T. Rowe Price
Limited-Term Bond Portfolio
Annual Report
December 31, 1998
Dear Investor
The investment environment was turbulent for the 12 months ended December 31,
1998, and the domestic economy showed wear after absorbing the effects of crises
in Southeast Asia and Russia. Especially in the third quarter, these trends
heightened investors' preference for relatively low-risk investments, such as
short-term instruments and Treasuries. Your fund made moderate returns in this
environment but exceeded its peer group average by a respectable margin.
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.
Treasuries were the chief beneficiaries of the trends toward lower rates
and higher investor demand for safety. Robust demand pushed prices up and
yields down on short- and intermediate-term Treasuries, as noted in the
Interest Rate Levels chart. Corporate bonds did less well, although
shorter-term, higher-quality issues provided decent performance. Falling
rates were more problematic for mortgage-backed bonds, which struggle when
home mortgage prepayments increase.
Interest Rate Levels
Current 5-Year 2-Year
Coupon Treasury Treasury
GNMA Note Note
12/31/97 6.81 5.71 5.66
6.64 5.48 5.40
6.76 5.60 5.54
3/31 6.80 5.62 5.57
6.76 5.72 5.66
6.65 5.57 5.56
6/30 6.59 5.50 5.51
6.60 5.51 5.48
6.33 5.07 5.09
9/30 5.96 4.24 4.31
6.25 4.22 4.10
6.25 4.62 4.64
12/31/98 6.26 4.59 4.61
Performance and Strategy Review
Your fund finished the six-month period with a relatively strong 4.05%
return, ahead of the 3.25% gain for its Lipper peer group average. That
showing contributed to a 7.28% total return for the past 12 months, again
besting the peer group's 6.04% return. Six-month dividends per share
remained unchanged from the prior six-month period, although in an
environment of falling interest rates, 12-month dividends slipped one penny
from the prior period. A strategy that emphasized higher-yielding bonds and
longer maturities contributed to the superior performance.
Performance Comparison
Periods Ended 12/31/98 6 Months 12 Months
---------------------------------------------------------------------------
Limited-Term
Bond Portfolio 4.05% 7.28%
Lipper Variable Annuity
Underlying Short
Intermediate Investment-
Grade Debt Funds Average 3.25 6.04
Portfolio duration was maintained at about 3.0 years, slightly longer than
the Lipper average. (Duration is a measure of price sensitivity to changes
in interest rates. A fund having a duration of three years will have a 3%
appreciation or decline in price in response to a one-percentage-point fall
or rise, respectively, in interest rates.) This strategy helped the fund
post good results despite a heavy concentration in corporate bonds, which
did not perform as well as Treasuries when rates fell and investors rushed
to relatively safe investments in autumn. Indeed, toward the end of the
period, we took profits on our Treasury holdings and shifted additional
assets to corporates, which grew to 55% of assets from 49% six months ago.
Some of the companies whose bonds we purchased included Rite Aid and
Safeway-retailers we think will do well even if the economy weakens.
Preparing for the Year 2000
The Year 2000 draws closer every day, and it holds special meaning beyond
the arrival of a new millennium. 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).
As the period progressed, we selectively trimmed holdings in top-quality
AAA bonds and added to positions in AA and BBB rated bonds with defensive
characteristics, particularly in the consumer products and services sector.
After the market's harsh sell-off of lower-rated securities in autumn, we
found these intermediate-quality bonds to have attractive valuations, and
their added income aided results. We sought to protect the fund from
excessive volatility by simultaneously reducing our stake in
noninvestment-grade BB and B bonds from 7% of assets to 4%, which helped
keep its credit quality at a relatively high AA- average. We continued to
maintain a cautious view of mortgage-backed bonds, which we trimmed
significantly in the first half of the year. These issues tend to
underperform when interest rates fall because their prepayment risk
increases. (Prepayments occur when homeowners refinance their high-rate
mortgages, causing premium-priced mortgage-backed bonds to be cashed out at
par. In that case, the premium and a typically high yield are lost.) We
correspondingly increased holdings of asset-backed securities, whose cash
flows are more predictable and less sensitive to falling rates.
