Fellow Shareholders
Before beginning our discussion, we take this opportunity to remind you
that you have received two consecutive annual reports because your Fund's
fiscal year-end was recently changed from February 28 to May 31.
Market Environment
For the quarter ended May 31, 1994, short- and long-term interest rates
continued to rise in response to fears that economic momentum might trigger
a rise in inflation. Accelerated growth has been evident since the middle
of 1993 when the economy began to decisively overcome the factors holding
it back in recent years: sharp declines in defense spending, the burden of
debt accumulated by households during the 1980s, and weakness abroad. These
problems have not gone away, but the economy is achieving reasonably good
growth on the strength of solid consumer spending and robust business
spending on fixed equipment.
Chart 1: Interest Rate Levels (see appendix)
Since the highly accommodative monetary policy of 1992 and 1993 has
clearly borne fruit for the economy, the Fed began dismantling the strategy
in early February. The federal funds rate was raised in a series of steps
from 3.00% to 4.25% to achieve what the Fed has characterized as a
"neutral" monetary policy, neither restrictive nor stimulative. Money
market yields marched up in step with the federal funds rate, climbing 100
to 150 basis points during the last six months.
Portfolio Strategy and Performance
On May 31, the Prime Reserve Fund's yield was 36 basis points higher than
the February 28 level. As with any money market fund, the full effects of
the recent increases in short-term interest rates were not reflected
immediately in the portfolio's yield. Instead, the Fund's yield will tend
to "catch up" to market rates as existing holdings mature and
higher-yielding securities are purchased, or as new money comes into the
Fund.
Chart 2: Yield Comparison (see appendix)
As the chart above reveals, the Fund's climb toward higher rates was
in line with its peer group. On June 3, the Fund's return was 3.37% while
the Donoghue's First Tier Peer Group Average was 3.45%. Bank money market
deposit accounts, which tend to lag changes in market rates to a greater
extent than money market funds, have been slower to respond.
To allow faster reinvestment in the higher rate environment, the
Fund's weighted average maturity has been targeted at a level shorter than
its peer group average. As an important part of our strategy to increase
the Fund's responsiveness to rising interest rates, we increased holdings
of variable rate notes from 39% to 50% of the portfolio over the past three
months. The variable rate notes purchased by the Fund are unleveraged,
traditional short-term money market instruments whose interest rates
reset one or more times prior to final maturity. The rate resets are tied
to a benchmark such as the London Inter-Bank Offered Rate (LIBOR), the
federal funds rate, Treasury bill yields, or commercial paper rat es.
Variable rate notes are typically issued by banks and other financial
institutions, although industrial, utility, and municipal issuance is
becoming increasingly commonplace.
Chart 3: Maturity Comparison (see appendix)
The Fund's sector diversification changed little over the quarter.
Holdings in the banking and finance & credit sectors remain customarily
high at 31% of net assets, but are down from 36% three months ago. Foreign
government and municipality issues, investment dealer securities, and
domestic CDs are also strongly represented, with allocations of 10% each.
Credit quality remains high, and the Fund continues to operate under a
policy of purchasing only first tier securities, i.e., those which receive
the highest rating from one or more rating agencies.
Outlook
The rise in interest rates, along with higher taxes, should dampen economic
growth during the balance of the year. However, consumer sentiment has been
buoyed by falling unemployment and gains in personal income; meanwhile,
interest rates are still relatively low compared with the 1980s. Therefore,
any economic slowdown should be gradual.
If economic growth is around 3% in the second half of the year, the
Federal Reserve will likely tighten monetary policy further by raising the
federal funds rate. We expect that money market rates will follow the
federal funds rate and that money fund yields will continue trending
gradually upward until the economy slows to its long-term trend rate of
growth. Accordingly, we will continue to position the Fund to take
advantage of rising money market yields within a conservative portfolio
structure.
