Annual Report
December 31, 1999
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Prime Reserve Portfolio
Invest with Confidence (registered trademark) T. Rowe Price
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
Dear Investor
The U.S. economy continued its remarkable run of strong, steady growth during
the 12 months ended December 31, 1999. Although signs of inflation were modest,
the Federal Reserve raised the federal funds target rate three times to
forestall inflationary pressure, and interest rates overall rose significantly.
Money market funds largely benefited, a trend reflected in the performance of
the Prime Reserve Portfolio.
Market Environment
There was little doubt during the past 12 months that the U.S. economy was
on solid footing. Annual GDP data painted an attractive picture, with
growth rates fluctuating between 3.5% and 4.5% for nearly four years now.
However, both the Fed and the market kept a wary eye on steady growth in
employment and rising prices on some basic goods, such as oil. An improving
outlook overseas prompted the Fed to raise the federal funds target rate in
June, August, and November by a total of 75 basis points (100 basis points
equal one percent). The target rate now stands at 5.5% - the same as August
1998, just before the Fed cut it three-quarters of a percent to alleviate a
global financial crisis.
Interest Rate Levels
1-Year 90-day Federal Fund
Treasury Bill Treasury Bill Target Rate
12/31/98 4.59 4.55 4.75
4.51 4.47 4.75
4.82 4.65 4.75
3/99 4.72 4.47 4.75
4.73 4.51 4.75
4.93 4.65 4.75
6/99 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 5.29 5.50
To this point, the extent to which consumer price inflation has been held
in check by the Fed's action has been remarkable. Both the closely watched
employment cost index and the wage component of the monthly employment
report have shown only modest increases, and a portion of those gains can
be explained by short-term events, such as seasonal hiring for the
holidays. Clearly technology and increased globalization have played
significant roles in containing costs, reducing pricing power, and
improving productivity and efficiency. These trends, combined with the
Fed's sound monetary policy, are very positive for investors in the long
term.
The market largely anticipated the Fed's actions, pushing rates sharply
higher throughout the year. For example, 90-day Treasury bill yields rose
74 basis points to 5.29% on December 31 from one year earlier, and the
one-year Treasury bill climbed 136 basis points to 5.95% in the same time
frame. A considerable portion of those increases occurred in the last few
months of the period - for example, the one-year rate rose 44 basis points
between October and December. Yields on money market funds benefited from
these changes.
Although the broad markets exhibited some volatility, in general the New
Year came without disruption by the Y2K bug. We are pleased to report that
we experienced no Y2K-related problems.
Performance and Strategy Review
The six-month returns of the Prime Reserve Portfolio improved significantly
over an already solid showing in the first half of the year. The fund
posted 6- and 12-month results of 2.57% and 4.89%, respectively, surpassing
the 2.48% and 4.75% gains for the Lipper Variable Annuity Underlying Money
Market Funds Average. Performance was aided by rising interest rates, which
helped rebuild yields in our market. For the first time in many quarters,
six-month dividends per share increased over last period, contributing to a
considerably improved seven-day compound dividend yield.
Performance Comparison
Periods Ended 12/31/99 6 Months 12 Months
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Prime Reserve Portfolio 2.57% 4.89%
Lipper Variable Annuity
Underlying Money Market
Funds Average 2.48 4.75
We made modest shifts in our investment strategy throughout the period.
Earlier in the fiscal year, rates had been relatively low and the fund's
dividend yield had slipped as a result. As we noted in the last shareholder
report, our strategy at the time was to capture the higher yields at the
longer end of the money market universe by maintaining an average maturity
at least 10 days longer than our average peer. During autumn, we felt the
rising rate environment suggested that a more-neutral interest rate stance
was in order and reduced the portfolio's weighted average maturity to a low
of 50 days. This shift proved effective as a short-term strategy, but
toward the end of the period we felt it was appropriate to again take
advantage of the attractive yields on the longer issues in our market. We
also wished to clear out some shorter issues whose yields had declined
around year-end. As a result, the fund's average maturity finished the
period near where it began, at 66 days. We largely used a "barbell"
portfolio structure to achieve the desired maturity - that is, dividing
assets predominantly between securities with one-month and one-year
maturities.
