Annual Report
Prime Reserve Fund
May 31, 1996
T. Rowe Price
REPORT HIGHLIGHTS
o After initially falling on signs of slow growth and moderate inflation,
money market yields rose in 1996 when the economy showed surprising
strength. Bond prices tumbled as longer-term interest rates rose
sharply.
o Since they are managed to maintain a stable share price, money market
funds, including yours, generally outperformed bond funds over the last
6 and 12 months.
o The Prime Reserve Fund returned 2.49% and 5.25% for the 6- and 12-month
periods ended May 31, slightly ahead of its peer group average.
o The fund modestly increased its holdings of floating rate securities,
which are more attractive in a rising rate environment.
o We think the Federal Reserve may tighten later this year and are
positioning the portfolio for moderately higher short-term interest
rates.
Fellow Shareholders
Money market funds, including yours, generally outperformed bond funds over
the last six months as the powerful rally of 1995 turned into a rout this
year. Most bond funds produced negative returns as prices tumbled, but money
funds, which are managed to maintain a stable share price, posted gains.
MARKET ENVIRONMENT
Proving once again the capricious nature of Wall Street, market psychology
changed almost in the blink of an eye. In December and January, money market
yields continued to decline modestly on the expectation of moderate economic
growth, subdued inflation, and progress toward a balanced budget. The Federal
Reserve trimmed the federal funds target to 5.25% and money market yields fell
in tandem. The 90-day Treasury bill slid from 5.4% in November to 5.0% in
February, as shown in the chart. The market awaited further easing by as much
as 50 basis points to prod the sluggish economy. (One hundred basis points
equal one percentage point.)
As the new year progressed, however, it became clear that the economy was
stronger than originally thought, growing at a robust 2.3% in the first
calendar quarter. Payroll employment rose by a healthy 220,000 a month during
the first five months of 1996. Producer inflation picked up due to higher oil
and grain prices. Consumer prices have risen at an annualized rate of 4% so
far in 1996.
Chart 1 - Interest Rate Levels
As a result, the market reversed course from an expectation of further easing
by the Federal Reserve to one of more tightening. Money market yields rose,
though not as far as longer-term rates, and not to their levels of 6 and 12
months ago. As shown in the chart, the 90-day Treasury bill and the federal
funds rate finished the reporting period at 5.2%.
PORTFOLIO STRATEGY AND PERFORMANCE
Reflecting the generally downward path of money market interest rates, your
fund's yield fell from 5.4% last November to 4.8% on May 31, closely tracking
the average for first tier money funds as provided by IBC Financial Data. Six
months ago, we remained essentially in line with our competitor funds by
keeping average maturity slightly long in expectation of declining short-term
interest rates. (Maturity represents the average lifespan of fund assets. When
rates are expected to fall, holding longer maturities helps delay the rollover
of maturing assets into lower-yielding securities. Conversely, when rates are
likely to rise, holding shorter maturities helps hasten the move into
higher-yielding instruments.)
PERFORMANCE COMPARISON
Periods Ended 5/31/96 6 Months 12 Months
Prime Reserve Fund 2.49% 5.25%
Lipper Money Market Funds Average 2.41 5.09
On May 31, our average maturity stood at 59 days, essentially the same as in
our last report and similar to that of other money funds. We maintained this
neutral posture because of the uncertain direction of short-term rates. Due to
these moves, your fund provided favorable results for both the 6- and 12-month
periods ended May 31, slightly ahead of our Lipper peer group average.
Since the objective of this fund is to provide maximum protection for your
principal while pursuing an attractive level of income, we invest in a
well-diversified selection of only high-quality, short-term debt instruments.
Consequently, portfolio changes often reflect the availability more than the
relative attractiveness of these securities. For instance, during the last six
months, increased issuance of foreign negotiable CDs denominated in U.S.
dollars and of Eurodollar negotiable CDs led us to increase our holdings in
each of these sectors to 14% of fund assets, as shown in the table following
this letter. Meanwhile, a relative lack of supply of domestic bank commercial
paper led to a decrease of these holdings to 15% of assets. Since banks
account for the bulk of short-term debt issuance, our exposure to the banking
and finance sector remained high at 65% of assets.
