- --------------------------------------------------------------------------------
ANNUAL REPORT
- -------------------------------------------------------------------------------
T. Rowe Price
Prime Reserve Fund
- --------------------------------------------------------------------------------
May 31, 1997
Report Highlights
================================================================================
o Interest rates for most money market securities rose on balance during the
six-month period ended May 31. In March, the Federal Reserve raised the
federal funds target rate by onequarter percentage point.
o Prime Reserve Fund outperformed its Lipper peer group during the six-month
period ended May 31 with a solid 2.46% return. The fund's 4.92% one-year
gain also outpaced its average competitor.
o We shifted the fund's maturity structure throughout the period to increase
its yield potential, and we made moderate changes in our sector exposures.
o We cannot rule out further tightening by the Fed in coming months, but we
expect rates to remain within the range established over the past year.
Fellow Shareholders
================================================================================
<PAGE>
Rapid economic growth, an interest rate hike by the Federal Reserve, and
paydowns of Treasury bills placed conflicting pressures on money market yields
for the one-year period ended May 31, 1997. After falling in the first six
months, yields recovered strongly through March before trailing off in April and
May. Nonetheless, Prime Reserve Fund's yield rose on balance in the latter half
of the fiscal year.
MARKET ENVIRONMENT
The economy grew at a vigorous annualized rate of 5.8% in the first quarter
of 1997, roughly double its average pace during the current six-year expansion.
Consumers kept the cash registers ringing for such items as building materials,
major appliances, and furniture. With jobs being created at a rapid clip, the
civilian unemployment rate dropped to 4.8% in May, its lowest level in more than
two decades. Seeking to preempt a rise in inflation, the Federal Reserve lifted
the federal funds target by a quarter-point in March to 5.5%.
[A 3-line chart showing interest rates on one-year Treasury
bills, 90-day Treasury bills, and the Federal Funds Target Rate from 4/30/96 to
4/30/97.]
As the chart shows, the money markets had anticipated this increase in
rates, with yields on both shorter- and longer-term securities rising sharply
throughout the first quarter. Yields slipped a bit in April and May, however, as
repeated reports of subdued inflation reduced the likelihood of further rate
increases. Indeed, the Fed passed up the opportunity to raise rates again in
May. U.S. Treasury bill yields were particularly depressed over the past two
months because the federal government paid down a significant amount of
short-term debt, creating a temporary supply and demand imbalance for these
instruments.
PERFORMANCE AND STRATEGY REVIEW
In keeping with the general trend in interest rates, your fund's yield
increased over the past six months, from 4.89% last November to 5.09% as of May
31, as shown in the table following this letter.
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 5/31/97 6 Months 12 Months
- --------------------------------------------------------------------------------
Prime Reserve Fund 2.46% 4.92%
Lipper Money Market
Funds Average 2.37 4.79
- --------------------------------------------------------------------------------
<PAGE>
Your fund continued its strong relative performance, outgaining the Lipper
average for similar funds in both the 6- and 12-month periods ended May 31, as
shown in the table. Several strategic shifts helped us achieve these returns. We
adjusted the fund's average maturity, lengthening it from 60 days to 69 days
earlier in the six-month period, when the Fed was on hold, and shortening it to
57 days in anticipation of the rate hike in March. (When interest rates are
stable or falling, we often move toward longer-maturity issues to delay the
rollover of assets into lower-yielding securities, thus enhancing the fund's
yield. Conversely, when rates are rising, we may favor shorter-maturity issues
to hasten the rollover of assets into higher-yielding securities, again with the
aim of enhancing yield.) As of May 31, the fund's average maturity was 53 days,
down from 66 last November.
We also "barbelled" the portfolio by combining very short one-month
securities with a set of higher-yielding one-year issues. This approach helped
us maintain our overall yield while still being prepared to quickly capture
higher yields when the Fed increased the federal funds target rate.
Our exposure to negotiable certificates of deposit and bank notes remained
high due to ample supplies of attractively priced issues in that sector.
Asset-backed securities and asset-backed structured notes increased to 15% of
the fund's holdings, reflecting the growing number of new securities with
competitive yields. (Sector diversification is shown in the table following this
letter.) We accommodated these positions by reducing some of our holdings in
commercial paper, especially in the finance and credit area. Historically, the
fund has had a large commitment to the commercial paper market, so when we can
diversify into another sector without giving up yield, we will do so.
