-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVNZcwfkQs7QTe3iyyp08KBN2oYj7nHI+Gk35G9nTzyZatsz4wQbbPR9BW3ZnEU/ yNPnmhMSQJUZPO1Ezo/niA== 0000902259-02-000013.txt : 20020823 0000902259-02-000013.hdr.sgml : 20020823 20020823094338 ACCESSION NUMBER: 0000902259-02-000013 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020823 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE BLUE CHIP GROWTH FUND INC CENTRAL INDEX KEY: 0000902259 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-07059 FILM NUMBER: 02746374 BUSINESS ADDRESS: STREET 1: C/O T ROWE PRICE ASSOCIATES INC STREET 2: 100 EAST E PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 N-30D 1 bcg.txt TRP BLUE CHIP GROWTH FUND, INC. 6/30/02 Semiannual Report June 30, 2002 T. Rowe Price Blue Chip Growth Portfolio and II Shares Dear Investor Market declines are never enjoyable, and this down market is proving to be more prolonged and significant than the average post-WWII bear market. In particular, the past six months have been among the most difficult periods for large-cap growth investing in recent memory. A crisis of confidence - fueled by questions regarding accounting integrity, corporate ethical lapses, lackluster earnings, and global terrorism - has hurt stocks and particularly large growth stocks. Performance Comparison Periods Ended 6/30/02 6 Months 12 Months ------------------------------------------------------------ Blue Chip Growth Portfolio shares -16.84% -20.70% Blue Chip Growth Portfolio - II shares* - - S&P 500 Stock Index -13.16 -17.99 Lipper Variable Annuity Large-Cap Growth Funds Average -18.89 -26.16 *This share class' return since its inception on 4/30/02 is -10.29%. The steep drop that the portfolio endured during the past six months and year largely reflects the rapidly worsening environment of the most recent quarter. It was virtually impossible for a large-cap growth investment strategy to stay true to its mandate and avoid double-digit losses. While results were below those of the broad S&P 500, they were somewhat better than for the fund's growth-specific Lipper benchmark. This does not mitigate the impact of these losses, and we do not want to sugarcoat them. They are painful for us, as we know they are for you. However, we remain confident in our strategy, and we are working diligently to invest for solid long-term performance. MARKET ENVIRONMENT Corporate improprieties were the center of attention in the past six months, as several companies announced accounting irregularities, conflicts of interest, or SEC investigations. Adelphia, Enron, Xerox, and WorldCom were notable examples. Fortunately, your fund had no exposure to these (other than a very small amount of WorldCom sold much above current prices). We did not avoid the fallout altogether: meaningful positions in Tyco International declined significantly due to funding concerns and evidence of tax evasion by the now-former CEO, while our holding in Omnicom declined due to accounting questions. Moreover, in the post-Enron era, investors have become wary of all companies with complex accounting arrangements or that have grown via acquisitions. These qualities tend to be found more commonly among larger companies, and a number of large growth companies suffered, including leaders such as GE, AIG, Citigroup, and Merck. The large growth segment remained among the market's worst performers (a place it has held for several quarters). However, the crisis of confidence hampered every sector of the market during the half year. This was the case despite a fairly consistent stream of positive economic news in the broader economy, including improved factory orders and strong housing, auto, and retail sales. Conversely, neither the information technology or telecommunication services sector has yet recovered from the excessive capital expenditures during the tech bubble. WorldCom announced that it had misstated expenses (apparently intentionally) and actually suffered losses for the previous 15 months. The news helped push the entire telecom sector down more than 40% in 2002. The health care sector, normally somewhat defensive, had inconsistent performance, with health care services performing quite well but pharmaceutical stocks declining sharply. Several large drug companies are facing patent expirations on blockbuster drugs while also experiencing difficulty in getting new products approved by the FDA. The financial sector was also bifurcated: some regional banks and non-market-sensitive stocks held up reasonably well, but brokers and other market-sensitive stocks did poorly. Although the concerns regarding accounting integrity and the ongoing threat of terrorism are formidable obstacles, investors may have become overly pessimistic. The economic backdrop is favorable and the banking system appears to be reasonably sound (not always the case in a market crisis such as this). Inflation