Semiannual Report
June 30, 2000
Prime Reserve Portfolio
Invest With Confidence(registered trademark)
T. Rowe Price
This report is authorized for distribu- tion only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc.,
Distributor
Dear Investor
The Federal Reserve steadily tightened monetary policy during the six months
ended June 30, 2000, leading to sharply higher interest rates. The environment
was beneficial to money market funds, which were able to quickly reinvest their
assets in new securities with higher rates of income. The Prime Reserve
Portfolio registered a solid performance that outpaced its Lipper benchmark.
Market Environment
The past year has been a roller-coaster ride in the U.S. financial markets.
After months of strong economic growth and attractive investment
performance, the dawn of the new year brought Y2K-related anxiety and, as
2000 progressed, renewed concerns about economic overheating. First-quarter
GDP growth steamed ahead at a 5.4% rate; at the same time, consumer demand
rose 7% and business fixed investment rose 17%. The Fed indicated that it
viewed these growth levels as unsustainable and inflationary, and indeed,
signs of inflation became evident in labor costs and basic goods. The
central bank responded by raising the federal funds target rate three times
in 2000 by a total of 100 basis points (which is equivalent to a full
percent), the most recent move being a 50-basis-point hike on May 16. Since
beginning its tightening program approximately one year ago, the Fed has
raised this target rate by 175 basis points, to 6.5% on May 31.
Interest Rate Levels
1-Year 90-day
Treasury Treasury Federal Funds
Bill Bill Target Rate
06/30/99 5.11 4.77 5.00
5.07 4.71 5.00
5.19 4.97 5.25
9/99 5.24 4.88 5.25
5.51 5.13 5.25
5.65 5.28 5.50
12/99 5.95 5.33 5.50
6.17 5.59 5.50
6.22 5.81 5.75
3/00 6.30 5.88 6.00
6.19 5.78 6.00
6.28 5.92 6.50
06/30/00 6.13 5.84 6.50
The Fed's rate hikes rippled very quickly through the short-term bond and
money markets. As indicated in the accompanying chart, over the past year
yields on both 90-day and one-year Treasury bills rose more than 100 basis
points (equal to a full percentage point). Yet longer-term bond yields did
not rise as much and, in fact, 30-year Treasury rates actually fell
sharply, at times below money market yields. For this reason, the yield
curve (which charts rates on bonds of increasing maturities) among bonds
with maturities greater than two years actually inverted.
Part of the reason for this unusual occurrence is that the U.S. Treasury is
buying back a significant amount of 30-year issues due to the budget
surplus, and decreasing supply is helping keep yields down. Likewise, the
surplus is reducing borrowing needs in the money market and causing the
Treasury to change its borrowing schedule. Auctions of one-year Treasury
bills were changed from monthly to quarterly, and three- and six-month
auction amounts held steady at $16 billion. Again in this market, reduced
supply caused Treasury bill yields to be lower than they otherwise would
be. While Treasury supply has been skimpy, corporate and bank borrowing in
the money market have been plentiful and their yields have been relatively
attractive. Yields in this sector are behaving more normally, rising along
with the maturity of the security.
During the last month of the period, investors grew somewhat more confident
that the Fed was nearing the end of its rate-tightening cycle, and that the
rate environment would be more stable. The market reacted especially
positively to a few economic reports that showed continued moderate growth
in the consumer price index and a softening of real-estate prices, although
the Fed itself has remained coy about the future direction of rates. Yields
in the money market eased from their May highs as a result.
Performance and Strategy Review
The Prime Reserve Portfolio posted steady 6- and 12-month returns of 2.88%
and 5.53%, respectively, surpassing the 2.80% and 5.34% gains for the
Lipper Variable Annuity Underlying Money Market Funds Average. Performance
was aided by rising interest rates, which increased yields in our market.
The fund's dividends per share rose, and its seven-day compound dividend
yield climbed from 5.82% to 6.34%.
