T. Rowe Price
Prime Reserve
Portfolio
Annual Report
December 31, 1998
Dear Investor
After moving in a narrow range in the early part of 1998, interest rates fell
sharply during the six-month period ended December 31. The decline was sparked
both by strong investor preference for low-risk securities and by Federal
Reserve action. The trend benefited longer maturity issues but crimped yield on
short-term securities. The Prime Reserve Portfolio posted a better return than
its competitors and kept dividends stable.
Market Environment
Over the past 12 months, global events overshadowed domestic economic and
financial market developments. The lingering effects of last year's
Southeast Asia collapse were evident in weakening corporate earnings
reports and a growing external trade deficit, while the financial crisis in
Russia this past August heightened investor discomfort with higher-risk
investments. Economists, as well as the Federal Reserve, noted a worrisome
trend toward global deflation. These concerns culminated in the third
quarter, leading to poor worldwide market liquidity, a global credit
crunch, and sharp losses for stocks and higher-risk bonds. Even though U.S.
gross domestic product (GDP) growth was steady and inflation remained low,
market volatility in the U.S. increased and investors became highly risk
averse.
The Federal Reserve responded to the troubled atmosphere by reducing
short-term interest rates a total of 75 basis points (three-quarters of one
percent) in three moves between September and November. These actions eased
the credit crunch while improving consumer and investor confidence at home.
They also helped restore stability to the bond and stock markets, paving
the way for a late-year rebound among the higher-risk instruments that were
hurt earlier in the autumn.
Interest Rate Levels
1-Year 90-Day Federal
Treasury Treasury Funds
Bill Bill Target Rate
12/97 5.465 5.331 5.5
5.237 5.194 5.5
5.402 5.298 5.5
3/98 5.369 5.093 5.5
5.379 4.967 5.5
5.399 4.996 5.5
6/98 5.365 5.082 5.5
5.34 5.069 5.5
4.882 4.895 5.5
9/98 4.296 4.273 5.25
4.198 4.323 5
4.467 4.501 4.75
12/31/98 4.553 4.48 4.75
During the height of the crisis, investors abandoned lower-quality
corporate or foreign bonds in favor of Treasuries and short-term
instruments. In October, for example, the yield on 90-day certificates of
deposit issued by domestic or foreign banks was 85 basis points higher than
the yield on 90-day U.S. Treasury bills. This spread was higher than
average and indicated that investor demand for Treasuries significantly
outpaced the demand for those corporate issues.
Another important phenomenon of the past six months was the continuing
flattening of the short-term yield curve. In June, one-year Treasury bills
offered 29 basis points more yield than 90-day Treasury bills. By the end
of December, this difference was only seven basis points (4.55% vs. 4.48%).
This reduced the incentive to purchase longer-term issues as there was
little incremental yield to be gained.
Performance and Strategy Review
The Prime Reserve Portfolio ended the six-month period with a 2.61% total
return, exceeding the 2.49% result posted by the Lipper Variable Annuity
Underlying Money Market Funds Average. Its 12-month return of 5.29% also
outpaced the peer group's 5.10% showing. We were able to keep dividends per
share relatively stable from prior periods.
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).
Performance Comparison
Periods Ended 12/31/98 6 Months 12 Months
---------------------------------------------------------------------------
Prime Reserve Portfolio 2.61% 5.29%
Lipper Variable Annuity
Underlying Money Market
Funds Average 2.49 5.10
The most important factor contributing to the Prime Reserve Portfolio's
above-average performance was a longer-than-average maturity, which was
maintained throughout the year. Over the past six months, the weighted
average maturity was 10 to 15 days longer than the average money fund,
which helped us preserve higher income when interest rates declined.