In addition, we eliminated our holdings of U.S. government agency
securities. The fund ordinarily invests in these issues only when unusual market
conditions cause them to offer especially high yields. Finally, our investments
in floating rate instruments held steady at 10% of assets. We would have liked
to increase our exposure to these instruments, which reset to higher rates when
interest rates are rising. However, because supply of these issues was tight, we
felt the extra yield they offered over fixed rate obligations was not
sufficient, given their somewhat higher credit risk.
OUTLOOK
Further increases in short-term rates cannot be ruled out as the Fed
attempts to slow growth, keep inflation at bay, and thus prolong the current
expansion. We will continue to hold a large percentage of shorter maturity debt
so that the fund may be in the best position to take advantage of higher yields
when and if they become available.
Respectfully submitted,
/s/
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 20, 1997
<PAGE>
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
Key statistics
11/30/96 5/31/97
- --------------------------------------------------------------------------------
Price Per Share $1.00 $1.00
Dividends Per Share
For 6 months 0.024 0.024
For 12 months 0.048 0.048
Dividend Yield (7-Day Compound) * 4.89% 5.09%
Weighted Average Maturity (days) 66 53
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
================================================================================
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
Sector Diversification
Percent of Percent of
Net Assets Net Assets
11/30/96 5/31/97
- --------------------------------------------------------------------------------
U.S. Dollar-Denominated Foreign Negotiable CDs 14% 21%
Banking 14 12
Asset-Backed 6 11
Eurodollar Negotiable CDs 9 10
Finance and Credit 14 7
Domestic Negotiable Bank Notes 5 6
Broker-Dealers 3 6
Petroleum 2 5
Asset-Backed Structured Notes -- 4
Pharmaceuticals 4 4
Domestic Negotiable CDs 6 3
Automobiles and Related 6 3
Industrial 4 2
U.K. Building Societies -- 2
All Other 15 4
Other Assets Less Liabilities -2 --
- --------------------------------------------------------------------------------
Total 100% 100%
Fixed Rate Obligations 90% 90%
Floating Rate Instruments 10% 10%
================================================================================
<PAGE>
================================================================================
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.
[SEC chart for Prime Reserve Fund shown here]
================================================================================
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 5/31/97 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Prime Reserve Fund 4.92% 5.00% 4.10% 5.54%
- --------------------------------------------------------------------------------
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. An
investment in the fund is not insured or guaranteed by the U.S. government.
================================================================================
<PAGE>
<TABLE>
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year 3 Months Year
Ended Ended Ended
5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
Beginning of period ............... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment activities
Net investment income ....... 0.048 0.051 0.047 0.008 0.026 0.030
Distributions
Net investment income ....... (0.048) (0.051) (0.047) (0.008) (0.026) (0.030)
NET ASSET VALUE
End of period ..................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Ratios/Supplemental Data
Total return ...................... 4.92% 5.25% 4.85% 0.76% 2.60% 3.06%
Ratio of expenses to
average net assets ................ 0.64% 0.66% 0.67% 0.73% 0.74% 0.75%
Ratio of net investment
income to average
net assets ........................ 4.83% 5.07% 4.76% 3.02% 2.56% 3.04%
Net assets, end of period
(in millions) ..................... $ 4,561 $ 4,011 $ 3,841 $ 3,627 $ 3,379 $ 3,597
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Annualized.
