Semiannual Report
June 30, 2000
Limited-Term Bond 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
Sharply rising interest rates and volatility in the equity markets heavily
influenced bond behavior during the six months ended June 30, 2000. Although
long-term Treasury bonds did better than expected, most fixed-income issues
struggled through May. Only in June did rates begin to ease off, leading to a
modest late-period rally for bonds in many categories.
Market Environment
The interest rate environment was particularly challenging during the past
half year. After a period of broad optimism, investors became concerned
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 the first half of 2000
by a total of 100 basis points (1%), the most recent move being a
50-basis-point hike on May 16. Since beginning its tightening program in
early 1999, the Fed has raised short-term rates by 175 basis points, to
6.5%.
Interest Rate Levels
---------------------------------------------------------------------------
Current 5-Year 2-Year
Coupon Treasury Treasury
GNMA Note Note
6/30/99 7.27 5.76 5.61
7.61 5.75 5.59
7.77 5.71 5.61
9/99 7.48 5.81 5.66
7.51 6.09 5.92
7.64 6.03 5.96
12/99 7.83 6.33 6.22
8.14 6.63 6.48
8.01 6.59 6.54
3/00 7.77 6.42 6.57
8.00 6.42 6.53
8.00 6.65 6.77
6/30/00 7.77 6.25 6.44
For the most part, the bond market has weakened in response to the Fed's
rate hikes. As indicated in the chart, over the past year yields on both
the five-year and the two-year Treasury notes climbed sharply prior to June
2000. Like other shorter-term securities, the two-year note actually fared
worse than its intermediate-term counterpart. GNMA yields also rose, though
to a lesser extent. Bond prices declined commensurately. High-yield issues
were also weak, as investors were concerned that a slower economy might
adversely affect this sector. After the late May rate hike, however,
investors gained more confidence that the Fed would slow or even halt its
tightening program. The renewed optimism helped bonds in many categories -
including high yield - post significant rallies just in the month of June.
One segment of the bond market broke with the pattern, however. After the
start of 2000, prices of long-term Treasuries, which are normally very
sensitive to rate increases, actually rose. The rally was due partly to
investor confidence in the ability of the Fed to tame inflation, but also
to supply and demand. Flush with higher-than-expected tax receipts, the
Treasury has issued fewer long-term bonds and has begun a program to buy
back a large number of existing securities. This decline in supply inspired
some panic buying, as institutions rushed to stock up on Treasuries before
the shortage became critical. It also coincided with a sharp pullback in
the equity markets, which drove many stock investors to seek comfort in
long-term Treasuries. As a result of this activity, the yield curve, which
charts the yields on bonds of rising maturities, has flattened and even
inverted.
Investment-grade corporate bonds did not do as well as Treasuries and
mortgage-backed bonds, but nonetheless produced modestly positive returns
and outpaced lower-quality, high-yield issues. After reaching two-year
highs in February, mortgage rates actually fell noticeably during the
remainder of the period. One benefit of the higher yields on corporate and
mortgage-backed bonds is that they now offer a significant advantage over
similar-maturity Treasuries.
Performance and Strategy Review
The Fed's rate hikes had a harsh effect on shorter-term securities, making
it difficult for your fund to make much headway. Nonetheless, a June
rebound helped it to produce a positive six-month return of 3.03%, which
outpaced both the Lipper group average and the Merrill Lynch 1-5 Year U.S.
Corporate and Government Index. We were pleased with this result because we
fell behind these benchmarks in the previous six-month period, as reflected
in 12-month performance. Dividends per share rose only slightly, but with
the share price remaining unchanged from December 31, income accounted for
all of fund performance.