Performance Comparison
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Periods Ended 6/30/00 6 Months 12 Months
---------------------------------------------------------------------------
Prime Reserve Portfolio 2.88% 5.53%
Lipper Variable Annuity
Underlying Money Market
Funds Average 2.80 5.34
With rates steadily rising, our predominant investment strategy during the
past six months was to reduce maturity, because that approach allows us to
rapidly reinvest the proceeds of maturing issues into new securities with
higher yields. Since December 31, 1999, maturity has declined from 66 days
to 56 days. Throughout, we used a "barbell" portfolio structure to achieve
the desired maturity - that is, dividing significant assets between
securities with one-month and one-year maturities. As long as the
possibility of rising interest rates remains, we will preserve an average
maturity that is generally the same as or shorter than the average money
market fund.
We made important changes in sector positioning during the past six months.
Principally, we sharply increased the portfolio's exposure to commercial
paper and medium-term notes, which rose from 70% of assets six months ago
to 80% at June 30. As government issues have dwindled, the commercial paper
sector has become considerably more attractive, offering better yields and
supply and demand dynamics. Within this sector, asset-backed securities
remained our largest single position. These securities provide extremely
high quality, liquidity, diversification, and high relative returns. To
make room, we cut back sharply on U.S. negotiable bank notes as well as
dollar-denominated foreign negotiable CDs and bank notes, whose income
characteristics seemed unappealing.
Holdings of floating-rate securities declined, after reaching a high level
late last year when a flood of supply made their yields very attractive.
More recently, floating- rate note issuance has subsided, minimizing their
yield advantage. Thus, as our positions have matured, we have reinvested in
other areas, bringing exposure down from 29% on December 31 to 22% by the
end of June.
Outlook
In the wake of the 50-basis-point rate hike in May, new data suggest that
the economy may have begun to slow. The Fed will undoubtedly watch these
signs of moderating growth carefully, as it does not want to push the
economy into recession. Nevertheless, inflation pressures have not
disappeared, and we think further rate hikes are a possibility, although
they may come at a slower pace than the first half of the year. We
therefore expect to maintain a lower-than-average maturity until we see
more stability in the economy and the rate environment. With short-term
rates as high as they've been in a decade, we also are hopeful that returns
for your fund will be more robust over the next six and 12 months than in
the past year.
Respectfully submitted,
Edward A. Wiese
President
July 21, 2000
Portfolio Highlights
Key Statistics
--------------------------------------------------------------------------------
Periods
Ended
6/30/00
--------------------------------------------------------------------------------
Price Per Share $ 1.00
Dividend Per Share
6 months 0.029
12 months 0.054
Dividend Yield (7-Day Compound) * 6.34%
Weighted Average Maturity (days) 56
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.
Portfolio Highlights
Security Diversification
--------------------------------------------------------------------------------
Percent of Percent of
Net Assets Net Assets
12/31/99 6/30/00
--------------------------------------------------------------------------------
U.S. Negotiable Bank Notes 6% 1%
Certificates of Deposit 22 14
Domestic Negotiable CDs 2 2
U.S. Dollar Denominated
Foreign Negotiable CDs/
Bank Notes 20 12
Commercial Paper and Medium-
Term Notes 70 80
Asset-Backed 22 23
Banking 10 15
Finance and Credit 6 11
Manufacturing 1 4
Electric Utilities 2 4
All Other 29 23
Canadian Government and
Municipalities -- 1
Foreign Government and
Municipalities 1 3
Other Assets Less Liabilities 1 1
Total 100% 100%
--------------------------------------------------------------------------------
Fixed-Rate Obligations 71% 78%
Floating-Rate Obligations 29% 22%
Performance Comparison
--------------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
Prime Reserve Portfolio
--------------------------------------------------------------------------------
As of 6/30/00
Lipper Variable
Prime Annuity Underlying
Reserve Money Market
Portfolio Funds Average
12/31/96 10,000 10,000
06/30/1997 10,256 10,250
06/30/1998 10,808 10,786
06/30/1999 11,340 11,304
06/30/2000 11,968 11,911
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 6/30/00
Since Inception
1 Year 3 Years Inception Date
--------------------------------------------------------------------------------
5.53% 5.28% 5.27% 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
6/30/00 12/31/99 12/31/98 12/31/97
NET ASSET VALUE
Beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment activities
Net investment income (loss) 0.029 0.048 0.052 0.052
Distributions
Net investment income (0.029) (0.048) (0.052) (0.052)
NET ASSET VALUE
End of period $ 1.000 $ 1.000 $ 1.000 $ 1.000
-----------------------------------------------
Ratios/Supplemental Data
Total return(diamond) 2.88% 4.89% 5.29% 5.33%
Ratio of total expenses
to average net assets 0.55%! 0.55% 0.55% 0.55%!