Respectfully submitted,
(signature)
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 23, 1994
Statistical Highlights
T. Rowe Price Prime Reserve Fund / May 31, 1994
Key Statistics
Dividend Yield<F1> Periods Ended 5/31/94
3 Months 3.01%
12 Months 2.73
Dividend Per Share
3 Months $0.01
12 Months 0.03
<F1>Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period. The yield will vary with market conditions.
Maturity Diversification
Percent of Net Assets
Range 5/31/93 2/28/94 5/31/94
0-30 Days 41% 52% 55%
31-60 Days 25 22 21
61-90 Days 12 3 11
91-120 Days 6 5 5
121-180 Days 10 15 5
181-365 Days 6 2 3
Over 1 Year 0 1 0
Weighted Average (Days) 59 46 46
Quality Diversification
Percent of Net Assets
TRPA Quality Rating<F1> 5/31/93 2/28/94 5/31/94
1 26% 21% 20%
2 67 59 60
3 7 20 20
Weighted Average 1.8 2.0 2.0
<F1>On a scale of 1 to 10, with Grade 1 representing highes quality.
Sector Diversification
Percent of Net Assets
5/31/93 2/28/94 5/31/94
Banking 14% 22% 19%
Finance & Credit 6 14 12
Foreign Government & Municipalities 19 11 10
Investment Dealers 8 8 10
Domestic Negotiable CDs 1 6 10
Industrial 10 7 8
Miscellaneous 2 3 8
Structured Finance 7 11 6
U.S. Dollar-Denominated Foreign
Negotiable CDs 16 7 5
Canadian Government & Municipalities 1 2 5
Petroleum 5 6 3
Food & Beverage 1 0 2
Telephone 0 2 1
Eurodollar Negotiable CDs 6 1 1
Letters of Credit 1 0 1
Gas & Gas Transmission 1 0 0
Housing Finance Revenue 1 0 0
Other Assets Less Liabilities 1 0 -1
Fixed Obligations 80 61 50
Floating Rate Instruments 20 39 50
<TABLE>
<CAPTION>
Investment Record<F1>
T. Rowe Price Prime Reserve Fund
The table below shows the investment record of one share of the T. Rowe
Price Prime Reserve Fund purchased at the adjusted original offering price
of $1.00. Over this time, interest rates have been volatile. The results
shown should not be considered a representation of the dividend income
which may be realized from an investment made in the Fund today.
Adjusted to Reflect Reinvestment
Fiscal Reported Income Cumulative Dollars Annual Percentage Return
Year Net Asset Dividend Taken Income Value of Total
Ended Value in Cash Dividend Investment Return
<S> <C> <C> <C> <C> <C>
12/31/76<F2> $1.00 $0.05 $0.05 $1.05 5.36%
1977 1.00 0.05 0.11 1.11 5.08
1978 1.00 0.07 0.19 1.19 7.53
1979 1.00 0.11 0.32 1.32 11.17
1980 1.00 0.13 0.50 1.50 13.34
1981 1.00 0.16 0.76 1.76 17.35
1982 1.00 0.12 0.99 1.99 12.89
2/28/83<F3> 1.00 0.01 1.02 2.02 1.36
1984 1.00 0.09 1.20 2.20 9.12
1985 1.00 0.10 1.43 2.43 10.32
1986 1.00 0.08 1.62 2.62 7.85
1987 1.00 0.06 1.77 2.77 6.01
1988 1.00 0.06 1.95 2.95 6.49
1989 1.00 0.07 2.17 3.17 7.49
1990 1.00 0.09 2.45 3.45 8.79
1991 1.00 0.07 2.71 3.71 7.56
1992 1.00 0.05 2.91 3.91 5.25
1993 1.00 0.03 3.03 4.03 3.06
1994 1.00 0.03 3.13 4.13 2.60
5/31/94<F4> 1.00 0.01 3.16 4.16 0.76
Total $1.44
<FN>
<F1>All figures adjusted to reflect 10 for 1 stock split of record May 1, 1981.
<F2>From inception 1/26/76 to 12/31/76.
<F3>Fiscal year-end changed from December 31 to February 28; figures are for two months from 1/1/83-2/28/83.
