 7.24
Lipper Variable Annuity
Underlying Equity Income
Funds Average -1.65 -2.98
As shown in the Performance Comparison table, your portfolio declined by
2.74% during the six months ended June 30, 2000, reflecting a drop of
nearly 3% in the first quarter and a slim gain in the second. Despite the
weak results, we were pleased to see the portfolio hold up reasonably well
during the sharp sell-off in technology and so-called New Economy stocks in
the spring. Since 1998, we have been struggling in an environment that has
favored growth stocks, many with little or no earnings, over value stocks.
However, momentum may have begun to shift back toward quality companies
with a history of earnings growth and relatively high dividend yields, and
we regard this development - if it continues - as a welcome return to
reality in the equities market.
The year began with a continuation of the pattern that characterized the
stock market through most of last year. In the first quarter, the
technology-heavy Nasdaq Composite led the way as the more aggressive market
sectors provided the strongest performance. In April and May, those stocks
experienced a sudden and sharp decline, and traditional value stocks
provided better relative performance. In June the market underwent another
reversal in sentiment, with growth stocks rebounding from their spring
decline. By the end of the second quarter the S&P 500, the Dow Jones
Industrial Average, and the Nasdaq Composite had all posted losses. Within
these indices, growth stocks generally fared better than value stocks, and
smaller and mid-cap shares outperformed the largest-cap stocks.
DIVIDEND DISTRIBUTIONS
On June 27, 2000, your Board of Directors declared a second-quarter income
dividend of $0.09 per share, bringing the year-to-date total to $0.18. This
distribution was paid on June 29 to shareholders of record on June 27.
Earlier this year we declared a capital gain distribution of $0.31 per
share, of which $0.11 represented short-term and $0.20 represented
long-term capital gains. This distribution was paid in the first quarter,
and no capital gain distribution was declared in the second quarter.
PORTFOLIO STRATEGY
During the first half, the portfolio benefited from several successful
investments and suffered from some that did not work out as well. Our
holdings in the health care, utility, and energy sectors were generally
good performers, while telecommunications and basic materials stocks
declined overall. Among our profitable positions were American Home
Products, Baker Hughes, Pharmacia, Disney, and Starwood Hotels & Resorts
Worldwide. Disappointing stocks included International Paper, DuPont,
Hercules, and ALLTEL.
Security Diversification
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6/30/00
Reserves 5
Technology 5
Capital Equipment, Process Industries, and Basic Materials 10
Consumer Services and Cyclicals 13
Financial 17
Consumer Nondurables 20
Energy and Utilities 26
Business Services and Transportation 4
The strategy we followed during the period was to invest in good companies
after the sell-off. Equity investors not only have high expectations for
future returns, but also little tolerance for any disappointing news
affecting their investments. What else could explain the recent collapse of
stocks like Procter & Gamble? It dropped about 50% after announcing slower
earnings growth - not losses, but slower growth in profitability. Many
small technology and Internet companies fared even worse. Imagine what
would happen in a more difficult economic environment.
In this climate we capitalized on the significant price declines in several
stocks to make new investments. Our experience suggests that investing in
strong companies after they lose half their value is often a rewarding
move. This was our reason for new purchases in Rockwell International,
Gillette, Microsoft, and Procter & Gamble. Rockwell is the classic value
stock. Having fallen substantially in price, the stock sold for 10 times
earnings and sported a dividend yield of 3% - an attractive valuation for a
leading manufacturing company. The other companies listed in the Major
Portfolio Changes table following this letter share the common
characteristics of recent price weakness, strong market position, and
attractive valuations. Microsoft is a slightly unusual holding for us given
our general reluctance to invest in technology stocks for valuation
reasons. Nonetheless, after its highly publicized antitrust problems and
stock price nosedive, we thought it was an opportune time to initiate a
small position.
Most of the portfolio sales listed in the table were of successful
investments whose valuations reached unattractive levels as their share
prices rose, which diminished their appeal for us. Two holdings, US West
and Consolidated Papers, were takeover targets.
