T. Rowe Price
Prime Reserve Portfolio
Semiannual Report
June 30, 1998
Dear Investor
The six months ended June 30, 1998, saw volatility within the short-term bond
market that resulted in notable interest rate declines. Rates shifted both up
and down as investors tried to anticipate the Federal Reserve's decisions; your
fund took advantage of this activity by correctly predicting that the Fed would
make no changes during the period.
Market Environment
The last time the Fed changed the federal funds target rate was 16 months ago,
in March 1997. A marvelous economic environment, incorporating a near-ideal
blend of steady growth and flat-even declining-inflation, encouraged the central
bank's laissez-faire stance. Despite occasionally voicing concerns over the
sustainability of these conditions, Fed officials did not find enough troubling
data to support a change in policy.
While the target rate did not change, however, there was considerable
fluctuation in other measures of short-term interest rates, as depicted in the
accompanying chart. Investors tried to anticipate Fed action in the wake of two
important trends: increasing economic strength and the crises in Asia.
Interest Rate Levels
1-Year 90-Day Federal Funds
Treasury Bill Treasury Bill Target Rate
6/30/97 5.663 5.249 5.500
5.430 5.217 5.500
5.559 5.204 5.500
9/97 5.427 5.083 5.500
5.369 5.204 5.500
5.501 5.204 5.500
12/97 5.465 5.331 5.500
5.237 5.194 5.500
5.402 5.298 5.500
3/98 5.369 5.093 5.500
5.379 4.967 5.500
5.399 4.996 5.500
6/98 5.368 5.082 5.500
Data from many sources suggested that the economy continued to grow above trend.
The national budget has moved into a projected surplus for fiscal year 1998 of
$30 billion to $50 billion-a marked difference from fiscal years 1997 and 1996,
when the budgets reflected net borrowing of $21 billion and $140 billion,
respectively. Despite the growth surge, however, an increase in Asian exports
helped put a lid on inflation around the world, including the U.S. In addition,
many investors thought that Asia's economic slowdowns (and in particular Japan's
harsh recession) would prove a drag on the domestic economy. These conditions,
at times, made the money market very attractive to U.S. investors.
Despite the volatility, short-term interest rates edged still lower during the
six-month period, with the yields for both the one-year and 90-day Treasuries
well below the fed funds target rate level. In addition, the yield spread
between one-year and 90-day bills has been relatively narrow. These
circumstances are likely to persist until the Fed shows a more pronounced
inclination to change rates.
Performance and Strategy Review
Performance Comparison
Periods Ended 6/30/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Prime Reserve Portfolio 2.61% 5.38%
Lipper Variable Annuity
Underlying Money Market
Funds Average 2.54 5.21
Your fund was able to take advantage of activity in the money market to maintain
its income level and to outperform its peer group. For the six months ended June
30, 1998, the fund's 2.61% gain outpaced the 2.54% results for the Lipper
Variable Annuity Underlying Money Market Funds Average. Over the past 12 months,
the fund has produced an even greater advantage over its peer group.
Effective maturity management has been an important component of our approach
during this stretch of Fed inactivity. We maintained a "barbell" strategy over
the past six months: that is, we held a significant stake in securities with
one-year maturities for their somewhat higher yield, and balanced their modest
additional interest rate risk with more defensive one-month instruments.
By our estimates, this strategy kept the fund's overall weighted average
maturity about 10 days longer than that of its typical peer. A longer portfolio
generally produces a better income for investors during periods of flat to
declining interest rates. At the period's end, the fund's average maturity was
68 days.
We also attempted to make use of the fluctuations in short-term rates. We felt
fairly confident during the period that the Fed would not change interest rates,
so when investors bid up money market securities in the expectation of a Fed
easing, we took a more defensive approach by reducing average maturity. On the
other hand, when people sold longer securities out of concern that the Fed might
raise rates, we increased maturity to become more aggressive. These decisions
proved effective.
Overall, our sector positioning changed only modestly. The largest
exposures persist in banking certificates of deposit, as well as commercial
paper in the finance and credit sector-segments that had the greatest share of
market issuance. Relative yield advantages led to an increased allocation to
industrial commercial paper (from 3% to 10%) and a reduction in various types of
asset-backed securities (from 25% to 16%). With few changes in the economic
landscape, the market presented only limited opportunity to add value through
more dramatic sector rotation.
Outlook
With the troubles in Asia putting pressure on the U.S. economy and domestic
inflation under wraps, we see little likelihood of any tightening by the Fed,
possibly through year-end. As long as the central bank stands pat, we expect to
remain somewhat more aggressive than our peers. However, we plan to keep a close
eye on inflation data. If there were any hard evidence that inflation was
starting to pick up, we would become more defensive.
Respectfully submitted,
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
July 17, 1998
Portfolio Highlights
Key Statistics
Periods
Ended
6/30/98
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Price Per Share $ 1.00
Dividend Per Share
6 months 0.026
12 months 0.053
Dividend Yield (7-Day Compound) * 5.37%
Weighted Average Maturity (days) 68
Weighted Average Quality ** First Tier
- --------------------------------------------------------------------------------
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if
unrated, are deemed of comparable quality by T. Rowe Price.