and interest rates also are quite supportive of improved equity performance. Restoring investor confidence in corporate governance and accounting integrity will take time. However, private sector actions (the pressures of the capital markets and resultant management actions to improve disclosure) and some level of increased regulation will improve financial reporting discipline. One risk is that in their zeal to eliminate impropriety, political leaders will aggressively implement a number of burdensome regulations and also vilify American business leaders. This would be ill advised and is a real risk for the U.S. stock market. PORTFOLIO REVIEW As we noted in our last semiannual report, the outlook for earnings is somewhat uncertain despite a slowly recovering economy. Accordingly, we continue to pay special attention to earnings prospects, and were disappointed that companies such as Pfizer, American International Group, and Home Depot declined despite generating durable, sustainable earnings growth. Investors are simply skeptical of large, complex companies, even if they have strong long-term growth records and prospects. We also recognize that a hallmark of bear markets is that established growth companies can decline significantly, particularly in the latter stages of the correction. There were some areas where your fund made money in the first half of 2002. UnitedHealth Group and Wellpoint Health Networks, leading HMOs, continued to generate very good earnings and cash flow growth and were the top two performers in the first half. The health care services area also produced other major winners, such as pharmaceutical distributor AmerisourceBergen, and leading hospital chains HCA and Tenet Healthcare. Financial stocks generally outperformed, although banks, insurance, and consumer finance did much better than brokers. Wells Fargo, Bank of America, Fifth Third Bancorp, and U.S. Bancorp are all relatively high-quality banks and each was a top performer. Progressive, a major provider of auto insurance, continued to be an outstanding stock for your fund. Sector Diversification 6/30/02 -------------------------------------------- Consumer Discretionary 13.75% Consumer Staples 5.17 Energy 3.90 Financials 26.49 Health Care 22.59 Industrials and Business Services 11.87 Information Technology 13.16 Telecommunication Services 1.20 Utilities 0.04 Reserves 0.65 Miscellaneous 1.18 Total 100.00% Other positive contributors came from various industry sectors but all possessed strong balance sheets, managements, and growth prospects. Selected consumer products companies such as Coca-Cola performed well. We were fortunate in that we increased our position meaningfully (after several years of being underweight) and captured much of its outperformance. Other winners included Apollo Group, a leader in post-secondary education; Smith International, a high-quality oil services firm; long-time holding Danaher, an industrial company with outstanding free cash flow; and blue chip drug retailer Walgreen. A Second Take on Our Misses The list of first-half losers was extensive. As always, we will try to share with you whether we think the market's punishment was deserved and perhaps, more important, whether the future prospects are solid for major problem holdings. After several years of stellar performance, Tyco International became a disastrous position. Although we think the extent of the decline has been overdone, the company gave investors ample reason to lose confidence. We disliked the company's acquisition of CIT, which contributed to a perceived funding crisis that ultimately caused Tyco to reverse course and sell CIT. The CEO also resigned following charges that he evaded taxes on purchases of art. Although there continues to be various concerns regarding the company, its core health care, security, and industrial businesses appear to be healthy. In our view, the sale of CIT and continued strong cash flow generation are strong positives. If our analyst's earnings projections are reasonable, the stock could recover quite well. AOL Time Warner also deserved some of its poor performance. The company had to lower earnings guidance modestly and incurred costs as it simplified its partnerships with other media players. However, we believe that the new management team is improving operations while increasing the transparency of financial results. While the AOL classic service has growth challenges, investors are not ascribing much worth to it in the firm's overall valuation, and any improvement in results could drive strong stock performance. This is a holding we will continue to monitor carefully. Longtime holding Citigroup was also a major loser in the first half. Its investment banking relationships with Enron, Adelphia, and WorldCom, as well as challenges in its corporate finance, consumer finance, and foreign operations, topped the list of