We maintained a relatively high stake in floating rate notes through
December. Floating rate issues are designed with adjustable coupons that
track rate changes relatively quickly - a benefit to shareholders when
rates are rising. Also, issuance of these securities increased dramatically
during the middle of the year as they became a popular form of Year 2000
financing. The increased supply forced issuers to price offerings somewhat
more attractively than in the last couple of years. As of the end of the
period, our position in floating rate notes stood at 29%, the same level as
six months earlier.
Otherwise, we made minor changes to the portfolio's sector positioning.
Significantly, we reduced holdings in banking and finance issues and
modestly increased our stake in a variety of asset-backed securities -
extremely high-quality, liquid securities collateralized by receivables or
other assets. These securities contribute to the fund's very high-quality
profile and also add to the fund's diversification.
Outlook
Rising rates have been a boon to money market results, and continued strong
economic numbers suggest that the Fed will raise the federal funds target
rate again this winter. Although current interest rate levels already seem
to factor in this possibility, we would not be surprised to see money
market yields rise further in the near future. We expect to keep our
average maturity on a par with our competitors and, as current issues
mature, we will reinvest the proceeds into new, higher-yielding issues.
Respectfully submitted,
Edward A. Wiese
President
January 19, 2000
Portfolio Highlights
Key Statistics
Periods
Ended
12/31/99
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Price Per Share $ 1.00
Dividend Per Share
6 months 0.025
12 months 0.048
Dividend Yield (7-Day Compound) * 5.82%
Weighted Average Maturity (days) 66
Weighted Average Quality ** First Tier
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*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
6/30/99 12/31/99
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U.S. Negotiable Bank Notes 8% 6%
Certificates of Deposit 21 22
Domestic Negotiable CDs 6 2
Eurodollar Negotiable CDs/
Bank Notes 1 --
U.S. Dollar Denominated
Foreign Negotiable CDs/
Bank Notes 14 20
Commercial Paper and Medium-
Term Notes 68 70
Receivables-Backed 14 17
Banking 19 10
Finance and Credit 8 6
Auto and Related 4 5
Loan/Bond-Backed 3 5
All Other 20 27
U.S. Government Agency Obligations 1 --
Foreign Government and
Municipalities 3 1
Other Assets Less Liabilities -1 1
Total 100% 100%
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Fixed Rate Obligations 71%
Floating Rate Obligations 29%
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.
For SEC chart as follows (Prime Reserve Portfolio)
Prime Reserve Lipper Variable Annunity
Portfolio Underlying
Funds Average Money Market
12/31/96 10,000 10,000
12/97 10,533 10,518
12/98 11,090 11,058
12/31/99 11,632 11,585
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 12/31/99
Since Inception
1 Year 3 Years Inception Date
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4.89% 5.17% 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
For a share outstanding throughout each period
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Year 12/31/96
Ended Through
12/31/99 12/31/98 12/31/97
NET ASSET VALUE
Beginning of period $ 1.000 $ 1.000 $ 1.000
Investment activities
Net investment income (loss) 0.048 0.052 0.052
Distributions
Net investment income (0.048) (0.052) (0.052)
NET ASSET VALUE
End of period $ 1.000 $ 1.000 $ 1.000
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Ratios/Supplemental Data
Total return (diamond) 4.89% 5.29% 5.33%
Ratio of total expenses
to average net assets 0.55% 0.55% 0.55%!
Ratio of net investment income
(loss) to average net assets 4.79% 5.12% 5.24%!