<F4>Fiscal year-end changed from February 28 to May 31; figures are for three months from 3/1/94-5/31/94.
</FN>
</TABLE>
Statement of Net Assets (Amounts in thousands)
T. Rowe Price Prime Reserve Fund/May 31, 1994
Auto Loans-Backed _ 1.1%
Face Amount Value
John Deere Owner Trust, VR, 4.375%, 6/15/94 $ 4,311 $ 4,308
Premier Auto Trust, 3.28%, 2/2/95 34,104 34,101
Total Auto Loans-Backed (Cost _ $38,414) 38,409
Bank Notes _ 5.3%
Bank of New York, 3.41%, 6/8/94 10,000 9,999
Bank of New York (Delaware), VR,
3.977 - 4.39%, 6/1 - 6/23/94 53,000 53,000
First National Bank of Chicago, VR, 4.495%,
6/3/94 50,000 49,981
Huntington National Bank, VR, 4.43%, 6/3/94 20,000 19,983
Landeskreditbank Baden-Wuerttemburg, 3.55%, 6/10/94 15,000 14,996
MBNA America Bank, 3.93%, 6/6/94 5,000 5,000
Old Kent Bank & Trust, VR, 4.375%, 6/20/94 30,000 29,994
Pittsburgh National Bank, 3.65%, 7/28/94 10,000 9,984
Total Bank Notes (Cost _ $192,994) 192,937
Bankers' Acceptances _ 0.3%
Chemical Bank, 4.24 - 4.52%, 9/23 - 10/3/94
(Cost - $11,293) 11,500 11,285
Certificates of Deposit _ 4.7%
Banque Nationale de Paris, 3.39%, 8/8/94 10,000 9,978
Caisse Nationale de Credit Agricole, LCD,
3.29 - 3.30%, 7/12/94 20,000 19,969
Canadian Imperial Bank of Commerce, 3.25%, 7/12/94 25,000 24,960
Commerzbank, VR, 4.406%, 6/1/94 43,000 43,003
Credit Suisse, 3.63%, 6/3/94 20,000 20,000
Royal Bank of Canada, 3.38%, 7/11/94 25,000 24,966
Societe Generale, 3.60%, 8/16/94 16,000 15,965
Union Bank Switzerland, 3.46%, 8/30/94 12,000 11,966
Total Certificates of Deposit (Cost _ $171,015) 170,807
Commercial Paper _ 48.8%
ANZ (Delaware), 4.48 - 4.50%, 8/18 - 8/24/94 45,000 44,467
Asset Securitization Cooperative, 4(2),
3.80 - 4.43%, 6/1 - 8/8/94 109,925 109,251
AT&T, 3.83%, 6/27/94 19,000 18,777
Bankers Trust New York, 4.20%, 10/4/94 23,500 22,948
BASF, 3.80%, 6/21/94 5,000 4,951
Bayerische Vereinsbank, 4.45%, 8/18/94 4,350 4,301
Bell Atlantic Financial Services, 4.05%, 6/21/94 7,461 7,419
Bell Atlantic Network Funding, 4.30%, 6/20/94 1,905 1,899
BMW U.S. Capital, 3.82 - 4.48%, 6/6 - 8/23/94 32,300 32,050
BNP U.S. Finance, 3.24 - 3.90%, 7/8 - 7/13/94 $45,000 $44,232
Bombardier Capital (LOC National Westminster Bank),
3.92%, 6/1 - 6/3/94 14,700 14,650
BP Australia Finance Ltd., 4.35%, 6/1/94 4,500 4,499
BP Oil New Zealand Ltd., 3.86-4.50%,6/21-8/23/94 39,590 39,215
Caisse des Depots et Consignations, 4(2), 4.40%,
7/15/94 25,020 24,843
Canadian Imperial Holdings, 4.48%, 8/22/94 18,000 17,790