Performance Comparison
---------------------------------------------------------------------------
Periods Ended 6/30/00 6 Months 12 Months
---------------------------------------------------------------------------
Limited-Term
Bond Portfolio 3.03% 4.06%
Merrill Lynch 1-5 Year
U.S. Corporate and
Government Index 2.98 4.57
Lipper Variable Annuity
Underlying Short
Intermediate Investment-
Grade Debt Funds Average 2.67 4.20
Our relative performance improved in the half year primarily because, near
the end of last year, we took steps to reduce interest rate exposure. At
that time, we had reduced effective duration (a measure of sensitivity to
movements in interest rates) from 3.2 years as of June 30, 1999, to 2.8
years. That duration level was approximately neutral compared with our
peers. As the current period wore on, we focused on keeping
rate-sensitivity stable (duration at June 30, 2000, was 2.7 years) while
maximizing yield. This effort provided increased protection against
principal loss while still allowing us to outperform our peers.
Corporate bonds became a less attractive investment for us this year.
Generally speaking, we believe that cost pressures may begin to threaten
corporate balance sheets because rapid economic growth has resulted in
higher production costs without the flexibility to pass those costs through
to consumers. We have seen corporate profit margins come under pressure,
increasing the likelihood that credit quality will erode. Corporate bonds -
particularly lower-rated issues - have at times been hurt by deteriorating
liquidity and declining prices. Therefore, we reduced corporate holdings
from 47% of assets to 41% mainly by selling underperforming sectors, such
as consumer products, but also by trimming industrials and financials where
risk appeared to have risen modestly. To keep yield competitive, the
proceeds of these sales were deployed into AAA rated mortgage-backed
securities, which enjoyed strong relative performance for most of the
period.
Quality diversification reflected our preference for high quality. The
percentage of assets in AAA securities rose from 38% to 43% of assets,
while A holdings climbed from 22% to 25%. Our stake in BBB rated issues -
the lowest region of investment grade - fell from 21% to 15%, and we
eliminated all noninvestment-grade holdings. These moves were a positive
considering the underperformance of these issues. Average portfolio credit
quality remained at a solid AA.
As inflation pressures have grown, we have increased our small but
strategic allocation to Treasury inflation-protected securities (TIPS). Our
holdings now stand at 3% of assets. These securities have a lower coupon
than traditional Treasuries, but their principal adjusts upward at the rate
of inflation to provide a stable real return. They act as a good inflation
hedge for short-term investors, and we expect that we will continue to use
TIPS as long as the threat of rising inflation lingers.
Outlook
While the Fed seems to have been effective in easing inflationary risks
thus far, we are not out of the interest rate woods yet. Further rate hikes
remain a possibility later in the year, although the pace of tightening may
not be as rapid. With rates higher and the economy's growth slowing,
corporate profits may be pinched. We therefore expect to take a cautious
approach, limiting interest rate exposure where possible. We will also try
to strike a balance between maintaining high credit quality and seeking out
higher-yielding bonds, which we think will provide good returns while
limiting risk.
Respectfully submitted,
Edward A. Wiese
President
July 25, 2000
Portfolio Highlights
Key Statistics
--------------------------------------------------------------------------------
Periods
Ended
6/30/00
Dividend Yield*
6 months 6.04%
12 months 5.97
Dividend Per Share
6 months 0.14
12 months 0.28
30-Day Standardized Yield 6.44%
Change in Price Per Share
6 months (from $4.79 to $4.79) 0.00
12 months (from $4.88 to $4.79) -0.09
Weighted Average Maturity (years) 3.4
Weighted Average Effective Duration (years) 2.7
* 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.
Quality Diversification
--------------------------------------------------------------------------------
Percent of Percent of
Net Assets Net Assets
12/31/99 6/30/00
Quality Rating*
AAA 38% 43%
AA 17 17
A 22 25
BBB 21 15
BB 2 --
Weighted Average Quality AA AA
*Based on T. Rowe Price research.
Portfolio Highlights
Sector Diversification
--------------------------------------------------------------------------------
Percent of Percent of
Net Assets Net Assets
12/31/99 6/30/00
Corporate Bonds and Notes 47% 41%
Banking and Finance 12 10
Consumer Products and Services 11 9
Industrial 9 7
Utilities 7 6
Media and Communications 3 4
Transportation 4 4
All Other 1 1
Asset-Backed Securities 14 15
Mortgage-Backed Securities 18 22
U.S. Government Obligations 18 19
U.S. Treasuries 11 15
Government Agency Obligations 7 4
Money Market Funds 2 3
Other Assets Less Liabilities 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 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.
