T. Rowe Price
Prime Reserve Portfolio
Semiannual Report
June 30, 1999
Dear Investor
During the past six months, investor concerns about potentially inflationary
economic growth pushed interest rates higher, and the Federal Reserve raised the
federal funds target rate. However, as of June 30, 1999, short-term rates were
still below their levels of one year ago. Money market securities enjoyed
relatively good performance, and Prime Reserve outpaced its benchmark average.
Market Environment
The market environment of the past six months was dominated by concern over
rising pressure on interest rates. Interest rates rose relatively sharply
for several months, with the yield on one-year Treasury bills climbing 87
basis points from its lows in October 1998 (100 basis points equal one
percentage point). On June 30, 1999-the last day of the period-the Federal
Reserve responded to these pressures by hiking the federal funds target
rate 25 basis points, from 4.75% to 5%.
Even so, the move was only a partial reversal of the deep cuts in interest
rates between late September and mid-November of last year. At that time,
the Fed lowered the target rate from 5.50% to 4.75% to help ease widespread
international problems. Russia had defaulted on its debt, investors sold
off lower-quality securities, and a very large hedge fund had collapsed.
The demand for safe, high-quality investments was so great that one-year
Treasury bill yields were pushed below the federal funds rate-an unusual
occurrence.
Interest Rate Levels
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1-Year 90-Day Federal Funds
Treasury Treasury Target
Bill Bill Rate
6/30/98 5.37 5.08 5.50
5.34 5.07 5.50
4.88 4.90 5.50
9/98 4.30 4.27 5.25
4.20 4.32 5.00
4.47 4.50 4.75
12/98 4.55 4.48 4.75
4.52 4.48 4.75
4.83 4.65 4.75
3/99 4.67 4.44 4.75
4.78 4.55 4.75
5.00 4.65 4.75
6/30/99 5.07 4.76 5.00
The rate cuts paved the road to recovery for several international
economies, and also contributed to sustained economic strength in the U.S.
Indeed, data from the fourth quarter of 1998 and the first of 1999 was
surprisingly strong, with GDP growth running well ahead of projections and
consumer spending outpacing earnings. Inflation remained subdued, but the
price of oil rose and the pressures that could lead to rising prices
increased. Anticipating possible Fed action, investors began to sell down
their bond holdings and broadly pushed interest rates higher. Yields on
money market instruments rose in tandem, and the rate on one-year Treasury
bills moved back above the federal funds target rate. Given this
environment, the Fed's decision to raise the target rate was almost
reassuring, as was its subsequent announcement that it had shifted toward a
neutral policy.
Once again, the federal budget surplus affected the short-term fixed income
markets. The Treasury is expected to have paid down outstanding debt by
$105 billion during the first half of 1999. While indicative of a strong
economy, public debt reduction significantly depletes the supply of
available investments in the marketplace. With demand holding steady,
declining availability puts downward pressure on yields.
Performance and Strategy Review
Performance Comparison
Periods Ended 6/30/99 6 Months 12 Months
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Prime Reserve Portfolio 2.25% 4.93%
Lipper Variable Annuity
Underlying Money Market
Funds Average 2.21 4.77
Your fund's performance compared favorably with its peer group average. It
returned 4.93% for the 12 months ended June 30, 1999, versus a return of
4.77% for the Lipper Variable Annuity Underlying Money Market Funds
Average. For the six-month period, its 2.25% showing modestly outpaced the
benchmark's 2.21% gain. The recent eight-month period of very low interest
rates affected the fund's distributions and dividend yield, which slipped
considerably from year-end 1998. As rates have headed somewhat higher,
however, we expect that the current yield could rise again as the year
progresses.
For some time, we have maintained a relatively long weighted average
maturity, and during most of the past year, it was not unusual for the fund
to be at least 10 days longer than the average first-tier taxable money
fund. In general, this positioning helps the fund take advantage of higher
yields available on longer-term instruments; when these longer securities
yield significantly more than shorter securities, as was the case in recent
months, the strategy contributes to superior performance. Late in the
period, however, we became concerned about the possibility of an interest
rate hike and moved the fund's average maturity back in line with other
money market funds. This approach helps the fund's yield more immediately
reflect newly elevated interest rates. For the time being, we expect to
maintain this neutral approach rather than moving to a very short posture
because we think a lot of the expected rate hikes are already priced into
the short-term yield curve.