Outlook
While there was some negative news and much concern about the state of the
U.S. economy during the period, there was little convincing evidence that a
recession is at hand. Indeed, we expect 1999 to be marked by slower GDP
growth-perhaps below 2%-but not a recession. This slowing will place some
pressure on corporate profits, but the overall economic climate should
remain generally favorable for business. The Fed may be accommodative given
the current low rate of inflation and the high level of economic
uncertainty. Accordingly, we expect to maintain a slightly long duration
compared with our Lipper peer group. We will probably keep the portfolio's
corporate bond weighting in the 50% to 55% range, emphasizing
higher-quality bonds in less economically sensitive sectors, and increase
holdings in mortgage-backed securities in light of their recent attractive
prices. Both of these sectors should help this generally high-quality
portfolio to maintain a slight yield advantage. Overall, we expect a
positive environment for bonds, in which returns will mainly reflect
income, although some price appreciation is possible.
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
- --------------------------------------------------------------------------------
Dividend Yield*
6 months 5.50%
12 months 5.76
Dividend Per Share
6 months 0.14
12 months 0.28
Long-Term Capital Gain Per Share 0.01
Change in Price Per Share
6 months (from $4.97 to $5.02) 0.05
12 months (from $4.96 to $5.02) 0.06
Weighted Average Maturity (years) 3.8
Weighted Average Effective Duration (years) 3.0
- --------------------------------------------------------------------------------
* 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.
Portfolio Highlights
Quality Diversification
Percent of Percent of
Net Assets Net Assets
6/30/98 12/31/98
- --------------------------------------------------------------------------------
Quality Rating*
AAA 45% 37%
AA 8 14
A 25 25
BBB 15 20
BB 7 3
B -- 1
- --------------------------------------------------------------------------------
Weighted Average Quality AA- AA-
- --------------------------------------------------------------------------------
*Based on T. Rowe Price research.
Sector Diversification
Percent of Percent of
Net Assets Net Assets
6/30/98 12/31/98
- --------------------------------------------------------------------------------
Corporate Bonds and Notes 49% 55%
Consumer Products and Services 7 15
Banking and Finance 13 14
Industrial 10 10
Utilities 10 8
All Other 9 8
Asset-Backed Securities 7 10
Mortgage-Backed Securities 15 14
U.S. Government Obligations 19 14
U.S. Treasuries 12 5
Government Agency Obligations 7 9
Money Market Funds 8 6
Other Assets Less Liabilities 2 1
- --------------------------------------------------------------------------------
Total 100% 100%
- --------------------------------------------------------------------------------
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.
Limited-Term Bond Portfolio
As of 12/31/98
Merrill Lynch
1-5 Year
Corporate/
Limited-Term Government
Bond Portfolio Bond Index
5/13/94 10,000 10,000
12/94 10,262 10,157
12/95 11,276 11,473
12/96 11,643 12,003
12/97 12,428 12,862
12/31/98 13,332 13,850
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.
Limited-Term Bond Portfolio
Periods Ended 12/31/98
Since Inception
1 Year 3 Years Inception Date
- --------------------------------------------------------------------------------
7.28% 5.74% 6.40% 5/13/94
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 Limited-Term Bond Portfolio
For a share outstanding throughout each period
-------------------------------------------------------
Year 5/13/94
Ended Through
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of period 4.96 4.93 5.06 4.92 5.00
Investment activities
Net investment income 0.28 0.29 0.29 0.33 0.21
Net realized and
unrealized gain (loss) 0.07 0.03 (0.13) 0.14 (0.08)
Total from investment
activities 0.35 0.32 0.16 0.47 0.13
Distributions
Net investment income (0.28) (0.29) (0.29) (0.33) (0.21)
Net realized gain (0.01) -- -- -- --
Total distributions (0.29) (0.29) (0.29) (0.33) (0.21)
NET ASSET VALUE
End of period 5.02 4.96 4.93 5.06 4.92
Ratios/Supplemental Data
Total return* 7.28% 6.74% 3.26% 9.88% 2.62%
Ratio of expenses to
average net assets 0.70% 0.70% 0.70% 0.70% 0.70%!