Limited-Term Bond Portfolio
--------------------------------------------------------------------------------
As of 6/30/00
Merrill Lynch
Limited-Term 1-5 Year U.S.
Bond Corporate and
Portfolio Government Index
5/13/94 10,000 10,000
6/94 10,046 10,079
6/95 10,814 10,975
6/96 11,215 11,558
6/97 11,941 12,349
6/98 12,813 13,279
6/99 13,311 13,939
6/30/2000 13,851 14,576
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 6/30/00
Since Inception
1 Year 3 Years 5 Years Inception Date
--------------------------------------------------------------------------------
4.06% 5.07% 5.08% 5.46% 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
Unaudited
For a share outstanding throughout each period
-----------------------------------------------------------
6 Months Year
Ended Ended
6/30/00 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
NET ASSET VALUE
Beginning of period $ 4.79 $ 5.02 $ 4.96 $ 4.93 $ 5.06 $ 4.92
Investment activities
Net investment
income (loss) 0.14 0.27 0.28 0.29 0.29 0.33
Net realized and
unrealized
gain (loss) -- (0.23) 0.07 0.03 (0.13) 0.14
Total from
investment activities 0.14 0.04 0.35 0.32 0.16 0.47
Distributions
Net investment income (0.14) (0.27) (0.28) (0.29) (0.29) (0.33)
Net realized gain -- -- (0.01) -- -- --
Total distributions (0.14) (0.27) (0.29) (0.29) (0.29) (0.33)
NET ASSET VALUE
End of period $ 4.79 $ 4.79 $ 5.02 $ 4.96 $ 4.93 $ 5.06
----------------------------------------------------------
Ratios/Supplemental Data
Total
return(diamond) 3.03% 0.84% 7.28% 6.74% 3.26% 9.88%
Ratio of total
expenses to average
net assets 0.70%! 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment
income (loss) to
average net assets 6.02%! 5.54% 5.58% 5.91% 5.83% 6.60%
Portfolio
turnover rate 56.3%! 36.2% 50.9% 48.7% 97.7% 73.7%
Net assets,
end of period
(in thousands) $ 62,628 $ 53,148 $ 46,235 $ 24,280 $ 12,312 $ 3,966
(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 Limited-Term Bond Portfolio
June 30, 2000 (Unaudited)
Shares/Par Value
--------------------------------------------------------------------------------
In thousands
CORPORATE BONDS AND NOTES 40.8%
Banking and Finance 11.8%
ABN AMRO Bank (Chicago)
Gtd. Sub. Notes
7.25%, 5/31/05 410 408
AIG Sunamerica Global Financing
Sr. Notes, (144a)
7.40%, 5/5/03 550 551
American General Finance
5.875%, 7/1/00 125 125
Banco Generale, (144a)
7.70%, 8/1/02 300 288
CIT Group, 5.50%, 2/15/04 550 508
Finova Capital, MTN
5.98%, 2/27/01 85 81
First USA Bank, 7.00%, 8/20/01 85 85
General Electric Capital, MTN
7.50%, 5/15/05 550 557
Hewlett Packard
7.15%, 6/15/05 650 652
HSBC Finance Nederland
Sub. Gtd. Notes, (144a)
7.40%, 4/15/03 190 189