concerns. These are legitimate issues. However, Citigroup's valuation is becoming compelling. Continued improvement in the global economy and capital markets could result in a sharp improvement in stock performance. GE also performed very poorly. Investors were concerned about the company's jet engine and power turbine business as well as its complexity and the adequacy of its financial disclosures. On balance, we think the company continues to improve disclosure. However, it has posted mediocre results in key divisions, including its GE Capital financial segment. Thus, while we will continue to hold GE, we are not overly enthusiastic about it relative to other holdings. Omnicom, a top ad agency, was pummeled along with other media companies. Omnicom was plagued by a Wall Street Journal article questioning how it accounted for organic growth and noting large upcoming debt repayments. However, Omnicom has the best operating results in its industry and has demonstrated that it has adequate funding to meet its debt obligations. The company is reasonably valued and should perform well as the economy recovers. Home Depot declined sharply, but we believe investors will reevaluate the company more favorably over time. Home Depot is producing same-store-sales gains somewhat below its largest competitor, Lowe's. This is chiefly because Home Depot is significantly larger and its store base is more mature (its stores produce a much higher level of sales per store and profitability). Also, the new management at Home Depot is emphasizing improved inventory management, efficiency, and cash flow. The company has been very successful in these areas and is now able to finance growth internally. While management may have been a bit too zealous and thus hurt same-store sales, it remains an outstanding company at an attractive valuation. Microsoft and Pfizer were also major detractors, but mainly because both are large holdings. Microsoft was a strong relative performer in the technology area and Pfizer performed reasonably well versus other pharmaceutical stocks. In our view, both companies are well positioned to generate very strong earnings and cash-flow growth. STRATEGY Our strategy of seeking high-quality fundamentals is particularly important in this emotion-driven market. We continue to add to core holdings as long as we are confident regarding fundamentals and return potential, and we try to be decisive about weeding out holdings where we believe the return potential relative to risk is no longer attractive. Additions to existing holdings such as Texas Instruments, Pharmacia, U.S. Bancorp, and Bank of America were significant enough to be included in the 10 largest purchases for the past six months. However, we did establish four new major positions, all of which we think have quality balance sheets and profitability. We expect UPS to perform well once it resolves negotiations with its labor unions. Printer company Lexmark International has done well relative to other technology stocks since purchase. While we continue to view Internet-based companies with skepticism, USA Interactive (parent to online travel company Expedia and Ticketmaster) has strong management (Barry Diller) and continues to generate attractive cash-flow growth. Student-loan provider SLM, also known as Sallie Mae, continues to benefit from strong growth in student enrollment, increasing lending amounts, and a competitive advantage in loan servicing compared to the government's direct lending program. Most stock sales were driven by deteriorating fundamentals or the belief that other companies in the sector were better positioned. It was somewhat gratifying that several stocks that were eliminated declined very significantly after their sale (falling far more than market averages). Included in this group were contract manufacturer Flextronics, Sprint PCS, Safeway, media firm Liberty Media, and Electronic Data Systems. The fund's analysts have played an important role in identifying problems with these companies before we suffered significant losses. OUTLOOK Despite reassurance from the Federal Reserve that the economic recovery is on target, the markets have not reacted well. However, history tells us that almost every investment boom has been accompanied by excess investment in certain sectors and corporate mismanagement. While the problems may be somewhat more widespread currently, there are many excellent companies run by competent and honest managements in which we can invest. Our job in this difficult environment is to invest in such companies at prices that increase your odds of making solid returns. Lower stock prices can help us in this endeavor, but we must effectively distinguish between stocks suffering short-term setbacks and those facing long-term decline. Market critics have asserted that stock returns could be poor for several years. On balance, however, we think the outlook is quite good for several reasons: 1. Earnings growth remains strong at many high-quality U.S. companies. 