Ratio of net
investment income to
average net assets 5.58% 5.91% 5.83% 6.60% 6.63%!
Portfolio turnover rate 50.9% 48.7% 97.7% 73.7% 146.0%!
Net assets,
end of period
(in thousands) 46,235 24,280 12,312 3,966 2,081
* 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 Limited-Term Bond Portfolio
December 31, 1998
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
CORPORATE BONDS AND NOTES 55.1%
Banking and Finance 13.6%
ABN AMRO Bank (Chicago), N.V.
Gtd. Sub. Notes
7.25%, 5/31/05 500 535
American Express Credit
8.50%, 6/15/99 100 102
American General Finance
5.875%, 7/1/00 125 125
Aristar, Sr. Notes
7.875%, 2/15/99 50 50
Banco Generale, (144a)
7.70%, 8/1/02 250 236
Finova Capital, MTN
5.98%, 2/27/01 150 150
First Union, Sub. Notes
9.45%, 6/15/99 140 143
First USA Bank, MTN
7.00%, 8/20/01 150 156
General Electric Capital, MTN
6.15%, 11/5/01 250 256
Goldman Sachs Group, MTN, (144a)
6.25%, 2/1/03 500 511
Heller Financial
5.625%, 3/15/00 100 100
HSBC Finance Nederland
Sub. Gtd. Notes, (144a)
7.40%, 4/15/03 80 84
Intermediate American Development
Bank, 6.375%, 10/22/07 375 403
Kansallis Osake Pankki (New York)
Sub. Notes, 10.00%, 5/1/02 350 395
Lincoln National
6.50%, 3/15/08 340 344
MBNA, Sub. Notes
7.25%, 9/15/02 150 153
Mercantile Safe Deposit & Trust
6.53%, 7/3/00 200 203
Merrill Lynch
7.00%, 3/15/06 500 531
Midlantic, Deb.
9.25%, 9/1/99 100 102
Nationwide Mutual Life Insurance, (144a)
6.50%, 2/15/04 149 153
Paine Webber Group
7.875%, 2/15/03 500 525
Penske Truck Leasing
6.65%, 11/1/00 150 154
Republic of New York, Deb.
8.875%, 2/15/01 360 383
Salomon Smith Barney Holdings
7.30%, 5/15/02 350 366
Union Planters, Sub. Notes
6.25%, 11/1/03 135 137
6,297
Consumer Products and Services 15.2%
Amvescap, Sr. Notes, (144a)
6.375%, 5/15/03 350 353
Anheuser Busch, Deb.
8.75%, 12/1/99 150 155
Beckman Instruments
7.10%, 3/4/03 500 499
Coca Cola Femsa
8.95%, 11/1/06 125 122
Comcast Cable Communications I
Sr. Notes, 6.20%, 11/15/08 400 407
Dayton Hudson
6.625%, 3/1/03 200 207
7.50%, 3/1/99 100 100
Grand Metropolitan Investment
Zero Coupon, 1/6/04 750 565
Hospital Corporation America
Deb., Zero Coupon, 6/1/01 500 421
Nabisco, 6.125%, 2/1/33 250 246
Pepsico, MTN
5.75%, 1/2/03 300 304
Philip Morris
7.25%, 9/15/01 284 295
Rite Aid, 6.70%, 12/15/01 500 510
Safeway, 5.75%, 11/15/00 500 500
Service Corporation International
7.375%, 4/15/04 500 532
Sony, 6.125%, 3/4/03 425 436
Tenet Healthcare
Sr. Sub. Notes
8.625%, 1/15/07 350 364
USA Waste Services
Sr. Notes
6.50%, 12/15/02 325 331
Viacom, 6.75%, 1/15/03 150 154
Waste Management
6.625%, 7/15/02 300 307
Watson Pharmaceuticals
7.125%, 5/15/08 225 228
7,036
Consumer Products 0.8%
PDV America
7.875%, 8/1/03 400 364
364
Industrials 9.7%
Alcan Aluminum
5.875%, 4/1/00 130 131
7.25%, 12/15/99 250 255
Allied-Signal
5.75%, 3/15/01 300 298
Corning, Deb.