Inter-American Development Bank
6.375%, 10/22/07 200 191
Kansallis Osake Pankki (New York)
Sub. Notes, 10.00%, 5/1/02 400 416
Marsh and McLennan
Sr. Notes, 6.625%, 6/15/04 550 531
MBNA, Sub. Notes
7.25%, 9/15/02 185 182
Mercantile Safe Deposit & Trust
6.53%, 7/3/00 200 200
Merrill Lynch
MTN, 6.81%, 6/13/02 275 272
7.00%, 3/15/06 275 266
Morgan Guaranty Trust
Sub. Notes
7.375%, 2/1/02 135 135
Morgan Stanley Dean Witter
7.75%, 6/15/05 600 605
Penske Truck Leasing
6.65%, 11/1/00 150 150
Provident Bank, Sub. Notes
7.125%, 3/15/03 275 266
Republic of New York
8.875%, 2/15/01 200 202
Salomon Smith Barney Holdings
7.30%, 5/15/02 350 349
Union Planters, Sub. Notes
6.25%, 11/1/03 200 189
7,398
Consumer Products and Services 8.1%
Beckman Instruments, Sr. Notes
7.10%, 3/4/03 385 370
Coca Cola Femsa,
8.95%, 11/1/06 220 219
Comcast Cable Communications
6.20%, 11/15/08 440 396
Dayton Hudson,
6.625%, 3/1/03 200 197
Federated Department Stores
Sr. Notes, 8.125%, 10/15/02 550 555
Grand Metropolitan Investment
Zero Coupon, 1/6/04 825 641
Johnson & Johnson
6.625%, 9/1/09 470 455
Nabisco, 6.125%, 2/1/33 290 275
Pepsico, MTN, 5.75%, 1/2/03 300 290
Sony, 6.125%, 3/4/03 425 415
Viacom, 6.75%, 1/15/03 210 206
Wal-Mart Stores
6.55%, 8/10/04 825 812
Watson Pharmaceuticals
7.125%, 5/15/08 260 233
5,064
Energy 0.7%
PDV America, 7.875%, 8/1/03 220 206
YPF Sociedad Anonima
7.25%, 3/15/03 235 227
433
Industrials 6.7%
Caterpillar Financial Services
6.875%, 8/1/04 550 536
DaimlerChrysler, 7.125%, 3/1/02 550 549
Eaton Offshore, 9.00%, 2/15/01 370 374
Ford Motor Credit
7.50%, 3/15/05 275 274
Lockheed, 6.75%, 3/15/03 245 238
Northrop Grumman
8.625%, 10/15/04 300 308
Parker Hannifin, MTN
5.65%, 9/15/03 550 522
Toyota Motor Credit
5.625%, 11/13/03 550 527
United Technologies
6.625%, 11/15/04 550 537
Waste Management
6.625%, 7/15/02 340 325
4,190
Media and Communications 4.1%
360 Communications
Sr. Notes
7.125%, 3/1/03 550 543
Deutsche Telekom
International Finance
7.75%, 6/15/05 600 605
Sprint Capital, 5.70%, 11/15/03 410 387
U.S. West Capital Funding
6.875%, 8/15/01 550 546
Vodafone AirTouch, (144a)
7.625%, 2/15/05 485 487
2,568
Transportation 3.7%
Amerco, Sr. Notes
8.80%, 2/4/05 550 522
CSX, 9.50%, 8/1/00 150 150
Delta Air Lines, 7.90%, 12/15/09 330 309
ERAC USA Finance, (144a)
6.375%, 5/15/03 200 192
GATX Capital, 6.875%, 11/1/04 275 260
Norfolk Southern
6.95%, 5/1/02 550 545
7.875%, 2/15/04 145 146
Northwest Airlines
8.375%, 3/15/04 210 194
2,318
Utilities 5.7%
CE Electric UK Funding
Sr. Notes, (144a)
6.853%, 12/30/04 ^+ 330 322
Cleveland Electric
7.19%, 7/1/00 210 210
Entergy Mississippi
6.45%, 4/1/08 380 346
National Rural Utilities
5.00%, 10/1/02 550 523