As shown in the Financial Profile table, the fund's holdings sell at a
substantial discount to the overall market. Our historical approach has
been to invest in companies selling at relatively low price/earnings ratios
with attractive dividend yields and other compelling valuation
characteristics. Compared with the broad market, at the end of June we had
a portfolio of undervalued companies with good prospects over the next few
years.
Financial Profile
Equity Income
Portfolio S&P 500
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Current Yield 2.9% 1.1%
Price/Book Ratio 3.2 8.9
Price/Earnings Ratio
(2000 estimated EPS) 14.5 30.0
Historical Beta
(based on monthly
returns for 5 years) 0.68 1.00
OUTLOOK
After the shakeout of the past six months, the market ended up treading
water as investors digested a series of tightening moves by the Fed aimed
at slowing the pace of economic growth. In earlier reports we discussed the
delinkage between stock prices and the earnings and dividend growth that
normally support them, since share prices have risen at a faster pace in
recent years. This gap began to close modestly during the first half of the
year, with earnings and dividend growth moving ahead while stocks declined
in value. Despite the improved performance of value stocks discussed
earlier, they remain very inexpensive relative to their growth stock
siblings. If history is any guide, true value tends to reassert itself over
time. The fund holds investments in many companies with inexpensive
valuations, thanks to the contrary investor sentiment of recent years. We
believe our portfolio comprises stocks that offer a good combination of
solid return potential and relatively low downside risk.
As always, we appreciate your confidence in T. Rowe Price and your
continued support.
Respectfully submitted,
Brian C. Rogers
President and Chairman of the
Investment Advisory Committee
July 21, 2000
Portfolio Highlights
Twenty-Five Largest Holdings
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Percent of
Net Assets
6/30/00
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BP Amoco 2.9%
Exxon Mobil 2.6
Mellon Financial 2.4
SBC Communications 2.1
American Home Products 1.9
General Mills 1.8
Pharmacia 1.6
Chevron 1.6
FleetBoston Financial 1.5
Royal Dutch Petroleum 1.4
Texaco 1.4
ALLTEL 1.4
Kimberly-Clark 1.4
Hershey Foods 1.3
Lockheed Martin 1.3
Heinz 1.3
Starwood Hotels & Resorts Worldwide 1.3
GTE 1.3
Bell Atlantic 1.3
Citigroup 1.3
3M 1.2
Fannie Mae 1.2
Disney 1.2
Eastman Kodak 1.2
American General 1.1
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Total 39.0%
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Major Portfolio Changes
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Six Months Ended 6/30/00
Listed in descending order of size
LARGEST PURCHASES (10)
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Rockwell International*
Microsoft*
Procter & Gamble*
Eaton*
Unisys*
Motorola*
AT&T
Gillette*
International Paper
UNUMProvident
LARGEST SALES (10)
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BCE**
US West
Hewlett-Packard**
BP Amoco
Exxon Mobil
Baker Hughes
Consolidated Papers
American Home Products
TRW**
Anheuser-Busch
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*Position added.
**Position eliminated.
Performance Comparison
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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.