Portfolio Highlights
Sector Diversification
Percent of Percent of
Net Assets Net Assets
12/31/97 6/30/98
- --------------------------------------------------------------------------------
U.S. Negotiable Bank Notes 3% 2%
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Certificates of Deposit 26% 25%
- --------------------------------------------------------------------------------
Domestic Negotiable CDs 3 7
Eurodollar Negotiable CDs/
Bank Notes 2 1
U.S. Dollar Denominated
Foreign Negotiable CDs/
Bank Notes 21 17
Commercial Paper and Medium-
Term Notes 67% 70%
- --------------------------------------------------------------------------------
Finance and Credit 13 15
Banking 13 13
Asset-Backed 16 12
Industrial 3 10
Asset-Backed Structured Notes 9 4
All Other 13 16
U.S. Government Agency
Obligations -- --
- --------------------------------------------------------------------------------
Foreign Government and
Municipalities 4% 4%
- --------------------------------------------------------------------------------
Other Assets Less Liabilities -- -1%
- --------------------------------------------------------------------------------
Total 100% 100%
- --------------------------------------------------------------------------------
Fixed Rate Obligations 90%
Floating Rate Obligations 10%
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.
Prime Reserve Portfolio
As of 6/30/98
Lipper Variable
Annuity Underlying
Prime Reserve Money Market
Portfolio Funds Average
12/96 10,000 10,000
6/97 10,256 10,247
12/97 10,533 10,514
6/98 10,808 10,781
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.
Prime Reserve Portfolio
Periods Ended 6/30/98
Since Inception
1 Year Inception Date
- --------------------------------------------------------------------------------
5.38% 5.34% 12/31/96
Investment return represents past performance and will vary. While the fund is
managed to maintain a stable share price of $1.00, this is not guaranteed. An
investment in the fund is not insured or guaranteed by the U.S. government.
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 Prime Reserve Portfolio
(Unaudited)
For a share outstanding
throughout each period
--------------------------------
6 Months 12/31/96
Ended through
6/30/98 12/31/97
NET ASSET VALUE
Beginning of period $ 1.000 $ 1.000
Investment activities
Net investment income 0.026 0.052
Distributions
Net investment income (0.026) (0.052)
NET ASSET VALUE
End of period $ 1.000 $ 1.000
--------------------------------
Ratios/Supplemental Data
Total return(C) 2.61% 5.33%
Ratio of expenses to
average net assets 0.55%! 0.55%!
Ratio of net investment
income to average net assets 5.23%! 5.24%!
Net assets, end of period
(in thousands) $ 15,070 $ 10,964
(C) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
! Annualized.
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
T. Rowe Price Prime Reserve Portfolio
June 30, 1998 (Unaudited)
Par Value
In thousands
- --------------------------------------------------------------------------------
BANK NOTES 1.7%
National Bank of Commerce, VR
5.742%, 7/24/98 $ 250 $ 250
Total Bank Notes (Cost $250) 250
CERTIFICATES OF DEPOSIT 25.3%
ABN AMRO, 5.71%, 10/9/98 414 414
Bank of Austria
5.70%, 3/30/99 250 250
Bank of New York
5.75%, 5/14/99 250 250
Bankers Trust
5.64%, 1/12/99 150 150
5.98%, 12/10/98 100 100
Banque National de Paris
5.87%, 8/20/98 100 100
Bayerische Vereinsbank
5.70%, 10/6/98 100 100
Canadian Imperial Bank
5.915%, 8/12/98 100 100
Credit Agricole Indosuez
5.705%, 1/7/99 200 200
5.75%, 4/16/99 250 250
Den Danske Bank
5.75%, 4/26/99 300 300
Depfa Bank, VR
5.648%, 7/7/98 200 200
Deutsche Bank AG
5.70%, 3/5/99 400 399
First National Bank of Maryland
5.95%, 10/22/98 150 150
Kredietbank NV, 5.75%, 4/28/99 300 300
Societe Generale, 5.73%, 1/7/99 200 200
Union Bank of California
5.80%, 10/6/98 100 100
Wilmington Trust
5.60%, 11/12/98 250 250
Total Certificates of Deposit (Cost $3,813) 3,813
COMMERCIAL PAPER 64.1%
Abbey National N.A.