Ratio of net investment
income (loss)
to average net assets 5.71%! 4.79% 5.12% 5.24%!
Net assets, end of period
(in thousands) $ 23,334 $ 19,745 $ 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, 2000 (Unaudited)
Par Value
--------------------------------------------------------------------------------
In thousands
BANK NOTES 1.3%
National City Bank, VR
6.694%, 7/31/00 $ 300 $ 300
Total Bank Notes (Cost $300) 300
CERTIFICATES OF DEPOSIT 13.7%
Allfirst Bank, VR, 6.625%, 7/10/00 120 120
Bayerische Landesbank
5.855%, 9/27/00 210 210
VR, 6.576%, 7/17/00 300 299
Commerzbank, 5.90%, 8/9/00 100 100
Credit Agricole Indosuez VR
6.616%, 7/10/00 300 300
6.631%, 7/3/00 300 300
Dresdner Bank, VR,
6.62%, 7/24/00 100 100
Huntington National Bank
6.26%, 10/27/00 100 100
Merita Bank,
6.09%, 10/10/00 250 250
Natexis Banque,
7.45%, 5/22/01 250 250
Norddeutsche Landesbank
7.42%, 6/4/01 350 350
Societe Generale
6.555%, 1/16/01 110 110
VR, 6.605%, 7/17/00 200 200
UBS, 6.01%, 8/14/00 100 100
Unibank A/S, 5.92%, 8/7/00 200 200
Union Bank of California, VR
6.641%, 7/3/00 200 200
Total Certificates of Deposit
(Cost $3,189) 3,189
COMMERCIAL PAPER 55.3%
Alabama Power, 6.60%, 7/24/00 250 249
Alliance & Leicester
6.60%, 9/11/00 450 444
Alpine Securitization, 4(2)
6.58%, 8/11/00 385 382
American Express Credit
6.70%, 9/12/00 200 197
AON, 6.58%, 7/7/00 500 500
AT&T, 6.53%, 7/24/00 315 314
Bavaria TRR, 4(2)
6.65%, 9/12/00 329 324
6.70%, 7/21/00 300 299
Coca Cola, 4(2)
6.60%, 8/24/00 $ 500 $ 495
Dover, VR, 4(2),
6.848%, 8/28/00 500 500
Du Pont Ei de Nemours
6.53%, 7/13/00 400 399
Electricite de France,
6.90%, 7/3/00 685 685
Falcon Asset Securitization, 4(2)
6.59%, 7/5/00 900 899
General Electric Capital
6.60%, 7/10/00 434 433
7.00%, 7/12/00 454 453
Golden Funding, 4(2)
6.54%, 7/6/00 250 250
6.55%, 7/7/00 685 684
Honeywell International
7.30%, 7/6/00 300 300
International Lease Finance
6.62%, 7/5/00 300 300
Kitty Hawk Funding, 4(2)
6.56%, 7/7/00 500 500
Knight-Ridder, 6.55%, 8/31/00 238 235
Market Street Funding, 4(2)
6.60%, 8/22/00 400 396
6.63%, 9/11/00 500 494
Northern States Power Minnesota
6.60%, 9/11/00 500 493
Preferred Receivables Funding
6.54%, 7/11/00 419 418
6.60%, 9/7/00 500 494
Province of British Columbia
6.60%, 7/31/00 300 298
Tulip Funding, 4(2)
6.54%, 7/10/00 667 666
Yale Univ., 6.55%, 7/24/00 800 797
Total Commercial Paper (Cost $12,898) 12,898
MEDIUM-TERM NOTES 29.1%
A T & T Capital, VR
6.971%, 7/7/00 250 251
Banc One, VR,
6.908%, 9/25/00 500 501
Bank of Scotland Treasury Service
VR, 6.825%, 7/19/00 500 500
Bayerische Landesbank
6.375%, 8/31/00 100 100
Beta Finance, (144a)
6.75%, 3/15/01 500 500
Caterpillar Financial Services
8.85%, 5/22/00 $ 130 $ 130
VR, 6.819%, 7/10/00 100 100
Ciesco, (144a), VR
6.669%, 7/17/00 250 250
Cit Group, VR, 6.801%, 9/6/00 100 100
Colgate Palmolive, VR
6.553%, 8/7/00 200 200
Diageo NorthAmerica Holding
6.24%, 6/4/00 100 100
First Security Auto Owner Trust
6.773%, 9/28/00 200 200
Ford Capital BV
10.125%, 11/15/00 100 101
Goldman Sachs Trust
6.76%, 9/19/00 500 500