Niagara Mohawk
7.375%, 7/1/03 276 272
Sr. Notes, 7.25%, 10/1/02 275 272
Pacific Gas & Electric
1st Mtg. Bonds
8.75%, 1/1/01 235 237
Potomac Capital Investment, (144A)
MTN, 7.55%, 11/19/01 275 274
Public Service Electric & Gas
1st Mtg. Bonds, 8.875%, 6/1/03 260 259
1st Ref. Mtg. Bonds
6.25%, 1/1/07 75 69
Utilicorp United, Sr. Notes
7.00%, 7/15/04 550 526
Williams, 6.125%, 2/15/12 260 253
3,563
Total Corporate Bonds and Notes
(Cost $26,156) 25,534
ASSET-BACKED SECURITIES 15.4%
Advanta Equipment
Receivables, 7.56%, 2/15/07 361 361
Banc One Auto Grantor Trust
6.27%, 11/20/03 46 46
BMW Vehicle Owner Trust
6.54%, 4/25/04 550 543
California Infrastructure
6.38%, 9/25/08 600 579
6.42%, 9/25/08 500 484
Comed Transitional Funding
Trust, 5.44%, 3/25/07 670 627
Dayton Hudson Credit Card
Master Trust, 5.90%, 5/25/06 550 529
EQCC Home Equity Loan
Trust, 6.159%, 4/15/08 375 361
Fingerhut Master Trust
6.07%, 2/15/05 380 378
First USA Secured Note Trust
6.50%, 1/18/06 550 532
Harley Davidson Eaglemark
5.94%, 2/15/04 127 126
6.35%, 10/15/02 9 9
Heller Equipment Asset Trust
6.65%, 3/14/04 550 543
MBNA Credit Card Trust
7.45%, 4/16/07 275 270
7.90%, 7/16/07 550 548
MMCA Automobile Trust
6.80%, 8/15/03 550 550
New Holland Equipment
(144a), 6.80%, 12/15/07 ^+ 550 534
Onyx Acceptance
5.83%, 3/15/04 550 540
Peco Energy
5.63%, 3/1/05 330 321
Residential Accredit Loans
7.25%, 11/25/27 534 511
Saxon Asset Securities Trust
6.73%, 2/25/27 600 585
WFS Financial Owner Trust
7.41%, 9/20/07 550 550
Yamaha Motor Master Trust
6.20%, 5/15/03 100 100
Total Asset-Backed Securities
(Cost $9,799) 9,627
U.S. GOVERNMENT OBLIGATIONS/AGENCIES 18.5%
U.S. Government Agency Obligations 3.9%
Federal Home Loan Banks
5.625%, 3/19/01 700 694
Federal National Mortgage Assn.
4.625%,10/15/01 825 802
6.375%, 6/15/09 451 428
7.65%, 10/6/06 320 318
U.S. Department Housing &
Urban Development
6.49%, 8/1/07 215 211
2453
U.S. Treasury Obligations 14.6%
U.S. Treasury Inflation-Indexed Notes
3.625%, 7/15/02 1,737 1,725
U.S. Treasury Notes
4.25%, 11/15/03 3,550 3,333
6.50%, 10/15/06 900 911
7.25%, 5/15/04 3,100 3,197
9,166
Total U.S. Government Obligations/Agencies
(Cost $11,699) 11,619
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 18.7%
U.S. Government Agency Obligations 12.6%
Federal Home Loan Mortgage
6.00%, 2/15/08 - 5/15/16 2,761 2,709
6.40%, 1/15/08 550 543
7 year balloon, 6.50%, 5/1/05 845 825
REMIC
5.75%, 6/15/10 1,014 1,001
6.00%, 8/15/06 - 1/15/08 956 934
6.50%, 4/15/21 550 540
Federal National Mortgage Assn.
6.00%, 1/1/14 435 411
9.00%, 5/1/05 148 150
CMO, 9.00%, 1/25/08 750 772
7,885
U.S. Government Guaranteed Obligations 6.1%
Government National Mortgage Assn.