+ The fund's fiscal year-end was changed to May 31.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
May 31, 1997
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
Par Value
In thousands
- --------------------------------------------------------------------------------
BANK NOTES 6.5%
Bank America, 5.70%, 8/1/97 .............................. $ 50,000 $ 50,002
Comerica Bank, 5.77%, 8/13/97 ............................ 20,000 20,006
FCC National Bank of Wilmington, 5.60%, 11/4/97........... 25,000 25,000
First America Bank of Michigan N.A., 5.60%, 11/20/97 ..... 25,000 25,000
First National Bank of Boston, 5.56%, 6/26/97 ............ 25,000 25,000
Key Bank, VR, 5.608%, 6/23/97 ............................ 15,000 14,997
Mellon Bank N.A., 6.25%, 12/16/97 ........................ 50,000 50,175
PNC Bank N.A., VR, 5.588%, 6/2/97 ........................ 38,000 37,997
Southtrust Bank of North Carolina, VR, 5.688%, 6/12/9 .... 22,000 22,000
Westpac Banking, 6.07%, 5/27/98 .......................... 25,000 24,991
Total Bank Notes (Cost $295,168) 295,168
CERTIFICATES OF DEPOSIT 33.5%
ABN Amro
5.40%, 6/5/97 ..... 45,000 45,000
5.45%, 8/18/97 ..... 25,000 25,000
Australia & New Zealand Banking, 5.51%, 8/18/9730,000 .... 30,001
Banco Bilbao Vizcaya, (London), 5.61%, 6/16/97 ........... 25,000 25,000
Banco Santander, 5.58%, 6/17/97 .......................... 50,000 50,000
Bank of Montreal, 5.58%, 6/13/97 ......................... 50,000 50,000
Bank of Nova Scotia
6.08%, 8/4/97 ..... 10,000 10,009
(London), 6.05%, 6/25/97 ............................... 18,000 18,005
Banque National de Paris
5.78%, 2/4/98 ..... 10,100 10,078
6.11%, 6/3/98 ..... 20,000 19,994
Barclays Bank PLC
(London)
5.58%, 6/24/97 ..... 12,000 11,999
5.62%, 6/23/97 ..... 50,000 50,001
Bayerische Hypotheken und Wechsel
5.54%, 6/23/97 ..... 14,000 14,000
6.02%, 9/23/97 ..... 55,000 55,072
Bayerische Landesbank Girozentrale, (London)
5.425%, 8/21/97 ..... 35,000 35,000
Bayerische Vereinsbank
5.37%, 6/18/97 $ ... 8,000 $ 7,999
<PAGE>
(London)
5.47%, 8/11/97 ..... 20,000 20,001
5.70%, 10/31/97 ..... 15,000 15,008
Branch Banking & Trust, 5.55%, 6/9/97 .................... 36,000 36,000
Canadian Imperial Bank of Commerce, 5.97%, 3/19/98 ....... 10,000 9,998
Chase Manhattan Bank, 5.50%, 8/5/97 ...................... 50,000 50,002
Credit Agricole, 5.61%, 6/12/97 .......................... 49,000 49,001
Deutsche Bank AG
5.55%, 6/5/97 ..... 20,000 20,000
5.57%, 6/12/97 ..... 30,000 30,000
5.73%, 2/27/98 ..... 25,000 24,996
(London), 5.56%, 6/13/97 ............................... 50,000 50,000
Dresdner Bank AG, (London), 5.46%, 8/11/97 ............... 35,000 35,001
FCC National Bank of Wilmington, 5.73%, 8/21/9733,000 .... 33,011
Generale Bank, 5.81%, 2/27/98 ............................ 25,000 25,000
Hessische Landesbank Girozentrale, 6.09%, 9/11/97 ........ 45,000 45,064
Midland Bank, 5.58%, 6/12/97 ............................. 25,000 25,000
National Bank of Canada, 6.15%, 5/15/98 .................. 40,000 40,016
National Westminster Bank
5.50%, 6/17/97 ..... 15,000 15,000
5.66%, 3/5/98 ..... 20,000 19,994
Norddeutsche Landesbank Girozentrale
5.56%, 6/12/97 ..... 21,000 21,000
5.58%, 6/16/97 ..... 50,000 50,000
Rabobank Nederland N.V ...................................
5.41%, 6/4/97 ..... 32,000 32,000
5.97%, 3/20/98 ..... 20,000 19,995
Royal Bank of Canada, 5.65%, 3/3/98 ...................... 30,000 29,972
Societe Generale
5.73%, 10/15/97 ..... 45,000 45,021
5.80%, 1/13 - 2/3/98 ..... 28,500 28,516
Sudwesdeutsche Landesbank
(London)
5.43%, 8/21/97 ..... 30,000 30,000
5.61%, 6/26/97 ..... 15,000 14,999
Svenska Handelsbanken, 5.57%, 6/5/97 ..................... $ 30,000 $ 30,000
Swiss Bank, 5.98%, 3/19/98 ............................... 20,000 19,997