In our view, the Fed is more likely to tighten than to ease in coming months.
Therefore, we trimmed our holdings of fixed rate instruments in favor of a
slight increase in floating rate instruments, which are more attractive in a
rising rate environment.
OUTLOOK
Given the strength of the economy and continuing sporadic evidence of
inflationary pressures, we think the Fed may tighten later this year - good
news for money fund investors. While a rise in rates would slow growth, the
economy should remain healthy enough to keep the unemployment rate around
5.5%, where it has been since 1994. Although late in the cycle, the expansion
could well continue for another few years. Consequently, we are likely to
position the portfolio for moderately higher short-term interest rates.
Respectfully submitted,
Edward A. Wiese
President and
Chairman of the Investment Advisory Committee
June 20, 1996
T. Rowe Price Prime Reserve Fund
PORTFOLIO HIGHLIGHTS
KEY STATISTICS
11/30/95 5/31/96
_____________________________________________________________________________
Price Per Share $ 1.00 $ 1.00
Dividends Per Share
For 6 months 0.027 0.025
For 12 months 0.054 0.051
Dividend Yield (7-Day Compound) * 5.40% 4.79%
Weighted Average Maturity (days) 60 59
Weighted Average Quality ** First Tier First Tier
* 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.
** 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.
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/95 5/31/96
_____________________________________________________________________________
Banking 20% 15%
Eurodollar Negotiable CDs 6 14
U.S. Dollar-Denominated Foreign
Negotiable CDs 10 14
Finance and Credit 7 12
Asset-Backed 5 7
Foreign Government and Municipalities 11 5
Automobiles and Related 3 5
Industrial 4 5
Domestic Negotiable Bank Notes 7 5
Domestic Negotiable CDs 1 4
Broker-Dealers 5 3
Pharmaceuticals 1 3
U.S. Government and Agency 3 3
Food Processing 1 2
All Other 16 4
Other Assets Less Liabilities - - 1
_____________________________________________________________________________
Total 100% 100%
Fixed Rate Obligations 89 86
Floating Rate Instruments 11 14
T. Rowe Price Prime Reserve Fund
PERFORMANCE COMPARISON
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 2 - Prime Reserve Fund
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.
Periods Ended 5/31/96 1 Year 3 Years 5 Years 10 Years
_____________________________________________________________________________
Prime Reserve Fund 5.25% 4.27% 4.04% 5.62%
Investment return represents past performance and will vary. While the fund is
managed to maintain a stable share price of $1.00, this is not guaranteed.
T. Rowe Price Prime Reserve Fund
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
Year 3 Months# Year
Ended Ended Ended
5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
_____________________________________________________________________________
NET ASSET VALUE
Beginning of
period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment
activities
Net investment
income 0.051 0.047 0.008 0.026 0.030 0.051
Distributions
Net investment
income (0.051) (0.047) (0.008) (0.026) (0.030) (0.051)
NET ASSET VALUE
End of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Ratios/Supplemental Data
Total return 5.25% 4.85% 0.76% 2.60% 3.06% 5.26%
Ratio of expenses to
average net assets 0.66% 0.67% 0.73%! 0.74% 0.75% 0.78%
Ratio of net investment
income to average
net assets 5.07% 4.76% 3.02%! 2.56% 3.04% 5.14%
Net assets,
end of period
(in millions) $ 4,011 $ 3,841 $ 3,627 $ 3,379 $ 3,597 $ 4,115
! Annualized.