5.55%, 7/2/98 450 450
Anheuser Busch, 5.52%, 7/7/98 300 300
Asset Securitization Cooperative, 4(2)
5.54%, 8/31/98 $ 300 $ 297
BBL North America
5.53%, 7/9/98 250 250
Corporate Asset Funding, 4(2)
5.55%, 7/10/98 500 499
Delaware Funding, 4(2)
5.58%, 7/8/98 550 549
Dover Funding, 4(2)
5.52%, 7/9/98 325 325
Falcon Asset Securitization, 4(2)
5.55%, 7/17/98 450 449
Finova Capital, 5.54%, 7/7/98 140 140
Florida Power, 5.54%, 7/29/98 200 199
Ford Motor Credit
5.53%, 7/15/98 323 322
General Electric Capital
5.55%, 7/13/98 550 549
General RE, 5.50%, 9/3/98 400 396
Island Finance of Puerto Rico
5.60%, 7/15/98 450 449
KFW International Finance
5.60%, 7/16 - 7/28/98 450 449
Koch Industries, 6.30%, 7/1/98 251 251
Merck & Company
6.10%, 7/1/98 152 152
Metlife Funding, 5.57%, 8/7/98 470 467
Motorola, 5.54%, 7/1/98 100 100
New York Life Capital
5.55%, 7/13/98 550 549
New York State Power Authority
TECP, 5.51%, 7/14/98 100 100
Paccar Financial, 5.53%, 7/9/98 325 325
Paribas Finance, 5.53%, 9/1/98 215 213
Rio Tinto, 5.52%, 7/10/98 395 394
Snap On Tools, 5.55%, 7/16/98 400 399
Statoil (Den Norske Stats Oljeselskap)
5.53%, 7/9/98 175 175
Svenska Handelsbanken
5.55%, 7/13/98 300 299
Toys 'R' Us, 5.55%, 7/17/98 300 299
UBS Finance (Delaware)
5.75%, 7/2/98 308 308
Total Commercial Paper (Cost $9,654) 9,654
MEDIUM-TERM NOTES 9.3%
Becton Dickinson
9.95%, 3/15/99 $ 100 $ 103
Chrysler Financial, 7.26%, 7/1/98 50 50
Goldman Sachs Group, VR
5.652%, 7/17/98 150 150
5.656%, 7/27/98 100 100
Quebec Province of Canada
9.375%, 4/1/99 200 205
Rabobank, VR
5.652%, 7/17/98 138 138
Sears Roebuck
8.11%, 3/16/99 105 107
9.35%, 7/6/98 55 55
SMM Trust, VR, 5.656%, 7/13/98 250 250
Tiers Trust, VR, (144a)
5.656%, 7/15/98 250 250
Total Medium-Term Notes (Cost $1,408) 1,408
FUNDING AGREEMENTS 1.0%
General American Life Insurance, VR
5.85%, 7/1/98! 150 150
Total Funding Agreements (Cost $150) 150
Total Investments in Securities
101.4% of Net Assets (Cost $15,275) $ 15,275
Other Assets Less Liabilities (205)
NET ASSETS $ 15,070
----------
Net Assets Consist of:
Paid-in-capital applicable to 15,069,637
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
Corporation authorized $ 15,070
NET ASSETS $ 15,070
----------
NET ASSET VALUE PER SHARE $ 1.00
----------
! Private Placement
TECP Tax-Exempt Commercial Paper
VR Variable Rate
4(2) Commercial Paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors".
144a Security was purchased pursuant to Rule 144a under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers - total of such securities at period-end amounts to
1.7% of net assets.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Prime Reserve Portfolio
(Unaudited)
In thousands
6 Months
Ended
6/30/97
Investment Income
Income
Interest income $ 361
Expenses
Investment management and administrative 34
Net investment income 327
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 327
---------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price Prime Reserve Portfolio
(Unaudited)
In thousands
6 Months 12/31/96
Ended through
6/30/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 327 $ 412
Distributions to shareholders
Net investment income (327) (412)
Capital share transactions*
Shares sold 12,226 24,498
Distributions reinvested 325 412
Shares redeemed (8,445) (13,946)
Increase (decrease) in
net assets from capital
share transactions 4,106 10,964
Net Assets
Increase (decrease) during period 4,106 10,964
Beginning of period 10,964 --
End of period $ 15,070 $ 10,964
---------------------------------
*Share information
Shares sold 12,226 24,498
Distributions reinvested 325 412
Shares redeemed (8,445) (13,946)
Increase (decrease)
in shares outstanding 4,106 10,964
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Prime Reserve Portfolio
June 30, 1998 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Fixed Income Series, Inc. (the corporation) is registered under
the Investment Company Act of 1940. The Prime Reserve Portfolio (the fund), a
diversified, open-end management investment company, is one of the portfolios
established by the corporation and commenced operations on December 31, 1996.
The shares of the fund are currently being offered only to separate accounts of
certain insurance companies as an investment medium for both variable annuity
contracts and variable life insurance policies.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles for the investment company industry; these
principles may require the use of estimates by fund management.
Valuation Securities are valued at amortized cost. Assets and liabilities for
which such valuation procedures 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.
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. 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 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income.
At June 30, 1998, the aggregate cost of investments for federal income tax and
financial reporting purposes was $15,275,000.
NOTE 3 - 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, computed daily and paid monthly, equal to 0.55% 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.
Invest With Confidence(registered trademark)
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP658 (6/98) K15-072 6/30/98