Heller Financial
6.42%, 8/25/00 100 100
6.435%, 8/8/00 100 100
Household Finance
6.45%, 3/15/00 250 249
VR, 6.669%, 8/4/00 100 100
IBM Corp., VR, 6.275%, 7/28/00 200 200
International Lease Finance
6.43%, 9/15/00 200 200
John Deere Capital, VR
6.812%, 9/21/00 300 300
National Rural Utilities, VR
6.654%, 7/3/00 100 100
Northern Rock, VR, (144a)
6.651%, 7/20/00 250 250
Prudential Funding, VR
6.848%, 8/28/00 300 300
R.R. Donnelley & Sons
9.125%, 12/1/00 $ 100 $ 101
Rabobank Optional Redemption Trust
VR, 6.649%, 7/17/00 18 18
Sigma Finance, (144a)
6.75%, 3/15/01 500 500
Strategic Money Market Trust, 1999-A
6.40%, 7/13/00 250 250
Toyota Motor Credit
6.20%, 7/12/00 500 500
Total Medium-Term Notes (Cost $6,801) 6,801
Total Investments in Securities
99.4% of Net Assets (Cost $23,188) $ 23,188
Other Assets Less Liabilities 146
NET ASSETS $ 23,334
----------
Net Assets Consist of:
Accumulated net realized gain/loss -
net of distributions $ 5
Paid-in-capital applicable to 23,329,351
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
Corporation authorized 23,329
NET ASSETS $ 23,334
----------
NET ASSET VALUE PER SHARE $ 1.00
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
3.2% of net assets.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
Unaudited
T. Rowe Price Prime Reserve Portfolio
In thousands
6 Months
Ended
6/30/00
Investment Income (Loss)
Interest income $ 710
Expenses
Investment management and administrative 62
Net investment income (loss) 648
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 648
----------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
Unaudited
T. Rowe Price Prime Reserve Portfolio
In thousands
6 Months Year
Ended Ended
6/30/00 12/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 648 $ 838
Net realized gain (loss) -- 1
Increase (decrease) in net
assets from operations 648 839
Distributions to shareholders
Net investment income (648) (838)
Capital share transactions *
Shares sold 18,219 17,418
Distributions reinvested 648 839
Shares redeemed (15,278) (14,632)
Increase (decrease) in net
assets from capital
share transactions 3,589 3,625
Net Assets
Increase (decrease) during period 3,589 3,626
Beginning of period 19,745 16,119
End of period $ 23,334 $ 19,745
-----------------------
*Share information
Shares sold 18,219 17,418
Distributions reinvested 648 839
Shares redeemed (15,278) (14,632)
Increase (decrease) in
shares outstanding 3,589 3,625
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Prime Reserve Portfolio
Unaudited
June 30, 2000
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 fund seeks preservation of capital, liquidity, and, consistent with
these, the highest possible current income, by investing primarily in
high-quality money market securities.
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. Dividend income and
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, 2000, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$23,188,000.
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.