8.75%, 7/15/99 100 102
Eaton Offshore, Gtd. Notes
9.00%, 2/15/01 300 323
Hutchison Whampoa Finance, (144a)
6.95%, 8/1/07 400 383
Ingersoll Rand, Sr. Notes
6.255%, 2/15/01 250 254
International Paper, Deb.
9.70%, 3/15/00 100 104
Lockheed, 6.75%, 3/15/03 475 493
Northrop Grumman
8.625%, 10/15/04 300 336
Parker Hannifin, MTN
5.65%, 9/15/03 500 501
Praxair, 6.15%, 4/15/03 300 300
Raytheon, 5.70%, 11/1/03 500 501
Toyota Motor Credit
5.625%, 11/13/03 500 496
4,477
Media and Communications 3.9%
Cox Communications
8.875%, 3/1/01 300 320
MCI Communications
Sr. Notes
7.125%, 1/20/00 100 102
NWCG Holdings
Sr. Secured Disc. Notes
Zero Coupon, 6/15/99 150 146
Seagram Joseph E & Sons
Sr. Notes
6.40%, 12/15/03 500 493
Sprint Capital
5.70%, 11/15/03 375 377
MCI Worldcom, Sr. Notes
6.25%, 8/15/03 350 360
1,798
Transportation 3.6%
CSX, 9.50%, 8/1/00 150 159
Delta Air Lines, Deb.
9.875%, 5/15/00 185 195
ERAC USA Finance, (144a)
6.375%, 5/15/03 325 329
Norfolk Southern
6.95%, 5/1/02 500 522
7.875%, 2/15/04 270 296
Northwest Airlines
8.375%, 3/15/04 150 158
1,659
Utilities 8.3%
CE Electric UK Funding
Sr. Notes, (144a)
6.853%, 12/30/04 300 309
Cleveland Electric
Secured Notes
7.19%, 7/1/00 150 151
Entergy Mississippi
6.45%, 4/1/08 350 368
Houston Lighting & Power, MTN
6.10%, 3/1/00 125 126
Midamerican Energy
Sr. Notes
6.50%, 12/15/01 100 102
National Rural Utilities
5.00%, 10/1/02 500 493
Niagara Mohawk Power
7.375%, 8/1/03 225 238
Sr. Notes, 7.25%, 10/1/02 325 334
Orange & Rockland Utilities, Deb.
6.14%, 3/1/00 50 50
Pacific Gas & Electric
1st Mtg. Bonds
8.75%, 1/1/01 200 212
Progress Capital Holdings, MTN
(144a) 6.88%, 8/1/01 150 153
Public Service Electric & Gas
Mtg. Bonds, 8.875%, 6/1/03 175 199
1st Ref. Mtg. Bonds
6.25%, 1/1/07 75 78
Texas NM Power
1st Mtg. Bonds
9.25%, 9/15/00 300 314
Texas Power, Secured Deb.