2. Valuations are now much more reasonable. 3. Many of our holdings generate significant free cash flow. Shareholder-oriented management will use this cash to repurchase shares or make value-added acquisitions at advantageous prices. 4. Forces are building to restore investor confidence in U.S. companies. The U.S. regulatory agencies are heightening their scrutiny, and in the private sector, the capital markets and responsible management teams are encouraging better standards for disclosure. We expect that when companies generate solid results after these measures are undertaken, investors should feel much more assured. Respectfully submitted, Larry J. Puglia President and chairman of the Investment Advisory Committee July 26, 2002 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. Portfolio Highlights Major Portfolio Changes Listed in descending order of size Six Months Ended 6/30/02 TEN LARGEST PURCHASES - ---------------------------- Affiliated Computer Services Texas Instruments Home Depot Microsoft U.S. Bancorp UPS* Pharmacia American International Group Bank of America Intel TEN LARGEST SALES - ---------------------------- Exxon Mobil Flextronics** ChevronTexaco Liberty Media** Freddie Mac Sprint PCS** Safeway** ACE Limited Electronic Data Systems** Allergan - ----------------------------- *Position added. **Position eliminated. Portfolio Highlights Twenty-Five Largest Holdings Percent of Net Assets 6/30/02 - ------------------------------------------------ Pfizer 4.0% Citigroup 3.9 UnitedHealth Group 3.4 Freddie Mac 3.3 Microsoft 3.2 First Data 2.5 GE 2.4 Wyeth 2.3 Viacom 2.2 American International Group 2.2 Johnson & Johnson 1.9 Target 1.7 Wal-Mart 1.7 Home Depot 1.6 Wellpoint Health Networks 1.6 Bank of America 1.6 Concord EFS 1.5 Coca-Cola 1.5 Fannie Mae 1.5 Danaher 1.4 Cisco Systems 1.4 Philip Morris 1.3 Marsh & McLennan 1.2 AOL Time Warner 1.2 Mellon Financial 1.2 - ------------------------------------------------ Total 51.7% Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund. Performance Comparison This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with 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. Blue Chip Growth Portfolio
S&P 500 Blue Chip Lipper Variable As of 6/30/02 Index Growth Portfolio Large-Cap Growth Shares Funds Average 12/31/2000 10,000 10,000 10,000 06/30/2001 9,330 9,040 8,577 06/30/2002 7,652 7,168 6,362
Note: Performance for II Class shares will vary from portfolio shares due to the differing fee structure. See returns table below. 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. Blue Chip Growth Portfolio Periods Ended 6/30/02
Since Inception 1 Year Inception Date - -------------------------------------------------------------------- Blue Chip Growth Portfolio shares -20.70% -19.90% 12/29/00 Blue Chip Growth Portfolio - II shares - -10.29% 4/30/02
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 Blue Chip Growth Portfolio Blue Chip Growth shares Unaudited For a share outstanding throughout each period 6 Months 12/29/00 Ended Through 6/30/02 12/31/01 NET ASSET VALUE Beginning of period $ 8.61 $ 10.00 Investment activities Net investment income (loss) - 0.01 Net realized and unrealized gain (loss) (1.45) (1.39) Total from investment activities (1.45) (1.38) Distributions Net investment income - (0.01) NET ASSET VALUE End of period $ 7.16 $ 8.61 ------ ------ Ratios/Supplemental Data Total return(diamond) (16.84)% (13.73)% Ratio of total expenses to average net assets 0.85%! 0.85% Ratio of net investment income (loss) to average net assets 0.05%! 0.14% Portfolio turnover rate 47.3%! 42.2% Net assets, end of period (in thousands) $ 5,336 $ 6,030 (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. Financial Highlights T. Rowe Price Blue Chip Growth Portfolio Blue Chip Growth - II shares Unaudited For a share outstanding throughout each period 4/30/02 Through 6/30/02 NET ASSET VALUE Beginning of period $ 8.04 Investment activities Net realized and unrealized gain (loss) (0.89) NET ASSET VALUE End of period $ 7.15 ------ Ratios/Supplemental Data Total return(diamond) (10.29)% Ratio of total expenses to average net assets 1.10%! Ratio of net investment income (loss) to average net assets 0.09%! Portfolio turnover rate 47.3%! Net assets, end of period (in thousands) $ 90 (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 Blue Chip Growth Portfolio June 30, 2002 (Unaudited)