Net assets, end of period
(in thousands) $ 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
December 31, 1999
Par Value
In thousands
BANK NOTES 5.6%
First Tennessee Bank, VR
6.42%,1/18/00 $ 200 $ 200
Key Bank N.A., VR
6.061%,2/29/00 300 300
National City Bank, VR
6.501%, 1/31/00 300 300
Southtrust Bank, VR
6.509%, 1/4/00 300 300
Total Bank Notes (Cost $1,100) 1,100
CERTIFICATES OF DEPOSIT 22.2%
Allfirst Bank, 5.54%, 6/21/00 400 399
Banco Bilbao Vizcaya
5.60%, 6/12/00 100 100
Bayerische Landesbank, VR
6.387%, 1/18/00 300 300
Bayerische Vereinsbank
5.015%, 2/7/00 260 260
Commerzbank, 5.90%, 8/9/00 100 100
Credit Agricole Indosuez VR
6.459%, 1/10/00 300 300
6.476%, 1/3/00 300 299
Deutsche Bank, 5.33%, 3/9/00 175 175
Dresdner Bank, VR
6.44%, 1/24/00 100 100
Huntington National Bank
6.26%, 10/27/00 100 100
Merita Bank PLC, 6.09%, 10/10/00 250 250
Natexis Banque, 6.07%, 3/13/00 400 400
National Bank of Canada
5.49%, 6/5/00 150 150
Societe Generale, VR
6.416%, 1/18/00 200 200
Svenska Handelsbanken
5.63%, 6/19/00 200 199
Toronto Dominion, 5.18%, 2/29/00 285 284
UBS
5.51%, 6/5/00 100 100
6.01%, 8/14/00 100 100
Unibank A/S, 5.92%, 8/7/00 200 200
Westdeutsche Landesbank
6.01%, 6/6/00 $ 378 $ 378
Total Certificates of Deposit
(Cost $4,394) 4,394
COMMERCIAL PAPER 47.8%
Alpine Securitization, 4(2)
6.08%, 1/19/00 500 498
ANZ (Delaware), 6.00%, 2/17/00 100 99
Asset Securitization Cooperative
4(2), VR, 6.17%, 3/14/00 250 250
Commoloco, 6.06%, 1/26/00 100 100
Consolidated Edison Company
of N.Y., 4(2),6.65%, 1/10/00 250 250
Corporate Asset Funding, 4(2)
VR, 6.499%, 1/6/00 250 250
Corporate Receivables Corp.
4(2), VR,6.482%, 1/18/00 250 250
Dexia CLF Finance, 4(2)
6.00%, 2/10/00 300 298
Falcon Asset Securitization, 4(2)
6.10%, 1/27/00 350 349
6.15%, 2/14/00 250 248
Finova Capital, VR
6.12%, 2/4/00 100 100
General Electric Capital Corp.
6.00%, 4/7/00 120 118
6.05%, 3/17/00 166 164
6.20%, 1/18/00 101 101
General Motors Acceptance
Corporation
5.80%, 1/27/00 100 100
Golden Funding, 4(2)
5.83%, 3/3/00 250 248
Greenwich Funding, 4(2)
6.00%, 1/20/00 500 498
Harvard University, 5.00%, 1/3/00 139 139
HVB Finance, 6.20%, 1/3/00 100 100
International Bank For Reconstruction
& Development
5.90%, 1/18/00 260 259
Island Fin. of Puerto Rico
6.00%, 1/28/00 392 390
Jefferson-Pilot, 4(2)
5.95%, 2/24/00 350 347
Kitty Hawk Funding, 4(2)
5.89%, 1/21/00 $ 250 $ 249
Knight-Ridder
5.82%, 2/18/00 100 99
Lucent Technologies
6.00%, 4/12/00 250 246
Market Street Funding, 4(2)
6.26%, 1/14/00 250 249
Marsh USA, 4(2)
5.53%, 2/25/00 200 198
Merrill Lynch, 6.05%, 1/19/00 300 299
Northern Rock PLC
6.00%, 2/7/00 210 209
Park Avenue Receivables Co.