Canadian Wheat Board, 4.02 - 4.05%,
9/28 - 9/29/94 79,000 77,184
Corestates Capital, VR, 4.40-4.41%, 6/8-6/11/94 65,000 64,972
Corporate Asset Funding, 3.25%, 7/11/94 5,200 5,066
Cregem North America, 3.34 - 3.38%, 7/5 - 7/7/94 35,000 34,364
CS First Boston Group, 4.602%, 8/24/94 45,000 44,981
Daimler-Benz North America, 4.47 - 4.50%,
8/3 - 8/22/94 37,700 37,281
Dover, 4(2), 4.33%, 6/10/94 6,000 5,979
Dresdner U.S. Finance, 4.04%, 9/28/94 25,000 24,415
Enel, 3.80%, 6/30/94 23,149 22,917
Export Finance & Insurance, 3.34 - 4.30%,
6/15 - 7/1/94 39,000 38,401
Finnish Export Credit Ltd., 4.22%, 10/7/94 23,500 22,935
Ford Credit Europe, 3.37 - 4.25%, 6/28 - 10/5/94 49,000 47,992
General Electric Capital, 3.30 - 4.07%,
7/11 - 9/30/94 52,500 51,519
Hanson Finance (U.K.), 3.785-4.35%,6/9-6/23/94 55,450 55,032
Heinz (H. J.), 4.32%, 7/5/94 3,800 3,779
KFW International Finance, 3.24 - 3.25%,
7/11 - 7/25/94 50,000 49,087
Kingdom of Sweden, 3.24 - 3.25%, 7/11 - 7/15/94 85,000 83,510
Knight-Ridder, 3.90%, 6/6/94 3,150 3,134
Leeds Permanent Building Society, 4.55%, 7/18/94 7,000 6,940
MCA Funding, 4(2), 3.88 - 4.35%, 6/1 - 8/10/94 26,704 26,508
Melville, 4.05%, 9/26/94 2,568 2,510
Mobil Australia Finance,4(2),4.50%,8/18-8/23/94 34,902 34,483
National Australia Funding (Delaware), 4.52%,
7/11/94 30,000 29,778
NationsBank, 4.48%, 8/22/94 5,000 4,942
Nestle Capital, 3.00%, 7/15/94 5,000 4,965
New Center Asset Trust, 3.80%, 6/7 - 6/10/94 41,000 40,718
New South Wales Treasury, 4.22 - 4.45%,
8/19 - 10/7/94 57,500 56,220
Nynex, 3.83 - 4.02%, 6/23 - 6/28/94 19,200 19,019
Oesterrichische Kontrollbank, 4.00 - 4.25%,
6/20 - 8/15/94 6,350 6,271
Ontario Hydro, 4.47 - 4.50%, 7/6 - 8/26/94 52,500 51,891
Pepsico, 4(2), VR, 4.426%, 6/1/94 47,000 47,011
Preferred Receivables Funding,3.85-3.90%,6/1/94 12,925 12,879
Province of British Columbia, 3.80%, 6/7/94 4,500 4,473
Province of Quebec, 4.00 - 4.52%, 7/11 - 9/6/94 51,000 50,066
Prudential Funding, 4.42%, 7/18/94 50,000 49,626
Reed Publishing (USA), 4(2), 3.80%, 6/6/94 24,000 23,771
Repsol International, 4.00 - 4.44%, 6/20 - 8/8/94 25,000
24,837
SBNSW (Delaware), VR, 4.18%, 6/3/94 50,000 49,969
SBSA (Delaware), 3.80%, 6/17/94 10,000 9,903
South Australian Government Finance Auth., 4(2),
3.80%, 6/24/94 20,000 19,800
Sysco, 4.35%, 6/21/94 10,000 9,950
Tasmanian Public Finance, 3.85%, 6/15/94 4,250 4,212
Toronto-Dominion Holdings (USA), 3.25%, 7/15/94 50,000 49,078
Commercial Paper (cont.)