Shares Value - ---------------------------------------------------------------------- In thousands COMMON STOCKS 99.4% CONSUMER DISCRETIONARY 13.7% Automobiles 0.5% Harley-Davidson 500 $ 26 26 Hotels, Restaurants & Leisure 0.4% Starbucks * 1,000 25 25 Internet & Catalog Retail 0.4% USA Interactive * 1,000 23 23 Leisure Equipment & Products 0.1% Mattel 200 4 4 Media 6.3% AOL Time Warner * 4,400 65 Clear Channel Communications * 1,800 58 Comcast, Class A * 1,750 42 Disney 400 7 Omnicom 890 41 Univision Communications Class A * 200 6 Viacom, Class B * 2,751 122 341 Multiline Retail 3.8% Kohl's * 300 21 Target 2,470 94 Wal-Mart 1,660 91 206 Specialty Retail 1.9% Best Buy * 450 17 Home Depot 2,400 88 105 Textiles, Apparel, & Luxury Goods 0.3% Nike, Class B 300 16 16 Total Consumer Discretionary 746 CONSUMER STAPLES 5.2% Beverages 2.7% Anheuser-Busch 100 5 Coca-Cola 1,450 81 PepsiCo 1,210 58 144 Shares Value - ---------------------------------------------------------------------- In thousands Food & Drug Retailing 0.6% Sysco 100 $ 3 Walgreen 700 27 30 Household Products 0.6% Colgate-Palmolive 500 25 Procter & Gamble 100 9 34 Tobacco 1.3% Philip Morris 1,650 72 72 Total Consumer Staples 280 ENERGY 3.9% Energy Equipment & Services 2.1% Baker Hughes 1,370 45 BJ Services * 940 32 Smith International * 500 34 111 Oil & Gas 1.8% ChevronTexaco 500 44 Exxon Mobil 1,360 56 100 Total Energy 211 FINANCIALS 26.5% Banks 6.7% Bank of America 1,200 84 Bank of New York 1,100 37 Fifth Third Bancorp 800 53 Mellon Financial 1,990 63 Northern Trust 400 18 U.S. Bancorp 2,300 54 Wells Fargo 1,140 57 366 Diversified Financials 14.0% American Express 280 10 Capital One Financial 520 32 Charles Schwab 1,430 16 Citigroup 5,530 214 Fannie Mae 1,100 81 Franklin Resources 600 26 Freddie Mac 2,970 182 Goldman Sachs Group 400 29 Merrill Lynch 800 33 T. Rowe Price Blue Chip Growth Portfolio June 30, 2002 (Unaudited) Shares Value - ---------------------------------------------------------------------- In thousands Morgan Stanley 1,120 $ 48 SLM Corporation 300 29 State Street 1,300 58 758 Insurance 5.8% ACE Limited 710 22 Allstate 200 7 American International Group 1,710 117 Hartford Financial Services Group 700 42 John Hancock Financial Services 100 3 Marsh & McLennan 700 68 Progressive Corporation 500 29 XL Capital, Class A 300 25 313 Total Financials 1,437 HEALTH CARE 22.6% Biotechnology 1.1% Amgen * 700 29 IDEC Pharmaceuticals * 180 6 MedImmune * 1,000 27 62 Health Care Equipment & Supplies 1.8% Baxter International 1,300 58 Guidant * 300 9 Medtronic 640 27 Waters Corporation * 100 3 97 Health Care Providers & Services 8.3% AmerisourceBergen 700 53 Cardinal Health 525 32 HCA 900 43 Laboratory Corporation of America * 660 30 Tenet Healthcare * 300 22 UnitedHealth Group 2,000 183 Wellpoint Health Networks * 1,100 86 449 Pharmaceuticals 11.4% Abbott Laboratories 1,400 53 Allergan 300 20 Biovail * 500 14 Eli Lilly 300 17 Forest Laboratories * 200 14 Johnson & Johnson 2,000 105 Shares Value - ---------------------------------------------------------------------- In thousands King Pharmaceuticals * 100 $ 2 Pfizer 6,230 218 Pharmacia 1,070 40 Schering-Plough 490 12 Wyeth 2,400 123 618 Total Health Care 1,226 INDUSTRIALS & BUSINESS SERVICES 11.9% Aerospace & Defense 0.3% General Dynamics 100 11 Honeywell International 200 7 18 Air Freight & Logistics 0.7% UPS, Class B 600 37 37 Commercial Services & Supplies 6.3% Apollo Group, Class A * 1,100 43 Automatic Data Processing 880 38 Cendant * 2,100 33 Concord EFS * 2,700 82 First Data 3,680 137 Paychex 100 3 Waste Management 100 3 339 Industrial Conglomerates 3.2% 3M 70 9 GE 4,470 130 Tyco International 2,630 35 174 Machinery 1.4% Danaher 1,150 76 76 Total Industrials & Business Services 644 INFORMATION TECHNOLOGY 13.2% Communications Equipment 2.7% Brocade Communications Systems * 300 5 Cisco Systems * 5,450 76 Motorola 800 12 Nokia ADR 1,270 18 QUALCOMM * 1,200 33 144 T. Rowe Price Blue Chip Growth Portfolio June 30, 2002 (Unaudited) Shares Value - ---------------------------------------------------------------------- In thousands Computers & Peripherals 1.6% Dell Computer * 1,730 $ 45 IBM 200 15 Lexmark International, Class A * 500 27 87 IT Consulting & Services 1.1% Affiliated Computer Services Class A * 1,300 62 62 Semiconductor Equipment & Products 4.1% Analog Devices * 1,100 33 Applied Materials * 1,520 29 Intel 1,900 35 KLA-Tencor * 300 13 Linear Technology 100 3 Maxim Integrated Products * 1,400 54 QLogic * 300 11 Texas Instruments 1,600 38 Xilinx * 240 5 221 Software 3.7% Adobe Systems 200 6 Electronic Arts * 100 7 Microsoft * 3,210 175 Siebel Systems * 70 1 VERITAS Software * 600 12 201 Total Information Technology 715 TELECOMMUNICATION SERVICES 1.2% Diversified Telecommunication Services 0.1% Verizon Communications 100 4 4 Wireless Telecommunication Services 1.1% Vodafone ADR 4,530 62 62 Total Telecommunication Services 66 Shares Value - ---------------------------------------------------------------------- In thousands UTILITIES 0.0% Gas Utilities 0.0% El Paso Corporation 100 $ 2 Total Utilities 2 Total Miscellaneous Common Stocks 1.2% 64 Total Common Stocks (Cost $6,172) 5,391 SHORT-TERM INVESTMENTS 1.1% Money Market Fund 1.1% T. Rowe Price Reserve Investment Fund, 1.95% # 62,082 62 Total Short-Term Investments (Cost $62) 62 Total Investments in Securities 100.5% of Net Assets (Cost $6,234) $ 5,453 Other Assets Less Liabilities (27) NET ASSETS $ 5,426 ------- Net Assets Consist of: Undistributed net investment income (loss) $ 1 Undistributed net realized gain (loss) (776) Net unrealized gain (loss) (781) Paid-in-capital applicable to 757,960 shares of $0.0001 par value capital stock outstanding; 1,000,000,000 shares of the Corporation authorized 6,982 NET ASSETS $ 5,426 ------- NET ASSET VALUE PER SHARE Blue Chip Growth shares ($5,336,553/745,413 shares outstanding) $ 7.16 Blue Chip Growth - II shares ($89,734/12,547 shares outstanding) $ 7.15