4(2), 6.75%, 1/14/00 250 249
4(2), VR
6.511%, 1/13/00 250 250
6.611%, 1/24/00 250 250
Repeat Offering Securitization
Entity, 4(2)
6.14%, 1/24/00 250 249
Sand Dollar Funding, 4(2)
6.00%, 2/28/00 750 743
Santander Finance (Delaware)
5.775%, 1/13/00 200 200
Sigma Finance, 4(2)
6.20%, 1/18/00 250 249
Total Fina S.A., 4(2)
6.06%, 1/18/00 250 249
Tulip Funding, 4(2)
6.07%, 1/31/00 300 298
Total Commercial Paper (Cost $9,442) 9,442
MEDIUM-TERM NOTES 23.6%
A T & T Capital, VR
6.83%, 1/7/00 250 252
Bayerische Landesbank
6.375%, 8/31/00 100 100
Bear Stearns Companies, VR
6.579%, 1/10/00 200 200
Caterpillar Financial Services
8.85%, 10/1/99 130 132
VR, 6.104%, 7/10/00 100 100
Ciesco, (144a), VR
6.48%, 1/17/00 $ 250 $ 250
Colgate Palmolive, VR
6.032%, 2/7/00 200 200
DaimlerChrysler, VR
6.42%, 6/30/00 200 200
Diageo PLC, 6.24%, 6/4/00 100 100
Ford Capital BV
10.125%, 11/15/00 100 103
Gannett, 5.85%, 5/1/00 75 75
General Motors Acceptance
Corporation, 6.90%, 6/6/00 100 100
Goldman Sachs Group
6.17%, 2/8/00 400 400
GTE Corp., VR, 6.155%, 3/13/00 100 100
Heller Financial
6.42%, 8/25/00 100 100
6.435%, 8/8/00 100 100
IBM, VR, 6.104%, 1/28/00 200 200
International Lease Finance
6.43%, 9/15/00 200 200
John Deere Owner Trust
Series 1999-1, VR
4.999%, 6/19/00 10 10
LINCS
Series, 1999-2, (144a), VR
6.482%, 1/18/00 300 300
National Rural Utilities, VR
6.482%, 1/3/00 100 100
Pepsico, 6.80%, 5/15/00 50 50
Prudential Funding
6.126%, 2/28/00 300 300
R.R. Donnelley
9.125%, 12/1/00 100 103
Rabobank Optional Redemption
Trust (144a), VR, 6.46%, 1/18/00 27 27
Strategic Money Market Trust
1999-A, 6.298%, 1/13/00 250 250
Toyota Motor Credit
6.05%, 4/12/00 500 500
Wells Fargo, 5.225%, 4/10/00 100 100
Total Medium-Term Notes
(Cost $4,652) 4,652
T. Rowe Price Prime Reserve Portfolio
December 31, 1999
Value
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In thousands
Total Investments in Securities
99.2% of Net Assets (Cost $19,588) $ 19,588
Other Assets Less Liabilities 157
NET ASSETS $ 19,745
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Net Assets Consist of:
Accumulated net realized gain/loss
- - net of distributions $ 5
Paid-in-capital applicable to 19,739,963
shares of $0.0001 par value capital
stock outstanding; 1,000,000,000 shares
of the Corporation authorized 19,740
NET ASSETS $ 19,745
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NET ASSET VALUE PER SHARE $ 1.00
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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
4.19% of net assets.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Prime Reserve Portfolio
In thousands
Year
Ended
12/31/99
Investment Income (Loss)
Interest income $ 934
Expenses
Investment management
and administrative 96
Net investment income (loss) 838
Net Realized Gain (Loss)
Net realized gain (loss) on securities 1
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 839
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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
12/31/99 12/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 838 $ 790
Net realized gain (loss) 1 4
Increase (decrease) in net assets from operations 839 794
Distributions to shareholders
Net investment income (838) (790)
Capital share transactions*
Shares sold 17,418 29,742
Distributions reinvested 839 785
Shares redeemed (14,632) (25,376)
Increase (decrease) in net assets from capital
share transactions 3,625 5,151
Net Assets
Increase (decrease) during period 3,626 5,155
Beginning of period 16,119 10,964
-----------------------
End of period $ 19,745 $ 16,119
*Share information
Shares sold 17,418 29,742
Distributions reinvested 839 785
Shares redeemed (14,632) (25,376)
Increase (decrease) in shares outstanding 3,625 5,151
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Prime Reserve Portfolio
December 31, 1999
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, 1999, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and
totaled $19,588,000.
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, 1999, 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
accounting principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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, 1999 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 20, 2000
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