During the period, we adjusted the portfolio's maturity structure. In the
past we have used a "barbell" approach, splitting assets between CDs or
commercial paper with longer securities and very short 30-day issues to
achieve an average maturity we found desirable. This approach allowed us to
take advantage of higher yields on the long issues, while the short ones
provided some protection against the possibility of increasing rates. As
rates fell and the short-term yield curve flattened, however, we shifted to
issues with maturities in a narrower three- to six-month range. This
"bullet" structure generally results in a higher return when interest rates
are declining, as it did in this case.
We increased our exposure to floating rate instruments from 10% to 33% of
assets. The prices of these instruments became more attractive early in the
period when investors focused on Treasuries. Increased issuance also kept
prices down. Priced correctly, floaters can add significant income to a
money market portfolio. We also built up our holdings of some types of
asset-backed securities, specifically auto-backed and loan/bond-backed, to
12% of assets. These instruments offer diversification, high credit
quality, and attractive yields when compared with other money market
instruments. We sharply increased our exposure to Eurodollar CDs as
increased supply made them more competitively priced. However, we
significantly reduced our overall exposure to the banking and finance
industries, which are more exposed to the risks of a global slowdown than
other sectors.
Outlook
The domestic economy continues to exhibit remarkable strength. For example,
despite the newspaper headlines about record layoffs, the U.S. expanded
employment by well over two million jobs in 1998. We remain concerned by
weakness in other global regions, especially Asia and Latin America, which
significantly depresses the outlook for future growth. Declining growth
rates may inspire the Fed to lower short-term rates further, although we
expect them to wait until they have additional confirmation that the
economy is slowing down before doing so.
In this environment, we will expect to maintain a longer maturity than the
average of all money funds. We will continue to increase our investment in
asset-backed securities as the supply of this high credit quality sector
expands, and we will maintain our substantial floating rate position as
long as they remain competitively priced. As always, preservation of
principal and liquidity remain our chief concern.
Respectfully submitted,
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
January 20, 1999
Portfolio Highlights
Key Statistics
Periods
Ended
12/31/98
- --------------------------------------------------------------------------------
Price Per Share $ 1.00
Dividend Per Share
6 months 0.026
12 months 0.052
Dividend Yield (7-Day Compound) * 5.03%
Weighted Average Maturity (days) 74
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
6/30/98 12/31/98
- --------------------------------------------------------------------------------
U.S. Negotiable Bank Notes 2% 10%
Certificates of Deposit 25 32
Domestic Negotiable CDs 7 4
Eurodollar Negotiable CDs/
Bank Notes 1 9
U.S. Dollar Denominated
Foreign Negotiable CDs/
Bank Notes 17 19
Commercial Paper and Medium-
Term Notes 70 58
Receivables-Backed 12 12
Structured Investment Vehicle 4 7
Loan/Bond-Backed -- 6
Auto-Backed -- 6
Banking 13 6
All Other 41 21
Foreign Government and
Municipalities 4 2
Other Assets Less Liabilities -1 -2
- --------------------------------------------------------------------------------
Total 100% 100%
- --------------------------------------------------------------------------------
Fixed Rate Obligations 67%
Floating Rate Obligations 33%
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 12/31/98
Lipper
Variable Annuity
Prime Underlying
Reserve Money Market
Portfolio Funds Average
12/31/96 10,000 10,000
6/97 10,256 10,247
12/97 10,533 10,514
6/98 10,808 10,781
12/98 11,090 11,051
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 12/31/98
Since Inception
1 Year Inception Date
- --------------------------------------------------------------------------------
5.29% 5.31% 12/31/96
Investment return represents past performance and will vary. An investment in
the fund is not insured or guaranteed by the FDIC or any other government
agency. Although the fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the fund.
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
For a share outstanding
throughout each period
-----------------------------
Year 12/31/96
Ended Through
12/31/98 12/31/97
NET ASSET VALUE
Beginning of period $ 1.000 $ 1.000
Investment activities
Net investment income 0.052 0.052
Distributions
Net investment income (0.052) (0.052)
NET ASSET VALUE
End of period $ 1.000 $ 1.000
---------------------------------
Ratios/Supplemental Data
Total return# 5.29% 5.33%
Ratio of expenses to average net assets 0.55% 0.55%!