# Seven-day yield * Non-income producing ADR American Depository Receipts Statement of Operations T. Rowe Price Blue Chip Growth Portfolio In thousands Unaudited 6 Months Ended 6/30/02 Investment Income (Loss) Income Dividend $ 25 Interest 1 Total income 26 Investment management and administrative expense 25 Net investment income (loss) 1 Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities (271) Change in net unrealized gain (loss) on securities (803) Net realized and unrealized gain (loss) (1,074) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ (1,073) --------- The accompanying notes are an integral part of these financial statements. Statement of Changes in Net Assets T. Rowe Price Blue Chip Growth Portfolio In thousands Unaudited
6 Months Year Ended Ended 6/30/02 12/31/02 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 1 $ 6 Net realized gain (loss) (271) (505) Change in net unrealized gain (loss) (803) 22 Increase (decrease) in net assets from operations (1,073) (477) Distributions to shareholders Net investment income Blue Chip Growth shares - (6) Capital share transactions * Shares sold Blue Chip Growth shares 1,005 7,574 Blue Chip Growth - II shares 100 - Distributions reinvested Blue Chip Growth shares - 7 Shares redeemed Blue Chip Growth shares (636) (1,068) Increase (decrease) in net assets from capital share transactions 469 6,513 Net Assets Increase (decrease) during period (604) 6,030 Beginning of period 6,030 - End of period $ 5,426 $ 6,030 ------- ------- *Share information Shares sold Blue Chip Growth shares 122 826 Blue Chip Growth - II shares 13 - Distributions reinvested Blue Chip Growth shares - 1 Shares redeemed Blue Chip Growth shares (77) (127) Increase (decrease) in shares outstanding 58 700
The accompanying notes are an integral part of these financial statements. Notes to Financial Statements T. Rowe Price Blue Chip Growth Portfolio June 30, 2002 (Unaudited) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Equity Series, Inc. (the corporation) is registered under the Investment Company Act of 1940. The Blue Chip Growth Portfolio (the fund) is a diversified, open-end management investment company and is one of the portfolios established by the corporation. The fund seeks to provide long-term capital growth; income is a secondary objective. Shares of the fund are currently offered only through certain insurance companies as an investment medium for both variable annuity contracts and variable life insurance policies. The fund has two classes of shares: Blue Chip Growth Portfolio, offered since December 29, 2000, and Blue Chip Growth Portfolio - II, which was first offered on April 30, 2002. Blue Chip Growth - II sells its shares only through financial intermediaries, which it compensates for distribution and certain administrative services under a Board-approved Rule 12b-1 plan. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to both classes, and, in all other respects, the same rights and obligations as the other class. 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 - 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 official closing price for certain markets, at the time the valuations are made. 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 ask prices. Other equity securities are valued at a price within the limits of the latest bid and ask prices deemed by the Board of Directors, or by persons delegated by the Board, best to reflect fair value. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Directors. Blue Chip Growth - II pays distribution and administrative expenses, in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% of the class's average net assets. Management and administrative fee expense, investment income, and realized and unrealized gains and losses are allocated to the classes based upon the relative daily net assets of each class. 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. Currency Translation - Assets 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 ask prices of such currencies against U.S. dollars 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 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. NOTE 2 - INVESTMENT TRANSACTIONS Purchases and sales of portfolio securities, other than short-term securities, aggregated $1,968,000 and $1,352,000, respectively, for the six months ended June 30, 2002. 