Equity Income Portfolio
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As of 6/30/00
Equity Income Portfolio S&P 500 Index Lipper Variable
3/30/94 10000 10000 10000
6/30/94 10170 10042 10070
6/30/95 12409 12660 12136
6/30/96 15536 15952 14825
6/30/97 19815 21487 19355
6/30/98 23653 27968 23756
6/30/99 27261 34333 27067
6/30/00 24474 36820 26241
Average Annual Compound Total Return
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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 6/30/00
Since Inception
1 Year 3 Years 5 Years Inception Date
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-10.22% 7.29% 14.55% 15.40% 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
Unaudited
For a share outstanding throughout each period
--------------------------------------------------------------------------------
6 Months Year
Ended Ended
6/30/00 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
NET ASSET VALUE
Beginning of period $ 18.73 $ 19.25 $ 18.59 $ 15.26 $ 13.21 $ 10.42
Investment
activities
Net investment
income (loss) 0.19 0.38 0.39 0.40 0.42 0.44
Net realized and
unrealized gain
(loss) (0.71) 0.33 1.27 3.94 2.13 3.05
Total from
investment
activities (0.52) 0.71 1.66 4.34 2.55 3.49
Distributions
Net investment
income (0.18) (0.38) (0.39) (0.40) (0.42) (0.44)
Net realized gain (0.31) (0.85) (0.61) (0.61) (0.08) (0.26)
Total distributions (0.49) (1.23) (1.00) (1.01) (0.50) (0.70)
NET ASSET VALUE
End of period $17.72 $18.73 $19.25 $18.59 $15.26 $13.21
Ratios/Supplemental
Data
Total return(diamond) (2.74)% 3.72% 9.07% 28.85% 19.56% 34.76%
Ratio of total
expenses to
average net assets 0.85%! 0.85% 0.85% 0.85% 0.85% 0.85%
Ratio of net investment
income (loss) to average
net assets 2.10%! 1.90% 2.15% 2.56% 2.94% 3.61%
Portfolio turnover rate 41.1%! 32.6% 18.2% 20.5% 17.4% 10.1%
Net assets,
end of period
(in thousands) $550,046 $595,433 $526,952 $ 344,724 $103,751 $14,658
(diamond) 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
June 30, 2000 (Unaudited)
x Shares/Par Value
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In thousands
Common Stocks 94.5%
FINANCIAL 16.7%
Bank and Trust 9.2%
Bank of America 74,200 $ 3,191
Bank One 203,227 5,398
Firstar 117,400 2,473
FleetBoston Financial 239,617 8,147
J. P. Morgan 56,700 6,244
KeyCorp 58,300 1,027
Mellon Financial 359,000 13,081
Mercantile Bankshares 119,450 3,565
National City 132,700 2,264
Wells Fargo 128,560 4,982
50,372
Insurance 5.0%
American General 102,800 6,271
Chubb 80,700 4,963
Lincoln National 86,300 3,118
SAFECO 151,000 3,006
St. Paul 163,576 5,582
UNUMProvident 242,200 4,859
27,799
Financial Services 2.5%
Citigroup 114,448 6,895
Fannie Mae 128,300 6,696
13,591
Total Financial 91,762
UTILITIES 12.7%
Telephone 7.5%
ALLTEL 124,800 7,730
AT&T 105,500 3,336
Bell Atlantic 136,100 6,916
BellSouth 79,500 3,389
GTE 147,700 6,916
SBC Communications 264,168 11,425
Vodafone Airtouch ADR 40,600 1,682
41,394
Electric Utilities 5.2%
Duke Energy 99,400 5,604
Entergy 97,000 2,637
FirstEnergy 160,320 3,747
Niagara Mohawk * 137,600 $ 1,918
Reliant Energy 115,700 3,420
Scottish Power ADR 71,088 2,377
Southern 188,100 4,385
Unicom 119,600 4,627
28,715
Total Utilities 70,109
CONSUMER NONDURABLES 19.7%
Cosmetics 1.5%
Gillette 69,400 2,425
International Flavors &
Fragrances 184,200 5,560
7,985
Beverages 1.3%
Anheuser-Busch 38,700 2,890
Brown-Forman (Class B) 80,700 4,338
7,228
Food Processing 7.0%
Campbell 130,500 3,801
General Mills 264,400 10,113
Heinz 164,300 7,188
Hershey Foods 151,400 7,343
Kellogg 77,900 2,318
McCormick 159,300 5,177
Unilever (EUR) 54,900 2,518
38,458
Hospital Supplies/Hospital Management 1.5%
Abbott Laboratories 130,200 5,802
Becton, Dickinson 89,700 2,573
8,375
Pharmaceuticals 4.1%