U.S. Borax & Chemical, 4(2), 3.80%, 6/7/94 $11,000 $10,895
UBS Finance (Delaware), 4.30%, 6/1/94 2,906 2,906
Unilever Capital, 3.45%, 6/17/94 5,000 4,994
4(2), 4.53%, 7/5/94 24,200 24,036
U.S. Bancorp, 4.35%, 7/19/94 500 497
U.S. West Communications, 4.35%, 6/1/94 2,053 2,053
Western Australian Treasury, 4.43 - 4.50%,
7/13 - 8/18/94 21,000 20,800
Total Commercial Paper (Cost _ $1,771,421) 1,769,841
Medium-Term Notes _ 38.7%
Abbey National, (144a), VR, 4.455%, 6/2/94 5,000 4,997
VR, 4.10%, 6/18/94 15,000 14,994
AT&T, VR, 4.3125%, 5/4/95 5,000 4,999
Avco Financial, VR, 4.386 - 4.43%, 6/3 - 6/28/94 46,200 46,170
Bank of Scotland, (144a), VR, 4.3625%, 5/10/95 43,000 43,011
Bear Stearns Company, VR, 4.475%, 6/29/94 47,000 47,038
Beneficial, VR, 4.41%, 6/3/94 46,000 45,962
Branch Banking & Trust, VR, 4.38%, 6/1/94 32,000 31,975
Chase Manhattan, VR, 4.10%, 6/1/94 27,000 26,987
Chemical Banking, VR, 4.15-5.191%,6/1-8/21/94 34,875 34,905
Ciesco L.P., (144a), VR, 3.97-4.366%,6/18-7/11/94 100,000 99,945
CIT Group Holdings, VR, 4.41%, 6/3/94 50,000 49,955
Citicorp, VR, 3.863 - 3.895%, 6/7 - 6/14/94 34,000 33,992
Commercial Bank of Illinois, FR, 4.48%, 6/3/94 50,000 49,979
Corestates Capital, VR, 4.475%, 6/19/94 12,000 12,001
Corporate Asset Funding,(144a),VR,4.366%,6/18/94 100,000 99,945
VR, 4.665%, 8/28/94 25,000 24,986
Countrywide Funding, VR, 4.43%, 6/1/94 25,000 24,991
First National Bank of Maryland,VR,4.41%,6/3/94 35,000 34,970
Fleet Financial Group, VR, 3.875%, 6/15/94 22,000 21,991
Ford Motor Credit, VR, 4.172-4.741%,6/15-6/23/94 15,000 15,015
General Electric Capital, 3.50%, 7/1/94 15,000 14,991
Goldman Sachs Group L.P., VR, 4.094%, 6/3/94 95,000 95,000
Household Finance, VR, 4.48%, 6/3/94 50,000 49,978
Leland Stanford Junior University, VR, 4.335%,
6/1/94 16,000 15,993
Merrill Lynch & Company, VR, 3.913 - 4.053%,
6/2 - 6/7/94 70,000 69,973
Morgan Stanley Group, VR, 3.975 - 4.641%,
6/15 - 7/22/94 73,500 73,500
NationsBank, VR, 3.875%, 9/1/94 50,000 49,979
Paccar Financial, VR, 4.735%, 5/23/94 48,000 48,042
PHH, VR, 4.43 - 4.48%, 6/3/94 72,200 72,154
Province of Quebec, 12.75%, 9/15/94 5,150 5,250
Salomon, VR, 4.195 - 4.2915%, 6/16 - 7/1/94 25,000 25,029
Southwestern Bell Telephone Company, 5.30%, 6/27/94 4,000 4,002
U.S. National Bank of Oregon, VR, 3.93%, 6/5/94 50,000 49,960
Wells Fargo, VR, 4.375 - 5.75%, 6/15 - 8/18/94 36,000 36,040
Westdeusche Landesbank, VR, 3.45%, 8/22/94 25,000 24,934
Total Medium-Term Notes (Cost _ $1,404,092) 1,403,633
County of San Diego, VR, 3.938 - 4.518%,
6/3 - 6/29/94 $50,000 $49,977
New Orleans Aviation Board, VR, 4.51%, 6/3/94 10,600 10,600
Total Taxable Municipal (Cost _ $60,600) 60,577
Total Investments in Securities _ 100.6%
(Cost _ $3,649,829) 3,647,489
Other Assets Less Liabilities _ (0.6)% (20,234)
Net Assets Consisting of:
Accumulated net investment income -
net of distributions 2,106
Accumulated realized gains/losses -
net of distributions (3,826)
Unrealized depreciation of investments (2,340)
Paid-in-capital applicable to 3,632,477,735 shares
of $0.01 par value capital stock outstanding;
15,000,000,000 shares authorized 3,631,315
Net Assets - 100.0% $3,627,255
Net Asset Value Per Share $1.00
FR - Floating Rate
VR - Variable Rate
LCD - London Certificate of Deposit
LOC - Letter of Credit
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 only be resold subject to that rule, except to
qualified institutional buyers.