10.75%, 9/15/03 300 322
United Illuminating
6.25%, 12/15/02 160 161
Williams, 6.125%, 2/15/02 225 225
3,835
Total Corporate Bonds and Notes
(Cost $25,255) 25,466
ASSET-BACKED SECURITIES 9.8%
Amresco Residential Securities
6.925%, 6/25/25 350 355
Banc One Auto Grantor Trust
6.27%, 11/20/03 98 99
California Infrastructure
6.25%, 6/25/04 150 155
6.38%, 9/25/08 500 526
Comed Transitional Funding Trust
5.44%, 3/25/07 550 551
Fingerhut Master Trust
6.07%, 2/15/05 325 331
Green Tree Financial
8.35%, 3/15/20 75 76
Harley Davidson Eaglemark
5.94%, 2/15/04 125 126
6.35%, 10/15/02 43 43
IMC Home Equity Loan Trust
Zero Coupon, 8/20/22 325 326
Neiman Marcus Credit Master Trust
7.60%, 6/15/03 500 515
Newcourt Equipment
5.393%, 5/20/04 500 495
NPF Receivables Trust, (144a)
6.22%, 6/1/02 325 329
Sears Credit Account Master Trust
5.25%, 10/16/08 500 490
Yamaha Motor Master Trust
6.20%, 5/15/03 100 101
Total Asset-Backed Securities
(Cost $4,488) 4,518
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 14.4%
U.S. Government Agency Obligations 13.4%
Federal Home Loan Mortgage
6.00%, 5/15/16 750 755
5 year balloon
5.00%, 6/1/99 48 48
6.00%, 4/1/99 11 12
7 year balloon
6.50%, 12/1/99 - 5/1/05 1,476 1,491
CMO, 6.92%, 1/25/12 120 120
REMIC
6.00%, 8/15/06 - 1/15/08 1,360 1,362
6.40%, 1/15/08 500 508
7.50%, 8/25/05 14 15
Federal National Mortgage Assn.
6.00%, 11/1/13 500 502
7.00%, 4/1/09 329 336
9.00%, 5/1/05 - 1/25/08 975 1,035
6,184
U.S. Government Guaranteed Obligations 1.0%
Government National Mortgage Assn.
I
6.50%, 5/15/09 399 407
10.00%, 11/15/09 - 3/15/19 68 75
Midget, I
10.00%, 2/15/01 6 6
10.50%, 6/15/99 5 5
493
Total U.S. Government Mortgage-Backed
Securities (Cost $6,648) 6,677
U.S. GOVERNMENT OBLIGATIONS/AGENCIES 13.5%
U.S. Government Agency Obligations 8.5%
Federal Home Loan Banks
5.125%, 9/15/03 2,000 2,000
5.625%, 3/19/01 700 710
Federal National Mortgage Assn.
4.625%, 10/15/01 450 448
7.15%, 4/11/07 425 476
7.65%, 10/6/06 100 101
U.S. Department of Housing
& Urban Development
6.49%, 8/1/07 175 189
3,924
U.S. Treasury Obligations 5.0%
U.S. Treasury Notes
6.375%, 5/15/99 400 403
6.50%, 8/31/01 - 10/15/06 975 1,058
6.875%, 3/31/00 200 205
7.25%, 5/15/04 600 672
2,338
Total U.S. Government
Obligations/Agencies (Cost $6,119) 6,262
MUNICIPAL BONDS 0.1%
Taxable Municipal 0.1%
University of Miami, GO
6.90%, 4/1/04 25 26
Total Municipal Bonds (Cost $25) 26
WARRANTS 0.0%
President Casinos, Warrants,
9/30/99*+ 221 0
Total Warrants (Cost $1) 0
Money Market Funds 5.8%
Reserve Investment Fund
5.42% # 2,690 2,690
Total Money Market Funds (Cost $2,690) 2,690
Total Investments in Securities
98.7% of Net Assets (Cost $45,226) $ 45,639
Other Assets Less Liabilities 596
NET ASSETS 46,235
------
Net Assets Consist of:
Accumulated net investment income -
net of distributions (22)
Accumulated net realized gain/loss -
net of distributions 60
Net unrealized gain (loss) 413
Paid-in-capital applicable to 9,214,571
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
corporation authorized 45,784
NET ASSETS 46,235
------
NET ASSET VALUE PER SHARE 5.02
----
# Seven-day yield
* Non-income producing
+ Securities contain some restrictions as to public resale total of such
securities at period-end amounts to 0.00% of net assets.