# The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Prime Reserve Fund
May 31, 1996
Statement of Net Assets Par Value
In thousands
BANK NOTES 4.6%
Bank of New York (Delaware), VR,
5.584%, 7/24/96 $ 65,000 $ 65,000
Huntington National, VR, 5.39%, 6/3/96 25,000 25,000
PNC Bank N.A., VR, 5.358%, 6/6/96 44,000 43,979
Wachovia Bank of North Carolina N.A.,
5.32%, 6/11/96 50,000 50,000
Total Bank Notes (Cost $183,979) 183,979
BANKERS' ACCEPTANCES 0.3%
First National Bank of Boston, 5.30%, 7/22/96 10,000 9,925
Total Bankers' Acceptances (Cost $9,925) 9,925
CERTIFICATES OF DEPOSIT 32.0%
Abbey National
(London)
5.09%, 6/17/96 22,000 22,000
5.25%, 6/17/96 10,000 10,001
5.345%, 7/8/96 47,000 47,000
5.36%, 8/15/96 35,000 35,001
ABN AMRO
(London)
5.26%, 7/8/96 17,000 17,004
5.42%, 9/9/96 20,000 20,001
5.44%, 10/31/96 15,000 14,999
5.46%, 11/15/96 30,000 30,001
Bank of Scotland
5.30%, 6/28/96 24,000 24,000
5.36%, 8/2/96 30,000 30,000
Bank One Milwaukee, 5.32%, 6/7/96 20,000 20,000
Banque Nationale de Paris
5.02%, 8/2/96 20,000 20,000
5.36%, 9/23/96 25,000 24,997
5.53%, 6/14/96 10,000 10,000
Barclays Bank PLC, 5.32%, 7/23/96 62,000 62,001
Bayerische Hypotheken
(London)
5.04%, 8/9/96 10,000 10,001
5.10%, 7/5/96 $ 25,000 $ 25,002
5.37%, 8/2/96 15,000 15,000
5.38%, 8/15/96 40,000 40,001
5.46%, 11/27/96 5,000 5,000
Bayerische Vereinsbank
5.30%, 6/20 - 6/21/96 35,000 35,000
(London)
5.10%, 8/5/96 35,000 35,006
5.41%, 10/1/96 30,000 30,001
Canadian Imperial, 5.37%, 8/29/96 50,000 50,000
Chase Manhattan Bank, 5.40%, 6/10/96 25,000 25,000
Commerzbank AG
5.31%, 6/21/96 50,000 50,000
5.63%, 6/26/96 2,000 2,000
Deutsche Bank AG
5.19%, 7/19/96 15,000 15,001
(London)
5.37%, 7/1 - 8/7/96 77,000 77,002
Dresdner Bank AG, 5.30%, 6/27/96 60,000 60,000
First Tennessee Bank N.A.,
5.33%, 6/3 - 7/16/96 50,000 50,000
Hessische Landesbank-Girozentrale,
5.10%, 9/6/96 25,000 24,997
MBNA America Bank N.A., 5.20%, 8/2/96 20,000 20,000
National Bank of Canada, 5.188%, 7/5/96 50,000 50,000
National Westminster
5.07%, 6/3/96 50,000 50,000
5.57%, 6/4/96 2,000 2,000
Societe Generale
5.34%, 6/3/96 18,000 18,000
5.39%, 6/14/96 25,000 25,000
(London)
5.34%, 6/3/96 15,000 15,000
5.52%, 12/3/96 30,000 30,002
Sudwestdeutsche Landesbank, (London),
5.33%, 7/18/96 9,000 9,001
Swiss Bank
5.00%, 8/9/96 34,500 34,500
5.01%, 8/7/96 25,000 25,000
Toronto Dominion Bank
(London)
5.32%, 6/20/96 $ 10,000 $ 10,000
5.52%, 12/3/96 25,000 25,001
U.S. Bank of Oregon, 5.30%, 6/17/96 35,000 35,000
_____________________________________________________________________________
Total Certificates of Deposit (Cost $1,284,520) 1,284,520
COMMERCIAL PAPER 44.6%
A. H. Robins, 4(2), 5.32%, 6/6/96 2,200 2,198
ABB Treasury Center (USA), 4(2),
5.00%, 8/6/96 25,000 24,771
Abbey National North America, 5.30%, 11/29/96 23,000 22,387
ABN AMRO North America Finance,
5.00%, 8/22/96 25,000 24,715
Albertson's, 5.30%, 6/10/96 8,000 7,989