Statement of Operations
T. Rowe Price Prime Reserve Fund
Three Year
Months Ended Ended
May 31, 1994<F1> Feb. 28, 1994
Amounts in thousands
INVESTMENT INCOME
Interest income $34,248 $112,906
Expenses
Investment management fees 3,601 13,617
Shareholder servicing fees & expenses 2,769 10,760
Prospectus & shareholder reports 89 396
Custodian and accounting fees & expenses 76 368
Legal & auditing fees 59 43
Registration fees & expenses 24 79
Directors' fees & expenses 11 45
Miscellaneous 47 76
Total expenses 6,676 25,384
Net investment income 27,572 87,522
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain 2 389
Change in unrealized appreciation or depreciation 204 (3,216)
Net gain (loss) on investments 206 (2,827)
INCREASE IN NET ASSETS FROM OPERATIONS $27,778 $84,695
<F1> The Fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price Prime Reserve Fund
Three
Months Ended Year Ended
May 31, Feb. 28, Feb. 28,
1994<F1> 1994 1993
Amounts in Thousands
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 27,572 $ 87,522 $ 117,604
Net realized gain on investments 2 389 1,706
Change in unrealized appreciation or
depreciation of investments 204 (3,216) 944
Increase in net assets from operations 27,778 84,695 120,254
Distributions to shareholders
Net investment income (27,534) (87,982) (117,604)
Capital share transactions
($1.00 per share)
Sold 1,962,952 5,492,781 4,830,441
Distributions reinvested 26,277 84,630 113,294
Redeemed (1,741,194) (5,791,738) (5,465,019)
Increase (decrease) in net assets
from capital share transactions 248,035 (214,327) (521,284)
Total increase (decrease) 248,279 (217,614) (518,634)
NET ASSETS
Beginning of period 3,378,976 3,596,590 4,115,224
End of period $3,627,255 $3,378,976 $3,596,590
<F1> The Fund's fiscal year-end was changed to May 31.
Notes to Financial Statements
T. Rowe Price Prime Reserve Fund / May 31, 1994
Note 1 - Significant Accounting Policies
T. Rowe Price Prime Reserve Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. Effective March 1, 1994, the fiscal year-end of the
Fund changed from February 28 to May 31.
A) Security valuation - Securities with more than 60 days remaining to
maturity 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. Securities with remaining maturities of 60 days or less are valued
at amortized cost.
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.
B) Premiums and Discounts - Premiums and discounts on debt securities are
amortized for both financial and tax reporting purposes.
C) 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 an 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 which may differ from 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. The Fund has unused realized capital loss carryforwards
for federal income tax purposes of $3,826,000 at May 31, 1994, which expire
in 1995 through 1998.
At May 31, 1994, the aggregate cost of investments for federal income
tax and financial reporting purposes was $3,649,829,000 and net unrealized
depreciation aggregated $2,340,000, of which $134,000 related to
appreciated investments and $2,474,000 to depreciated investments.