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 to shareholders all of its taxable income and capital gains. Federal income tax regulations differ from generally accepted accounting principles; therefore, distributions determined in accordance with tax regulations may differ 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. Temporary differences are not adjusted. The amount and character of tax-basis distributions and composition of net assets are finalized at fiscal year-end; accordingly, tax-basis balances have not been determined as of June 30, 2002. For tax purposes, the fund has elected to treat net capital losses realized between November 1 and December 31 of each year as occurring on the first day of the following tax year; consequently, $53,000 of realized losses recognized for financial reporting purposes in 2001 were recognized for tax purposes on January 1, 2002. Further, the fund intends to retain realized gains to the extent of available capital loss carryforwards. As of December 31, 2001, the fund had $452,000 of unused capital loss carryforwards, of which $452,000 expire in 2009 At June 30, 2002, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $6,234,000. Net unrealized loss aggregated $781,000 at period-end, of which $244,000 related to appreciated investments and $1,025,000 related to depreciated investments. 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. The investment management and administrative agreement between the fund and the manager provides for an all-inclusive annual fee equal to 0.85% of the fund's average daily net assets. The fee is computed daily and paid monthly. The agreement provides that investment management, shareholder servicing, transfer agency, accounting, and custody services are provided to the fund, and interest, taxes, brokerage commissions, directors' fees and expenses, and extraordinary expenses are paid directly by the fund. At June 30, 2002, $18,000 was payable under the agreement. The fund may invest in the T. Rowe Price Reserve Investment Fund and T. Rowe Price Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by Price Associates. The Reserve Funds are offered as cash management options only to mutual funds and other accounts managed by Price Associates and/or 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, 2002, totaled $1,000 and are reflected as interest income in the accompanying Statement of Operations. T. Rowe Price Blue Chip Growth Portfolio About the Portfolio's Directors and Officers Your portfolio is governed by a Board of Directors that meets regularly to review investments, performance, expenses, and other business matters, and is responsible for protecting the interests of shareholders. The majority of the portfolio'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 portfolio'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. Independent Directors Name (Date of Birth) Principal Occupation(s) During Past 5 Years and Year Elected* Other Directorships of Public Companies Calvin W. Burnett, Ph.D. President, Coppin State College; Director, (3/16/32) Provident Bank of Maryland 2001 Anthony W. Deering Director, Chairman of the Board, President, and (1/28/45) Chief Executive Officer, The Rouse Company, real 2001 estate developers Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an (1/27/43) acquisition and management advisory firm 1994 David K. Fagin Director, Dayton Mining Corp. (6/98 to present), (4/9/38) Golden Star Resources Ltd., and Canyon Resources 1994 Corp. (5/00 to present); Chairman and President, Nye Corp. F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates, (8/22/34) Inc., consulting environmental and civil engineers 2001 Hanne M. Merriman Retail Business Consultant; Director, Ann Taylor (11/16/41) Stores Corp., Ameren Corp., Finlay Enterprises, 1994 Inc., The Rouse Company, and US Airways Group, Inc. John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a (10/21/46) real estate investment company; Senior Advisor and 2001 Partner, Blackstone Real Estate Advisors, L.P.; Director, AMLI Residential Properties Trust, Host Marriott Corp., and The Rouse Company Hubert D. Vos Owner/President, Stonington Capital Corp., a (8/2/33) private investment company 1994 Paul M. Wythes Founding Partner, Sutter Hill Ventures, a venture (6/23/33) capital limited partnership, providing equity 1994 capital to young high-technology companies throughout the United States; Director, Teltone Corp. * Each independent director oversees 98 T. Rowe Price portfolios and serves until the election of a successor. T. Rowe Price Blue Chip Growth PortfolioInside Directors Name (Date of Birth) Year Elected* [Number of T. Rowe Price Portfolios Principal Occupation(s) During Past 