Alliance & Leicester, 5.00%, 6/5/96 20,000 19,989
Allied Signal, 5.30%, 6/7/96 4,000 3,996
American Home Food Products, 4(2),
5.32%, 6/10/96 5,000 4,993
American Home Products, 4(2),
5.32%, 6/10/96 4,000 3,995
Ameritech, 5.28%, 6/17/96 4,000 3,991
Ameritech Capital Funding, 4(2),
5.30%, 6/24/96 2,600 2,591
ANZ (Delaware), 5.27%, 6/24/96 20,000 19,933
Asset Securitization Cooperative, 4(2),
5.30%, 6/10 - 6/26/96 107,500 107,222
Australian Wheat Board, 5.30%, 7/3/96 8,000 7,962
Bank of New York, 5.30%, 7/2/96 20,000 19,909
Bankamerica, 5.28%, 6/27/96 50,000 49,809
Bayer, 4(2), 5.29%, 8/16/96 25,000 24,721
Bell Atlantic Financial Services,
5.29%, 6/4/96 10,000 9,996
Beta Finance
4(2)
5.25%, 10/4/96 17,000 16,690
5.29%, 6/14/96 13,000 12,975
5.30%, 7/25/96 2,000 1,984
5.32%, 11/18 - 11/25/96 10,500 10,231
5.36%, 10/9/96 1,500 1,471
BMW U.S. Capital
5.25%, 6/7/96 12,800 12,789
5.27%, 6/7/96 11,800 11,790
5.30%, 6/18/96 $ 35,000 $ 34,912
Cadbury Schweppes, 5.28%, 6/24/96 42,000 41,858
Caisse des Depots et Consignations, 4(2),
5.30%, 6/4/96 31,000 30,986
Cargill Financial Services,
5.30%, 6/11/96 10,000 9,985
Ciesco, 5.30%, 6/11/96 5,180 5,172
Corestates Capital, 5.30%, 6/19/96 25,000 24,934
Corporate Asset Funding, 4(2), 5.29%, 7/15/96 22,760 22,613
Countrywide Funding
5.30%, 6/14/96 29,800 29,743
5.33%, 6/4 - 6/11/96 6,500 6,495
CPC International, 4(2), 4.96%, 6/21/96 40,000 39,890
Cregem North America, 5.28%, 7/8 - 7/10/96 85,000 84,528
Daimler-Benz North America
4.95%, 7/8/96 5,000 4,975
5.29%, 7/30/96 35,000 34,696
Delaware Funding, 4(2), 5.30%, 6/14 - 6/18/96 40,027 39,930
Dover
4(2)
5.29%, 6/14 - 6/25/96 24,000 23,938
5.30%, 6/18/96 11,500 11,471
Dresdner U.S. Finance, 5.30%, 6/3/96 10,350 10,347
Du Pont (EI) de Nemours, 4(2),
5.30%, 6/5 - 6/27/96 8,251 8,231
Exxon Imperial, 4(2), 5.28%, 7/16/96 45,639 45,338
Falcon Asset Securitization
4(2)
5.29%, 7/9/96 1,500 1,492
5.30%, 6/4/96 2,245 2,244
First Chicago Financial
4(2)
5.30%, 6/17/96 4,000 3,990
5.32%, 6/7/96 34,000 33,970
Ford Motor Credit, 5.31%, 6/11/96 2,324 2,321
Generale Bank
4.88%, 8/13/96 25,000 24,753
5.02%, 9/3/96 42,000 41,449
5.28%, 8/26/96 10,000 9,874
Glaxo Wellcome, 4(2), 5.30%, 6/27 - 6/28/96 12,400 12,351
Great Lakes Chemical
4(2)
5.30%, 6/18/96 $ 6,000 $ 5,985
5.40%, 6/3/96 4,980 4,978
Heinz (H. J.), 4(2), 5.30%, 6/13/96 3,130 3,124
Island Finance Puerto Rico
5.30%, 6/12 - 6/24/96 31,500 31,432
5.31%, 6/11/96 31,000 30,954
KFW International Finance,
5.30%, 12/2 - 12/5/96 63,000 61,281
Kingdom of Sweden
5.05%, 6/21/96 40,000 39,888
5.28%, 6/17/96 4,000 3,990
Leland Stanford Junior University of California,
5.30%, 11/19/96 10,000 9,748
Oesterrichische Kontrollbank, 5.33%, 11/22/96 9,000 8,768
Panasonic Finance, 4(2),
5.30%, 6/11 - 6/18/96 22,500 22,461
Pfizer, 5.28%, 7/2/96 40,000 39,818
PPG Holdings B.V., 5.30%, 6/6/96 25,000 24,982
Preferred Receivables Funding