Throughout the six-month period, we emphasized purchases of three- and
six-month securities. This repre-sented a modest shift from last year's
"barbell" strategy that divided assets between one-month and one-year
instruments. In a limited way, uncertainty surrounding the year 2000
problem affected our strategy: the recent restructuring will help us remain
as liquid as possible as we move closer to the end of this year and enter
the new one.
As usual, we continued to emphasize very high-quality paper. Holdings in
certificates of deposit declined, and our position in commercial paper
increased as we gravitated toward the most attractively priced issues
available in our market. Our exposure to floating rate instruments remained
essentially unchanged.
Outlook
The economy continues to exhibit astonishing strength, the unemployment
rate is at or near an all-time low, and international economies seem to
have stabilized. While rates have already risen significantly, and the Fed
has claimed a neutral bias toward future monetary policy, it is by no means
certain that the Fed is finished raising rates. Prior to last fall's
75-basis-point easing, which was considered to be a response to emergency
liquidity problems in global markets, the Fed had a bias in place to
tighten. The market seems to expect that most or all of that easing will be
rescinded, although the pace of change is debatable. As long as inflation
remains subdued, it is reasonable to think that the Fed will go slow, but
even so, we expect to maintain a comparatively conservative maturity
posture until we find ourselves on more stable interest rate footing.
Respectfully submitted,
Edward A. Wiese
President
July 21, 1999
Prospectus Update
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Prime Reserve Portfolio's May 1, 1999, prospectus included an error. The
objective listed on page 1 of the prospectus incorrectly stated that the fund is
"exempt from federal income taxes." The fund's correct objective is as follows:
The fund's goals are preservation of capital, liquidity, and consistent with
these, the highest possible current income.
The preceding updates the Prime Reserve Portfolio prospectus of May 1, 1999.
Portfolio Highlights
Key Statistics
- --------------------------------------------------------------------------------
Periods
Ended
6/30/99
- --------------------------------------------------------------------------------
Price Per Share $ 1.00
Dividend Per Share
6 months 0.022
12 months 0.048
Dividend Yield (7-Day Compound) * 4.68%
Weighted Average Maturity (days) 68
Weighted Average Quality ** First Tier
- --------------------------------------------------------------------------------
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset value per share at the end of the
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.
Security Diversification
- --------------------------------------------------------------------------------
Percent of Percent of
Net Assets Net Assets
12/31/98 6/30/99
- --------------------------------------------------------------------------------
U.S. Negotiable Bank Notes 10% 8%
- --------------------------------------------------------------------------------
Certificates of Deposit 32% 21%
- --------------------------------------------------------------------------------
Domestic Negotiable CDs 4 6
Eurodollar Negotiable CDs/
Bank Notes 9 1
U.S. Dollar Denominated
Foreign Negotiable CDs/
Bank Notes 19 14
Commercial Paper and Medium-
Term Notes 58% 68%
- --------------------------------------------------------------------------------
Banking 6 19
Receivables-Backed 12 14
Finance and Credit 4 8
Structured Investment Vehicle 7 5
Insurance 3 4
All Other 26 18
U.S. Government Agency
Obligations -- 1
- --------------------------------------------------------------------------------
Foreign Government and
Municipalities 2% 3%
- --------------------------------------------------------------------------------
Other Assets Less Liabilities -2% -1%
- --------------------------------------------------------------------------------
Total 100% 100%
- --------------------------------------------------------------------------------
Fixed Rate Obligations 71%
Floating Rate Obligations 29%
Portfolio Highlights
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. An index
return does not reflect expenses, which have been deducted from the fund's
return.