5 Years and Overseen] Other Directorships of Public Companies John H. Laporte Director, T. Rowe Price Group, Inc.; Vice (7/26/45) President, T. Rowe Price 1994 [15] James S. Riepe Director and Vice President, T. Rowe Price; Vice (6/25/43) Chairman of the Board, Director, and Vice 1994 President, T. Rowe Price Group, Inc.; Chairman [98] of the Board and Director, T. Rowe Price Global Asset Management 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., and T. Rowe Price Global Investment Services Limited; Vice President, Equity Series M. David Testa Vice Chairman of the Board, Chief Investment (4/22/44) Officer, Director, and Vice President, T. Rowe 1994 Price Group, Inc.; Chief Investment Officer, [98] Director, and Vice President, T. Rowe Price; Chairman and Director, T. Rowe Price Global Asset Management Limited; Vice President and Director, T. Rowe Price Trust Company; Director, T. Rowe Price Global Investment Services Limited and T. Rowe Price International, Inc.; President, Equity Series *Each inside director serves until the election of a successor. Officers Name (Date of Birth) Position(s) Held With Fund Principal Occupations Brian W.H. Berghuis, Vice President, T. Rowe Price and T. Rowe Price 10/12/58 Group, Inc. Executive Vice President, Equity Series Stephen W. Boesel Vice President, T. Rowe Price, T. Rowe Price (12/28/44) Group, Inc., and T. Rowe Price Trust Company Vice President, Equity Series Joseph A. Carrier Vice President, T. Rowe Price, T. Rowe Price (12/30/60) Group, Inc., and T. Rowe Price Investment Treasurer, Equity Series Services, Inc. Arthur B. Cecil III Vice President, T. Rowe Price and T. Rowe Price (9/15/42) Group, Inc. Vice President, Equity Series Giri Devulapally Vice President, T. Rowe Price and T. Rowe Price (11/18/67) Group, Inc. Vice President, Equity Series Anna M. Dopkin, 9/5/67 Vice President, T. Rowe Price and T. Rowe Price Vice President, Group, Inc. Equity Series Robert N. Gensler Vice President, T. Rowe Price and T. Rowe Price (10/18/57) Group, Inc. Vice President, Equity Series Eric M. Gerster Vice President, T. Rowe Price and T. Rowe Price (3/23/71) Group, Inc. Vice President, Equity Series Henry H. Hopkins Director and Vice President, T. Rowe Price Group, (12/23/42) Inc.; Vice President, T. Rowe Price, T. Rowe Price Vice President, International, Inc., and T. Rowe Price Retirement Equity Series Plan Services, Inc.; Vice President and Director, T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price Trust Company T. Rowe Price Blue Chip Growth Portfolio Officers (continued) Name (Date of Birth) Title and Fund(s) Served Principal Occupations Kris H. Jenner (2/5/62) Vice President, T. Rowe Price and T. Rowe Price Executive Vice President, Group, Inc. Equity Series J. Jeffrey Lang (1/10/62) Vice President, T. Rowe Price and T. Rowe Price Vice President, Trust Company Equity Series John D. Linehan (1/21/65) Vice President, T. Rowe Price, T. Rowe Price Vice President, Group, Inc., and T. Rowe Price International, Inc. Equity Series Patricia B. Lippert Assistant Vice President, T. Rowe Price and (1/12/53) T. Rowe Price Investment Services, Inc. Secretary, Equity Series David S. Middleton Vice President, T. Rowe Price, T. Rowe Price Group, (1/18/56) Inc., and T. Rowe Price Trust Company Controller, Equity Series Joseph Milano (9/14/72) Vice President, T. Rowe Price and T. Rowe Price Vice President, Group, Inc. Equity Series Larry J. Puglia, CFA Vice President, T. Rowe Price and T. Rowe Price (8/25/60) Group, Inc. Executive Vice President, Equity Series Brian C. Rogers Director and Vice President, T. Rowe Price Group, (6/27/55) Inc.; Vice President, T. Rowe Price and T. Rowe Executive Vice President, Price Trust Company Equity Series Robert W. Smith Vice President, T. Rowe Price, T. Rowe Price (4/11/61) Group, Inc., and T. Rowe Price International, Inc. Vice President, Equity Series Michael F. Sola Vice President, T. Rowe Price and T. Rowe Price (7/21/69) Group, Inc. Vice President, Equity Series William J. Stromberg, Vice President, T. Rowe Price and T. Rowe Price CFA (3/10/60) Group, Inc. Vice President, Equity Series John F. Wakeman Vice President, T. Rowe Price and T. Rowe Price (11/25/62) Group, Inc. Vice President, Equity Series Richard T. Whitney Vice President, T. Rowe Price, T. Rowe Price (5/7/58) Group, Inc., T. Rowe Price Trust Company, and Executive Vice President, T. Rowe Price International, Inc. Equity Series R. Candler Young Assistant Vice President, T. Rowe Price (9/28/71) Vice President, Equity Series Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. This report is authorized for distribution only to those who have received a copy of the portfolio's prospectus. T. Rowe Price, Invest With Confidence 100 East Pratt Street Baltimore, MD 21202 T. Rowe Price Investment Services, Inc., Distributor TRP594 (6/02) K15-232 6/30/02 -----END PRIVACY-ENHANCED MESSAGE-----