5.28%, 6/25 - 7/1/96 42,300 42,137
5.32%, 6/4/96 5,000 4,998
Province of Quebec, 5.32%, 6/10/96 27,650 27,613
Raytheon, 5.30%, 6/4/96 13,727 13,721
Reed Elsevier, 4(2), 5.27%, 6/24/96 15,000 14,950
RTZ America, 4(2), 5.28%, 6/21 - 6/24/96 9,985 9,954
Sandoz
5.31%, 7/3 - 7/15/96 11,000 10,938
5.32%, 6/6/96 4,000 3,997
4(2), 5.32%, 6/7/96 7,750 7,743
Smithkline Beecham, 5.27%, 6/27/96 16,107 16,046
Suntrust Banks, 5.30%, 6/28/96 10,000 9,960
Svenska Handelsbanken
5.02%, 9/3 - 9/4/96 21,000 20,723
5.25%, 7/2/96 4,000 3,982
Tasmanian Public Finance,
5.32%, 11/13 - 11/18/96 34,450 33,605
Teco Finance, 4(2), 5.30%, 8/15/96 18,600 18,395
Toyota Motor Credit
5.29%, 6/20/96 10,000 9,972
5.30%, 6/5/96 $ 25,000 $ 24,985
Travelers Aetna Property Casualty,
5.29%, 6/3 - 6/11/96 55,000 54,943
Unifunding, 5.29%, 8/22/96 45,000 44,458
Western Australian Treasury
4.98%, 8/22/96 17,000 16,807
5.29%, 7/24/96 8,000 7,938
Westpac Capital
5.29%, 6/28/96 25,000 24,901
5.35%, 6/7/96 4,915 4,910
Wool International, 5.29%, 7/12/96 4,000 3,976
_____________________________________________________________________________
Total Commercial Paper (Cost $1,790,644) 1,790,644
MEDIUM-TERM NOTES 16.3%
American General Finance, VR, 5.476%, 6/16/96 10,000 10,005
Associates Corporation of North America
6.875%, 1/15/97 3,000 3,026
8.70%, 1/1/97 10,000 10,169
Bankamerica, Eurodollar, VR, 5.906%, 8/28/96 9,000 9,026
Bear Stearns, VR, 5.48%, 6/28/96 45,000 45,000
Chemical Banking, 5.688%, 8/19/96 19,295 19,304
CIT Group Holdings, 5.50%, 2/28/97 6,500 6,518
Citicorp, 8.50%, 2/24/97 5,000 5,115
Corestates Capital, VR, 5.49%, 6/16/96 5,250 5,251
Corporate Asset Funding, (144a), VR,
5.363%, 6/28/96 28,000 27,996
Fleet Mortgage Group
5.788%, 6/17/96 19,000 19,002
VR, 5.384%, 6/28/96 20,000 19,996
Ford Motor Credit
5.625%, 3/3/97 10,000 10,042
8.00%, 12/1/96 5,000 5,062
VR, 5.715%, 7/10/96 4,500 4,504
General Electric Capital
5.12%, 1/27/97 12,000 11,995
5.30%, 1/3/97 119,200 119,177
7.646%, 2/3/97 30,000 30,478
General Motors Acceptance Corporation
7.80%, 5/5/97 1,650 1,678
8.125%, 1/13/97 $ 1,070 $ 1,088
8.375%, 5/1/97 1,000 1,021
8.625%, 7/15/96 1,000 1,003
Eurodollar, VR, 5.875%, 8/30/96 6,000 6,004
VR
5.56%, 6/4/96 7,000 7,000
5.59%, 6/4/96 10,880 10,880
5.61%, 6/7/96 4,000 4,000
Goldman Sachs Group, VR,
5.394%, 6/22 - 11/19/96 62,000 62,000
International Lease Finance
4.75%, 1/15/97 19,000 18,930
6.375%, 11/1/96 5,000 5,019
Nationsbank, 7.50%, 2/15/97 2,735 2,781
Norwest
7.75%, 12/31/96 1,000 1,014
7.875%, 1/30/97 8,000 8,131
Pepsico, Eurodollar, 7.75%, 2/28/97 6,000 6,113
PHH, VR, 5.374%, 6/9/96 50,000 49,989
Republic National Bank of New York,
7.95%, 1/14/97 2,000 2,033
SMM Trust, VR, 5.488%, 6/26/96 75,000 75,000
Toyota Motor Credit, 7.625%, 1/30/97 18,500 18,765
Wells Fargo & Company, VR, 5.438%, 6/20/96 5,000 5,000
WMX Technologies, 4.875%, 6/15/96 4,000 3,998