Note 3 - Related Party Transactions
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.05% of average daily net assets and a Group Fee. The Group Fee
is based on the combined assets of certain mutual funds sponsored by the
Manager or Rowe Price-Fleming International, Inc. (the Group). The Group
Fee rate ranges from 0.48% for the first $1 billion of assets to 0.31% for
assets in excess of $34 billion. The effective annual Group Fee rate at May
31, 1994, and for the three months then ended was 0.34%. The rate at
February 28, 1994 was 0.34%, and for the year then ended was 0.35%. The
Fund pays a pro rata portion of the Group Fee based on the ratio of the
Fund's net assets to those of the Group.
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc.
(RPS) are wholly owned subsidiaries of the Manager. TRPS provides transfer
and dividend disbursing agent functions and shareholder services for all
accounts. RPS provides subaccounting and recordkeeping services for certain
retirement accounts invested in the Fund. The Manager, under a separate
agreement, calculates the daily share price and maintains the financial
records of the Fund. The Fund is one of several T. Rowe Price mutual funds
(the Underlying Funds) in which the T. Rowe Price Spectrum Growth Fund and
T. Rowe Price Spectrum Income Fund (Spectrum) invests. In accordance with
an Agreement between Spectrum, the Underlying Funds, the Manager and TRPS,
expenses from the operation of Spectrum are borne by the Underlying Funds
based on each Underlying Fund's proportionate share of assets owned by
Spectrum. For the three months ended May 31, 1994, and the year ended
February 28, 1994, the Fund incurred fees totalling approximately -
$2,250,000 and $9,141,000, respectively, for these services provided by
related parties. At May 31, 1994, in vestment management and service fees
payable were $2,458,000.
<TABLE>
<CAPTION>
Financial Highlights
T. Rowe Price Prime Reserve Fund
For a share outstanding throughout each period
Three Months
Ended Year Ended
May 31, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1994<F1> 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Investment Activities
Net investment income 0.008 0.026 0.030 0.051 0.073 0.085
Distributions
Net investment income (0.008) (0.026) (0.030) (0.051) (0.073) (0.085)
NET ASSET VALUE, END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
RATIOS/SUPPLEMENTAL DATA
Total Return 0.76% 2.60% 3.06% 5.26% 7.56% 8.79%
Ratio of Expenses to
Average Net Assets 0.73%<F2> 0.74% 0.75% 0.78% 0.75% 0.75%
Ratio of Net Investment Income
to Average Net Assets 3.02%<F2> 2.56% 3.04% 5.14% 7.33% 8.45%
Net Assets, End of Period (in thousands) $3,627,255 $3,378,976 $3,596,590 $4,115,224 $4,753,267 $4,841,954
<FN>
<F1> The Fund's fiscal year-end was changed to May 31.
<F2> Annualized.
</FN>
</TABLE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
T. Rowe Price Prime Reserve Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the selected per
share data and information (which appears under the heading "Financial
Highlights") present fairly, in all material respects, the financial
position of T. Rowe Price Prime Reserve Fund, Inc. at May 31, 1994, the
results of its operations, the changes in its net assets and the selected
per share data and information for each of the fiscal periods presented in
conformity with generally accepted accounting principles. These financial
statements and selected per share data and information (hereafter referred
to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at May 31, 1994
by correspondence with custodians and brokers and, where appropriate, the
application of alternative auditing procedures for unsettled security
transactions, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
June 17, 1994
Appendix
Chart 1
Interest Rate Levels
A three line chart showing yields on a 5-Year Treasury Note ranged from
5.36 to 6.73, yields on 30-Day CP ranged from 3.15 to 4.33 and yields on a
90-Day Treasury Bill ranged from 3.06 to 4.23 for the period 5-28-94
through 6-3-94.
Chart 2
Yield Comparison
Bar chart showing yields on PRF ranged from 2.48 to 3.37, yields on
Donoghue's 1st Tier Peer Group Avg. ranged from 2.52 to 3.45 and yields on
MMDA ranged from 2.49 to 2.35 for the period 5-28-94 through 6-3-94.
Chart 3
Maturity Comparison
A two line chart showing maturities on PRF ranged from 58 days to 47 days
and maturities on Donoghue's 1st Tier Peer Group Avg. ranged from 67 days
to 46 days, for the period 5-28-94 through 6-3-93.