American Home Products 174,900 10,276
Merck 48,000 3,678
Pharmacia 167,763 8,671
22,625
Miscellaneous Consumer Products 4.3%
Armstrong World 91,700 1,404
Fortune Brands 139,300 3,213
Hasbro 160,300 2,414
Philip Morris 173,700 4,614
PPG Industries 51,200 2,269
Procter & Gamble 55,700 3,189
Stanley Works 147,400 $ 3,501
UST 225,700 3,315
23,919
Total Consumer Nondurables 108,590
CONSUMER SERVICES 7.2%
General Merchandisers 0.8%
J.C. Penney 98,700 1,820
May Department Stores 118,800 2,851
4,671
Specialty Merchandisers 1.3%
Toys "R" Us * 412,900 6,013
Tupperware 60,000 1,320
7,333
Entertainment and Leisure 2.3%
Disney 167,900 6,516
Hilton 317,300 2,975
Reader's Digest (Class A) 82,200 3,267
12,758
Media and Communications 2.8%
Dow Jones 43,000 3,150
Dun & Bradstreet 128,200 3,670
Knight-Ridder 97,200 5,170
R.R. Donnelley 140,700 3,174
15,164
Total Consumer Services 39,926
CONSUMER CYCLICALS 5.2%
Automobiles and Related 1.3%
Dana 50,000 1,059
Eaton 44,400 2,975
Genuine Parts 171,050 3,421
7,455
Building and Real Estate 2.7%
Rouse 138,000 3,416
Simon Property Group, REIT 189,536 4,205
Starwood Hotels &
Resorts Worldwide, REIT 220,505 7,180
14,801
Miscellaneous Consumer Durables 1.2%
Eastman Kodak 107,700 6,408
6,408
Total Consumer Cyclicals 28,664
TECHNOLOGY 4.8%
Electronic Components 0.4%
Motorola 82,400 $ 2,395
2,395
Office Automation 0.8%
Xerox 200,900 4,168
4,168
Aerospace & Defense 2.4%
Boeing 55,800 2,333
Lockheed Martin 291,400 7,230
Rockwell International 122,400 3,856
13,419
Information Processing 0.9%
COMPAQ Computer 107,800 2,756
Unisys * 132,900 1,935
4,691
Telecommunications & Equipment 0.3%
US West 16,650 1,428
1,428
Total Technology 26,101
CAPITAL EQUIPMENT 0.9%
Electrical Equipment 0.7%
Hubbell (Class B) 155,800 3,973
3,973
Machinery 0.2%
Cooper Industries 26,867 875
875
Total Capital Equipment 4,848
BUSINESS SERVICES AND TRANSPORTATION 4.4%
Miscellaneous Business Services 1.5%
H&R Block 93,200 3,017
Waste Management 276,672 5,257
8,274
Railroads 1.8%
Norfolk Southern 275,600 4,100
Union Pacific 154,700 5,753
9,853
Computer Service & Software 1.1%
BMC Software * 47,000 1,714
Microsoft * 54,900 4,390
6,104
Total Business Services and Transportation 24,231
ENERGY 13.5%
Energy Services 0.8%
Baker Hughes 140,800 $ 4,506
4,506
Integrated Petroleum - Domestic 1.6%
Amerada Hess 83,900 5,181
USX-Marathon 139,400 3,493
8,674
Integrated Petroleum - International 10.0%
BP Amoco ADR 283,096 16,013
Chevron 101,450 8,604
Exxon Mobil 183,061 14,370
Royal Dutch Petroleum 129,500 7,973
Texaco 147,100 7,833
54,793
Exploration & Production 1.1%
Unocal 186,900 6,191
6,191
Total Energy 74,164
PROCESS INDUSTRIES 8.6%
Diversified Chemicals 2.0%
Dow Chemical 80,700 2,436
DuPont 129,000 5,644
Hercules 205,500 2,890
10,970
Specialty Chemicals 3.1%
3M 82,300 6,790
Great Lakes Chemical 132,800 4,183
Imperial Chemical ADR 46,400 1,430
Pall 238,400 4,410
16,813
Paper and Paper Products 3.5%
Consolidated Papers 6,200 227
Fort James 248,500 5,747
International Paper 203,453 6,065
Kimberly-Clark 130,900 7,510
19,549
Total Process Industries 47,332
BASIC MATERIALS 0.8%
Metals 0.8%
Newmont Mining 99,949 $ 2,162
Phelps Dodge 55,400 2,060
Total Basic Materials 4,222
Total Common Stocks (Cost $531,072) 519,949
U.S. GOVERNMENT OBLIGATIONS 0.4%
U.S. Treasury Bonds
6.00%, 2/15/26 $ 500,000 489
6.25%, 8/15/23 20,000 20
U.S. Treasury Notes
5.625%, 2/15/06 250,000 243
5.75%, 8/15/03 400,000 393
5.875%, 2/15/04 20,000 20
6.50%, 5/31/01 700,000 700
7.00%, 7/15/06 400,000 415
Total U.S. Government Obligations
(Cost $2,222) 2,280
SHORT-TERM INVESTMENTS 4.3%
Money Market Funds 4.3%
Reserve Investment
Fund, 6.68% # 23,409,691 23,410
Total Short-Term Investments
(Cost $23,410) 23,410
Total Investments in Securities