_____________________________________________________________________________
Total Medium-Term Notes (Cost $653,113) 653,113
U.S. GOVERNMENT AGENCY OBLIGATIONS 2.5%
Federal National Mortgage Assn.
VR
5.395%, 7/8/96 50,000 50,000
5.465%, 6/3/96 50,000 50,000
_____________________________________________________________________________
Total U.S. Government Agency Obligations (Cost $100,000) 100,000
U.S. TREASURY OBLIGATIONS 0.6%
U.S. Treasury Notes, 6.625%, 3/31/97 25,000 25,264
_____________________________________________________________________________
Total U.S. Government Obligations (Cost $25,264) 25,264
Total Investments in Securities
100.9% of Net Assets (Cost $4,047,445) $ 4,047,445
Other Assets Less Liabilities (36,426)
NET ASSETS $ 4,011,019
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 814
Accumulated net realized gain/loss - net of distributions (2,308)
Paid-in-capital applicable to 4,013,799,743 shares of
$0.01 par value capital stock outstanding;
15,000,000,000 shares authorized 4,012,513
NET ASSETS $ 4,011,019
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
year-end amounts to 0.7% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Prime Reserve Fund
STATEMENT OF OPERATIONS
In thousands
Year
Ended
_____________________________________________________________________________
5/31/96
Investment Income
Interest income $ 227,318
Expenses
Investment management 15,320
Shareholder servicing 9,797
Prospectus and shareholder reports 434
Custody and accounting 326
Registration 77
Legal and audit 39
Directors 35
Miscellaneous 63
Total expenses 26,091
Net investment income 201,227
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 778
Change in net unrealized gain or loss on securities 335
Net realized and unrealized gain (loss) 1,113
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 202,340
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Prime Reserve Fund
STATEMENT OF CHANGES IN NET ASSETS
In thousands
Year Year
Ended Ended
5/31/96 5/31/95
_____________________________________________________________________________
Increase (Decrease) in Net Assets
Operations
Net investment income $ 201,227 $ 179,199
Net realized gain (loss) 778 613
Change in net unrealized
gain or loss 335 2,005
Increase (decrease) in net assets
from operations 202,340 181,817
Distributions to shareholders
Net investment income (202,178) (179,540)
Capital share transactions*
Shares sold 7,790,741 6,221,625
Distributions reinvested 196,288 172,687
Shares redeemed (7,816,950) (6,183,066)
Increase (decrease) in net assets
from capital share transactions 170,079 211,246
Net Assets
Increase (decrease) during period 170,241 213,523
Beginning of period 3,840,778 3,627,255
End of period $ 4,011,019 $ 3,840,778
*Share information
Shares sold 7,790,743 6,221,625
Distributions reinvested 196,288 172,682
Shares redeemed (7,816,950) (6,183,066)