Ratio of net investment
income to average net assets 5.12% 5.24%!
Net assets, end of period
(in thousands) $ 16,119 $ 10,964
# 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
December 31, 1998
Par Value
- --------------------------------------------------------------------------------
In thousands
BANK NOTES 15.0%
Associates Corporation North America
6.375%, 8/15/99 $ 250 $ 252
Bank of New York
5.75%, 5/14/99 250 251
Bankboston N.A.
5.74%, 4/15/99 250 250
Barclays Bank PLC, VR
5.484%, 1/4/99 650 650
First Fidelity Bancorp
9.625%, 8/15/99 300 307
Key Bank, VR
5.574%, 1/29/99 400 400
PNC Bank, VR
5.296%, 10/13/99 300 300
Total Bank Notes (Cost $2,410) 2,410
CERTIFICATES OF DEPOSIT 15.6%
Bank of Austria, 5.70%, 3/30/99 250 250
Bank of Nova Scotia
5.75%, 4/27/99 250 250
Bankers Trust, 5.64%, 1/12/99 150 150
Credit Agricole Indosuez
5.705%, 1/7/99 200 200
5.75%, 4/16/99 250 250
Den Danske Bank, 5.75%, 4/26/99 250 250
Fleet National Bank Providence
Rhode Island, VR
5.335%, 12/6/99 250 250
Kredietbank NV, 5.75%, 4/28/99 300 300
Regions Bank, 5.30%, 9/10/99 250 250
Societe Generale
5.73%, 1/6/99 250 250
5.75%, 4/15/99 120 120
Total Certificates of Deposit (Cost $2,520) 2,520
COMMERCIAL PAPER 32.0%
Bayerische Landesbank, VR
5.533%, 7/22/99 500 500
Beta Finance, 4(2)
5.22%, 1/15/99 250 249
5.30%, 2/19/99 450 447
Ciesco L.P., 5.30%, 2/11/99 395 393
Commerzbank, 5.25%, 2/4/99 200 199
Countrywide Funding
5.50%, 1/14/99 $ 260 $ 259
Falcon Asset Securitization, 4(2)
5.33%, 1/15/99 300 299
5.35%, 2/11/99 250 249
FCAR Owner Trust
5.08%, 1/15/99 500 499
Finova Capital, 5.30%, 2/9/99 180 179
Golden Funding, 5.57%, 1/15/99 450 449
Heinz (H.J.), 4(2), 5.65%, 1/7/99 285 285
Jefferson Pilot, 5.00%, 1/4/99 337 337
Reed Elsevier, 5.25%, 1/15/99 320 319
Repeat Offering Security
5.50%, 1/8/99 300 300
Reseau Ferre De France
5.30%, 1/20/99 200 199
Total Commercial Paper (Cost $5,162) 5,162
MEDIUM-TERM NOTES 38.0%
Baltimore Gas & Electric
8.40%, 10/15/99 100 102
Becton, Dickinson
9.95%, 3/15/99 100 101
Citicorp, Sr. Notes, VR
5.199%, 3/17/99 450 450
Daimler Banz Vehicle
Owner Trust, VR
5.271%, 1/3/00 430 430
Depfa Bank, VR, 5.273%, 1/7/99 200 200
Disney, 6.25%, 6/21/99 353 355
Du Pont Ei De Nemours
7.50%, 6/11/99 450 454
First Security Auto Owner Trust
5.248%, 11/15/99 58 58
Ford Motor Credit, VR
5.513%, 1/4/99 500 500
General Electric Capital
6.125%, 3/4/99 500 501
Goldman Sachs Group, VR
5.544%, 1/19/99 200 200
5.575%, 1/25/99 100 100
IBM Credit, 5.219%, 2/2/99 250 250
LINCS, VR, 5.551%, 1/19/99 500 500
Newcourt Equipment Trust
5.007%, 11/20/99 224 224
5.195%, 1/15/00 250 250
Quebec Province of Canada
9.375%, 4/1/99 $ 200 $ 202
Rabobank, VR, 5.544%, 1/17/99 88 88
Sears Roebuck, 8.11%, 3/16/99 105 105
Strategic Money Market Trust, VR
5.320%, 3/16/99 250 250
Tiers Trust, VR
5.535%, 1/15/99 300 300
Wachovia Bank, VR
5.562%, 1/5/99 500 500
Total Medium-Term Notes
(Cost $6,120) 6,120
FUNDING AGREEMENTS 0.9%
General American Life Insurance
5.24%, 1/4/99! 150 150
Total Funding Agreements
(Cost $150) 150
Total Investments in Securities
101.5% of Net Assets
(Cost $16,362) $ 16,362
Other Assets Less Liabilities (243)
NET ASSETS $ 16,119
----------
Net Assets Consist of:
Accumulated net realized gain/loss -
net of distributions $ 4
Paid-in-capital applicable to 16,114,908