99.2% of Net Assets (Cost $556,704) $545,639
Other Assets Less Liabilities 4,407
NET ASSETS $550,046
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T. Rowe Price Equity Income Portfolio
June 30, 2000 (Unaudited)
Value
--------------------------------------------------------------------------------
In thousands
Net Assets Consist of:
Accumulated net investment
income - net of distributions $306
Accumulated net realized gain/loss -
net of distributions 18,125
Net unrealized gain (loss) (11,063)
Paid-in-capital applicable to 31,049,656
shares of $0.0001 par value
capital stock outstanding;
1,000,000,000 shares 542,678
of the Corporation authorized
NET ASSETS $550,046
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NET ASSET VALUE PER SHARE $17.72
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# Seven-day yield
* Non-income producing
ADR American Depository Receipt
REIT Real Estate Investment Trust
EUR Euro
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Equity Income Portfolio
In thousands
(Unaudited)
6 Months
Ended
6/30/00
Investment Income (Loss)
Income
Dividend $ 7,413
Interest 747
Total income 8,160
Expenses
Investment management and administrative 2,348
Net investment income (loss) 5,812
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 18,005
Foreign currency transactions (2)
Net realized gain (loss) 18,003
Change in net unrealized gain or loss
Securities (41,364)
Other assets and liabilities
denominated in foreign currencies 2
Change in net unrealized gain or loss (41,362)
Net realized and unrealized gain (loss) (23,359)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $(17,547)
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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
(Unaudited)
6 Months Year
Ended Ended
6/30/00 12/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 5,812 $ 11,004
Net realized gain (loss) 18,003 33,148
Change in net unrealized gain or loss (41,362) (26,050)
Increase (decrease) in net assets from operations (17,547) 18,102
Distributions to shareholders
Net investment income (5,515) (11,093)
Net realized gain (9,407) (25,635)
Decrease in net assets from distributions (14,922) (36,728)
Capital share transactions *
Shares sold 50,457 126,172
Distributions reinvested 14,922 36,728
Shares redeemed (78,297) (75,793)
Increase (decrease) in net assets from capital
share transactions (12,918) 87,107
Net Assets
Increase (decrease) during period (45,387) 68,481
Beginning of period 595,433 526,952
End of period $550,046 $595,433
------------------------
*Share information
Shares sold 2,811 6,291
Distributions reinvested 849 1,944
Shares redeemed (4,408) (3,817)
Increase (decrease) in shares outstanding (748) 4,418
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Equity Income Portfolio
June 30, 2000 (Unaudited)
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 fund seeks substantial dividend income and also capital
appreciation by investing primarily in dividend-paying common stocks of
established U.S. companies. 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
securities, aggregated $109,292,000 and $131,551,000, respectively, for the
six months ended June 30, 2000.
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, 2000, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$556,704,000. Net unrealized loss aggregated $11,065,000 at period-end, of
which $51,841,000 related to appreciated investments and $62,906,000 to
depreciated investments.
T. Rowe Price Equity Income Portfolio
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 $431,000 was payable at June 30, 2000. 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, 2000, totaled $668,000 and are reflected as interest income in the
accompanying Statement of Operations.