Increase (decrease) in
shares outstanding 170,081 211,241
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Prime Reserve Fund
May 31, 1996
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
T. Rowe Price Prime Reserve Fund, Inc., (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on March 3, 1976.
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. The fund has unused realized capital loss carryforwards
for federal income tax purposes of $2,308,000, of which $1,035,000 expires in
1997, and $1,273,000 in 1998. Capital loss carryforwards utilized in 1996
amounted to $778,000. The fund intends to retain gains realized in future
periods that may be offset by available capital loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders to
reflect the tax character of certain transactions, the following
reclassifications were made during the year ended May 31, 1996. The results of
operations and net assets were not affected by the reclassifications.
Undistributed net realized gain 127,000
Paid-in-capital (127,000)
At May 31, 1996, the aggregate cost of investments for federal income tax and
financial reporting purposes was $4,047,445,000.
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, of which $1,301,000 was payable at May 31, 1996. The fee is computed
daily and paid monthly, and consists 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 0.305% for assets in excess of $50
billion. At May 31, 1996, and for the year then ended, the effective annual
group fee rate was 0.33% and 0.34%, respectively. The fund pays a pro rata
share of the group fee based on the ratio of its net assets to those of the
group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc.
(TRPS) is the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund. T. Rowe Price Retirement
Plan Services, Inc., provides subaccounting and recordkeeping services for
certain retirement accounts invested in the fund. Additionally, the fund is
one of several T. Rowe Price mutual funds (the underlying funds) in which the
T. Rowe Price Spectrum Growth and Income Funds (Spectrum) invest. In
accordance with an agreement among 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. The fund incurred expenses pursuant to these related party
agreements totaling approximately $8,350,000 for the year ended May 31, 1996,
of which $687,000 was payable at period-end.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
T. Rowe Price Prime Reserve Fund
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
T. Rowe Price Prime Reserve Fund, Inc. (the "Fund") at May 31, 1996, 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
generally accepted accounting principles. 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 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, 1996 by
correspondence with the custodian and, where appropriate, the application of
alternative auditing procedures for unsettled security transactions, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 19, 1996
T. ROWE PRICE SHAREHOLDER SERVICES
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety
of information and services - at no extra cost.
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10
p.m. and weekends from 8:30 a.m. to 5 p.m.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds.
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and T.
Rowe Price OnLine.
Discount Brokerage
Individual Investments Stocks, bonds, options, precious metals, and other
securities; potentially large savings on commissions.
Investment Information
Combined Statement An overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
The T. Rowe Price Report A quarterly investment newsletter discussing markets
and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
T. ROWE PRICE MUTUAL FUNDS
Stock Funds
Domestic
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Bond Funds
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-Free
California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Government Bond
International Bond
Short-Term Global Income
Money Market
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
Blended Asset
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
T. Rowe Price No-Load Variable Annuity
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
*Closed to new investors.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
625-7676 Baltimore area
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to shareholders and to others
who have received a copy of the prospectus of the T. Rowe Price Prime Reserve
Fund(registered trademark).
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services,Inc., Distributor RPRT PRF 5/31/96
Chart 1 - Interest Rate Levels - A 3-line chart showing interest rate levels
on the 1-year T-bill, 90-day T-bill, and fed funds rate from 5/31/95 to
5/31/96.
Chart 2 - SEC Chart - Prime Reserve Fund - A line chart showing the cumulative
growth of $10,000 invested in the Prime Reserve Fund over the past 10 years
compared with $10,000 invested in a broad-based average over the same period.