shares of $.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
corporation authorized $ 16,115
NET ASSETS $ 16,119
----------
NET ASSET VALUE PER SHARE $ 1.00
----------
! Private Placement
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."
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Prime Reserve Portfolio
In thousands
Year
Ended
12/31/98
Investment Income
Income
Interest income $ 875
Expenses
Investment management and administrative 85
Net investment income 790
Realized Gain (Loss)
Net realized gain (loss) on securities 4
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 794
----------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price Prime Reserve Portfolio
In thousands
Year
Ended
12/31/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 790 $ 412
Net realized gain (loss) 4 --
Increase (decrease) in net
assets from operations 794 412
Distributions to shareholders
Net investment income (790) (412)
Capital share transactions*
Shares sold 29,742 24,498
Distributions reinvested 785 412
Shares redeemed (25,376) (13,946)
Increase (decrease) in net assets from capital
share transactions 5,151 10,964
Net Assets
Increase (decrease) during period 5,155 10,964
Beginning of period 10,964 --
End of period $ 16,119 $ 10,964
---------------------------
*Share information
Shares sold 29,742 24,498
Distributions reinvested 785 412
Shares redeemed (25,376) (13,946)
Increase (decrease) in
shares outstanding 5,151 10,964
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Prime Reserve Portfolio
December 31, 1998
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 December 31, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$16,362,000.
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.
Report of Independent Accountants
To The Board of Directors of T. Rowe Price Fixed Income Series, Inc. and
Shareholders of Prime Reserve 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 Prime Reserve Portfolio (one of the portfolios comprising T. Rowe Price
Fixed Income 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 the 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
Annual Meeting Results
- --------------------------------------------------------------------------------
The Prime Reserve Portfolio held an annual meeting on October 15, 1998, to elect
directors of the portfolio and to ratify the Board of Directors' selection of
PricewaterhouseCoopers LLP as the portfolio's independent accountants.
The results of voting were as follows (by number of shares):
For nominees to the Board of Directors of the Fixed Income Series:
Calvin W. Burnett
In favor: 24,000,736.909
Withheld: 564,517.886
Anthony W. Deering
In favor: 23,962,384.875
Withheld: 602,869.920
F. Pierce Linaweaver
In favor: 24,165,444.557
Withheld: 399,810.238
William T. Reynolds
In favor: 24,020,077.826
Withheld: 545,176.969
James S. Riepe
In favor: 24,173,797.911
Withheld: 391,456.884
John G. Schreiber
In favor: 24,170,127.757
Withheld: 395,127.038
M. David Testa
In favor: 24,172,762.942
Withheld: 392,491.853
For PricewaterhouseCoopers LLP as independent accountants:
In favor: 16,856,007.863
Withheld: 153,720.085
Abstained: 430,011.472
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
TRP 658 (12/98)
K15-069 12/31/98