Prime Reserve Portfolio
As of 6/30/99
Lipper Variable
Annuity Underlying
Prime Reserve Money Market
Portfolio Funds Average
12/31/96 10,000 10,000
6/97 10,256 10,249
12/97 10,533 10,517
6/98 10,808 10,785
12/98 11,090 11,055
6/99 11,340 11,300
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 6/30/99
Since Inception
1 Year Inception Date
- --------------------------------------------------------------------------------
4.93% 5.17% 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
(Unaudited)
For a share outstanding throughout each period
-----------------------------------------------
6 Months Year 12/31/96
Ended Ended Through
6/30/99 12/31/98 12/31/97
NET ASSET VALUE
Beginning of period $ 1.000 $ 1.000 $ 1.000
Investment activities
Net investment income 0.022 0.052 0.052
Distributions
Net investment income (0.022) (0.052) (0.052)
NET ASSET VALUE
End of period $ 1.000 $ 1.000 $ 1.000
------------------------------------------
Ratios/Supplemental Data
Total return(diamond) 2.25% 5.29% 5.33%
Ratio of total expenses
to average net assets 0.55%! 0.55% 0.55%!
Ratio of net investment
income to average net assets 4.56%! 5.12% 5.24%!
Net assets, end of period
(in thousands) $17,382 $16,119 $10,964
(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 Prime Reserve Portfolio
June 30, 1999 (Unaudited)
Par Value
- --------------------------------------------------------------------------------
In thousands
BANK NOTES 8.3%
FCC National Bank
5.05%, 12/24/99 $ 250 $ 250
Key Bank, N.A.
5.118%, 7/28/99 400 400
PNC Bank, VR
4.984%, 7/13/99 300 300
Wachovia Bank, N.A.
4.922%, 7/6/99 500 500
Total Bank Notes (Cost $1,450) 1,450
CERTIFICATES OF DEPOSIT 20.7%
ABN AMRO, 5.50%, 9/2/99 500 500
Banco Bilbao Vizcaya
5.60%, 6/12/00 100 100
Bayerische Landesbank
4.845%, 7/22/99 500 500
Bayerische Vereinsbank
4.91%, 7/7/99 400 400
Chase Manhattan Bank (USA)
4.93%, 10/7/99 300 300
Fleet National Bank, VR
5.00%, 12/6/99 250 250
National Bank of Canada
5.49%, 6/5/00 150 150
National Westminster Bank PLC
5.29%, 12/27/99 100 100
Regions Bank of Alabama
5.30%, 9/10/99 250 250
Svenska Handelsbank
5.665%, 8/9/99 250 250
UBS AG
5.51%, 6/5/00 100 100
Union Bank of California
5.05%, 12/13/99 300 300
Westdeutsche Landesbank
4.84%, 11/5/99 400 400
Total Certificates of Deposit
(Cost $3,600) 3,600
COMMERCIAL PAPER 41.1%
Abbey National North America
4.80%, 8/9/99 400 398
4.82%, 8/16/99 100 99
Alliance & Leicester
4.95%, 7/6/99 $ 345 $ 345
Alpine Securitization
4.93%, 7/8/99 250 250
American Express Credit
5.16%, 12/23/99 350 341
American Petrofina
4.85%, 7/8/99 200 200
AON, 4.85%, 7/8/99 100 100
Asset Securitization Cooperative
VR, 4(2), 5.206%, 9/20/99 250 250
CADES, 4.80%, 12/23/99 200 195
Credit Suisse First Boston
International,
4.895%, 11/17/99 300 294
Cregem North America
4.75%, 7/21/99 500 499
Den Danske
5.12%, 12/23/99 300 293
Falcon Asset Securitization, 4(2)
4.91%, 7/12/99 500 499
Finova Capital
5.05%, 2/4/00 100 100
General Electric Capital
5.10%, 7/7/99 150 150
Golden Funding
5.05%, 7/9/99 250 250
5.10%, 7/13/99 250 249
LG&E Capital
4.83%, 10/6/99 300 296
Market Street Funding, 4(2)
5.10%, 7/22/99 250 249
Preferred Receivables Funding
4.90%, 7/8/99 500 499
Province of British Columbia
4.80%, 8/4/99 300 299
Province of Quebec
4.82%, 12/17/99 100 98
Teachers Insurance &
Annuity Assoc. of America
5.02%, 7/6/99 300 300
UBS Finance (Delaware)
4.78%, 8/9/99 400 398
Westpac Capital
5.12%, 12/22/99 200 195
Yale University
4.91%, 7/6/99 $ 300 $ 300
Total Commercial Paper
(Cost $7,146) 7,146
MEDIUM-TERM NOTES 29.7%
Associates Corporation of
North America,
6.375%, 8/15/99 250 250
Baltimore Gas & Electric
8.40%, 10/15/99 100 101
Bear Stearns, VR
5.063%, 7/12/99 200 200
Caterpillar Financial, VR
5.048%, 7/10/00 100 100
Citicorp, Sr. Notes, VR
5.135%, 9/17/99 450 450
CORE 1999-2 Limited, (144a), VR
5.326%, 4/27/00 500 500
Countrywide Home Loans, VR
5.378%, 9/30/99 200 200
DaimlerChrysler North America, VR
5.14%, 6/30/00 200 200
Deere (John) Owner Trust
4.999%, 6/19/00 89 89
Honda Auto Receivables Owner Trust
4.974%, 2/15/00 49 49
First Fidelity Bancorp.