I
6.50%, 5/15/09 282 276
7.00%, 9/15/12 - 4/15/13 2,841 2,810
8.00%, 5/15/07 673 676
10.00%, 11/15/09 - 4/15/19 48 51
3,813
Total U.S. Government Mortgage-Backed
Securities (Cost $11,865) 11,698
NON-U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 2.8%
GMAC Commercial
Mortgage Securities
6.15%, 5/15/35 493 471
LB Commercial Conduit
Mortgage Trust, 6.41%, 8/15/07 632 607
Prudential Securities
6.074%, 1/15/08 700 664
Total Non-U.S. Government Mortgage-Backed
Securities (Cost $1,810) 1,742
MUNICIPAL BONDS 0.1%
Taxable Municipal 0.1%
University of Miami
6.90%, 4/1/04 60 59
Total Municipal Bonds (Cost $60) 59
MONEY MARKET FUNDS 3.5%
Reserve Investment Fund, 6.68% # 2,202 2,202
Total Money Market Funds (Cost $2,202) 2,202
Total Investments in Securities
99.8% of Net Assets (Cost $63,591) 62,481
Other Assets Less Liabilities 147
NET ASSETS 62,628
------
Net Assets Consist of:
Accumulated net investment income -
net of distribution (22)
Accumulated net realized gain/loss -
net of distributions (794)
Net unrealized gain (loss) (1,110)
Paid-in-capital applicable to 13,084,698
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
Corporation authorized 64,554
NET ASSETS 62,628
------
NET ASSET VALUE PER SHARE 4.79
----
^ Private Placement
+ Securities contain some restrictions as to public resale - total of such
securities at period-end amounts to 1.4% of net assets.
# Seven-day yield
CMO Collateralized Mortgage 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
4.5% of net assets.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
Unaudited
T. Rowe Price Limited-Term Bond Portfolio
In thousands
6 Months
Ended
6/30/00
Investment Income (Loss)
Income
Interest income 1,999
Expenses
Investment management and administrative 208
Net investment income (loss) 1,791
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (628)
Change in net unrealized gain or loss on securities 616
Net realized and unrealized gain (loss) (12)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS 1,779
-----
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
Unaudited
T. Rowe Price Mid-Cap Growth Portfolio
In thousands
6 Months Year
Ended Ended
6/30/00 12/31/99
Increase (Decrease) in Net Assets
Operations
Net investment
income (loss) 1,791 2,809
Net realized gain (loss) (628) (226)
Change in net unrealized
gain or loss 616 (2,139)
Increase (decrease) in net
assets from operations 1,779 444
Distributions to shareholders
Net investment income (1,791) (2,809)
Capital share transactions *
Shares sold 14,219 18,783
Distributions reinvested 1,791 2,806
Shares redeemed (6,518) (12,311)
Increase (decrease) in net
assets from capital
share transactions 9,492 9,278
Net Assets
Increase (decrease) during period 9,480 6,913
Beginning of period 53,148 46,235
End of period 62,628 53,148
-------------------
*Share information
Shares sold 2,980 3,820
Distributions reinvested 377 575
Shares redeemed (1,370) (2,512)
Increase (decrease) in
shares outstanding 1,987 1,883
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Limited-Term Bond Portfolio
June 30, 2000 (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 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 fund seeks a high level of income consistent with
moderate price fluctuation by investing primarily in short-and
intermediate-term investment-grade debt securities. 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 of 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 mortgage-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 $13,095,000 and $11,701,000,
respectively, for the six months ended June 30, 2000. Purchases and sales
of U.S. government securities aggregated $12,147,000 and $4,554,000,
respectively, for the six months ended June 30, 2000.
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. As of December 31, 1999, the fund had capital loss
carryforwards for federal income tax purposes of $155,000, all of which
expires in 2007.
At June 30, 2000, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$63,591,000. Net unrealized loss aggregated $1,110,000 at period-end, of
which $103,000 related to appreciated investments and $1,213,000 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 $63,000 was payable at June 30, 2000. 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.
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 six months ended
June 30, 2000, totaled $48,000 and are reflected as interest income in the
accompanying Statement of Operations.