CMO Collateralized Mortgage Obligation GO General Obligation MTN Medium Term
Note
REMIC Real Estate Mortgage Investment Conduit
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
6.14% of net assets.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Limited-Term Bond Portfolio
In thousands
Year
Ended
12/31/98
Investment Income
Interest income 2,169
Expenses
Investment management
and administrative 242
Net investment income 1,927
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 241
Change in net unrealized gain
or loss on securities 192
Net realized and unrealized gain (loss) 433
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS 2,360
-----
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price Limited-Term Bond Portfolio
In thousands
Year
Ended
12/31/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 1,927 $ 969
Net realized gain (loss) 241 (20)
Change in net unrealized
gain or loss 192 196
Increase (decrease) in net
assets from operations 2,360 1,145
Distributions to shareholders
Net investment income (1,926) (970)
Net realized gain (91) --
Decrease in net assets
from distributions (2,017) (970)
Capital share transactions*
Shares sold 31,647 17,436
Distributions reinvested 2,033 970
Shares redeemed (12,068) (6,613)
Increase (decrease) in net
assets from capital
share transactions 21,612 11,793
Net Assets
Increase (decrease) during period 21,955 11,968
Beginning of period 24,280 12,312
End of period 46,235 24,280
---------------------------
*Share information
Shares sold 6,327 3,539
Distributions reinvested 406 197
Shares redeemed (2,410) (1,343)
Increase (decrease) in
shares outstanding $ 4,323 $ 2,393
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Limited-Term Bond 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 Limited-Term Bond Portfolio
(the fund), a diversified, open-end management investment company, is one
of the portfolios established by the corporation and commenced operations
on May 13, 1994. The shares of the fund are currently being offered only to
separate accounts of certain insurance companies as an investment medium
for both variable annuity contracts and variable life insurance policies.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities with original maturities one year or more
are stated at fair value as furnished by dealers who make markets in such
securities or by an independent pricing service, which considers yield or
price of bonds of comparable quality, coupon, maturity, and type, as well
as prices quoted by dealers who make markets in such securities. Securities
with original maturities of less than one year are stated at fair value,
which is determined by using a matrix system that establishes a value for
each security based on money market yields.
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.
Premiums and Discounts Premiums and discounts on debt securities other
than mortgaged-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are
recognized upon disposition or principal repayment as gain or loss for
financial reporting purposes. For tax purposes, premiums and discounts on
MBS acquired on or before June 8, 1997, are recognized upon disposition or
principal repayment as ordinary income. For MBS acquired after June 8,
1997, premiums are recognized as gain or loss; discounts are recognized as
gain or loss, except to the extent of accrued market discount.
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 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $23,531,000 and $6,731,000, respectively,
for the year ended December 31, 1998. Purchases and sales of U.S.
government securities aggregated $13,099,000 and $8,594,000, respectively,
for the year ended December 31, 1998.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The fund has utilized capital loss carryforwards of
$86,000 in 1998.
At December 31, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$45,226,000. Net unrealized gain aggregated $413,000 at period-end, of
which $583,000 related to appreciated investments and $170,000 to
depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management and administrative agreement between the fund and
T. Rowe Price Associates, Inc. (the manager) provides for an all-inclusive
annual fee, of which $45,000 was payable at December 31, 1998. The fee,
computed daily and paid monthly, is equal to 0.70% 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.
T. Rowe Price Limited-Term Bond Portfolio
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended
December 31, 1998, totaled $153,000 and are reflected as interest income in
the accompanying Statement of Operations.
Report of Independent Accountants
To The Board of Directors and Shareholders of The
T. Rowe Price Limited-Term Bond 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 Limited-Term Bond 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 each of the fiscal periods
presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998,
by correspondence with custodians, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 21, 1999
Annual Meeting Results
- --------------------------------------------------------------------------------
The Limited-Term Bond 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
T. Rowe Price Limited-Term Bond Portfolio
- --------------------------------------------------------------------------------
Tax Information (Unaudited) for the Tax Year Ended 12/31/98 We are providing
this information as required by the Internal Revenue Code. The amounts shown may
differ from those elsewhere in this report because of differences between tax
and financial reporting requirements.
The fund's distributions to shareholders included $91,000 from long-term capital
gains, subject to the 20% rate gains category.
Invest With Confidence(registered trademark)
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for dis-
tribution only to those who have
received a copy of the portfolio's
prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP 656 (12/98) K15-054 12/31/98