9.625%, 8/15/99 300 302
First Security Auto Owner Trust
5.015%, 6/15/00 74 74
Ford Motor Credit, VR
5.20%, 7/5/99 500 500
Goldman Sachs, VR
5.024%, 7/21/99 200 200
GTE, 5.135%, 9/13/99 100 100
IBM Credit, VR
4.995%, 8/2/99 250 250
International Lease Finance
5.75%, 12/15/99 50 50
LINCS, (144a), VR
5.04%, 7/19/99 300 300
Newcourt Equipment Trust
5.007%, 11/20/99 58 58
Norwest Financial
6.20%, 9/15/99 $ 300 $ 301
Prudential Funding
6.84%, 12/30/99 200 201
Rabobank, Optional Redemption Trust
(144a), VR,
5.00%, 7/19/99 43 43
Strategic Money Market Trust, (144a)
VR, 5.255%, 9/16/99 250 250
Tiers Trust, VR, (144a)
4.988%, 7/15/99 300 300
Wells Fargo & Company
5.225%, 4/10/00 100 100
Total Medium-Term Notes
(Cost $5,168) 5,168
U.S. GOVERNMENT OBLIGATIONS 0.6%
Federal Home Loan Banks
6.185%, 8/27/99 100 100
Total U.S. Government Obligations
(Cost $100) 100
FUNDING AGREEMENTS 0.9%
General American Life Insurance, VR
5.12%, 7/19/99 ! 150 150
Total Funding Agreements
(Cost $150) 150
Total Investments in Securities
101.3% of Net Assets (Cost $17,614) $ 17,614
Other Assets Less Liabilities (232)
NET ASSETS $ 17,382
----------
Net Assets Consist of:
Accumulated net realized gain/loss -
net of distributions $ 5
Paid-in-capital applicable to 17,376,599
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
Corporation authorized 17,377
NET ASSETS $ 17,382
----------
NET ASSET VALUE PER SHARE $ 1.00
----------
! Pivate 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."
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 8.0%
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
6/30/99
Investment Income
Income
Interest income $ 415
Expenses
Investment management and administrative 45
Net investment income 370
Realized Gain (Loss)
Net realized gain (loss) on securities 1
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 371
---------
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 Year
Ended Ended
6/30/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 370 $ 790
Net realized gain (loss) 1 4
Increase (decrease) in net
assets from operations 371 794
Distributions to shareholders
Net investment income (370) (790)
Capital share transactions*
Shares sold 9,218 29,742
Distributions reinvested 365 785
Shares redeemed (8,321) (25,376)
Increase (decrease) in net
assets from capital
share transactions 1,262 5,151
Net Assets
Increase (decrease) during period 1,263 5,155
Beginning of period 16,119 10,964
End of period $ 17,382 $ 16,119
-----------------------
*Share information
Shares sold 9,218 29,742
Distributions reinvested 365 785
Shares redeemed (8,321) (25,376)
Increase (decrease) in
shares outstanding 1,262 5,151
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Prime Reserve Portfolio
June 30, 1999 (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, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$17,614,000.
NOTE 3 - RELATED PARTY TRANSACTIONS
The investment management and administrative agreement between the fund and
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 (6/99)
K15-072 6/30/99