Toronto Dominion Bank, (London), 6.14%, 6/3/98 ........... 20,000 20,000
U.S. Bank of Oregon, 5.54%, 6/2/97 ....................... 30,000 30,000
Union Bank of Switzerland, 5.57%, 6/19/97 ................ 50,000 50,000
Westdeutsche Landesbank Girozentrale, (London)
5.50%, 8/5/97 ..... 30,000 30,002
Westpac Capital
5.975%, 6/5/97 ..... 8,000 8,000
6.23%, 9/5/97 ..... 28,000 28,047
6.24%, 9/4/97 ..... 40,000 40,068
Total Certificates of Deposit (Cost $1,527,867) 1,527,867
<PAGE>
COMMERCIAL PAPER 51.1%
ABB Treasury Center (USA), 4(2), 5.50%, 6/23/9715,000 .... 14,950
AC Acquisition Holding Company
5.57%, 7/23/97 ............ 10,000 9,919
5.60%, 6/13/97 ............ 13,000 12,976
Allied Signal, 5.52%, 6/17/97 ............................ 41,000 40,899
American Express Credit, 5.55%, 6/19/97 .................. 38,000 37,895
American Home Products, 4(2), 5.56%, 6/4/97 .............. 20,000 19,991
Asset Securitization Cooperative
4(2)
5.28%, 6/5/97 ..... 50,000 49,971
5.50%, 6/4/97 ..... 5,000 4,998
5.55%, 6/9 - 6/11/97 ..... 12,000 11,985
5.57%, 6/13/97 ..... 8,800 8,783
5.60%, 8/5/97 ..... 12,000 11,879
Associates Corporation of North America, 5.60%, 6/9/97 ... 19,875 19,850
Bank Austria Finance, 5.53%, 6/4/97 ...................... 25,000 24,988
Barnett Banks
5.69%, 6/2/97 ..... 10,105 10,103
5.70%, 6/2/97 ..... 10,000 9,999
Becton Dickinson, 5.36%, 6/19/97 ......................... 1,900 1,895
Bell Atlantic Financial Services, 5.55%, 6/26/97 ......... 5,035 5,016
Bell Atlantic Network Funding, 5.57%, 6/6/97 ............. 20,000 19,985
Beta Finance, 4(2), 5.56%, 6/16/97 ....................... 27,000 26,937
Bex America Finance, 5.55%, 6/10 - 6/26/97 ............... $ 22,000 $ 21,957
BHF Finance (Delaware), 5.55%, 6/9/97 .................... 45,000 44,945
BMW U.S. Capital
5.63%, 11/10 - 11/12/97 ..... 49,000 47,752
5.64%, 8/5/97 ..... 20,000 19,796
California Pollution Control, 5.60%, 6/13/97 ............. 40,000 40,000
Cargill Financial Services
5.53%, 6/13/97 ..... 204 204
4(2), 5.55%, 6/2/97 .................................... 26,500 26,496
Chevron
5.57%, 6/5/97 ..... 25,000 24,984
5.58%, 6/20/97 ..... 31,000 30,909
Chubb Capital, 5.52%, 6/9/97 ............................. 9,265 9,254
Ciesco L.P., 5.55%, 6/6 - 6/11/97 ........................ 28,000 27,959
Commercial Credit, 5.54%, 6/9/97 ......................... 10,000 9,988
Corporate Asset Funding
4(2)
5.52%, 6/9/97 ..... 30,000 29,963
5.55%, 6/16/97 ..... 9,000 8,979
5.59%, 6/11/97 ..... 53,000 52,926
Countrywide Funding
5.57%, 7/17/97 ..... 35,100 34,850
5.59%, 6/2/97 ..... 1,000 1,000
Credit Suisse, 5.58%, 6/3/97 ............................. 50,000 49,985
Cregem North America, 5.29%, 8/19/97 ..................... 24,000 23,721
<PAGE>
Daimler-Benz North America
5.28%, 7/16/97 ..... 17,000 16,888
5.55%, 6/3/97 ..... 17,000 16,995
Delaware Funding
4(2)
5.52%, 6/2/97 ..... 10,000 9,999
5.55%, 6/11/97 ..... 5,447 5,439
5.56%, 7/21/97 ..... 7,200 7,144
5.60%, 6/9/97 ..... 8,597 8,586
Dover, 4(2), 5.55%, 6/3 - 6/12/97 ........................ 15,800 15,783
Dresdner U.S. Finance
5.54%, 6/4/97 ..... 25,000 24,989
5.55%, 6/19/97 ..... 33,000 32,908
Falcon Asset Securitization
4(2)
5.52%, 6/3/97 ..... $ 5,000 $ 4,998
5.55%, 6/3 - 6/11/97 ..... 36,450 36,396
5.60%, 6/16 - 6/17/97 ..... 19,588 19,540
FCAR Owner Trust, 5.57%, 6/5/97 .......................... 40,000 39,975
Finova Capital
5.61%, 7/7/97 ..... 7,384 7,342
5.64%, 6/2/97 ..... 15,000 14,998
Ford Credit, 5.54%, 6/16/97 .............................. 28,000 27,935
General Motors Acceptance Corporation, 5.60%, 6/23/97 .... 2,000 1,993
Glaxo Wellcome
5.50%, 6/2/97 ..... 20,000 19,997
5.68%, 6/2/97 ..... 35,000 34,994
Golden Managers Acceptance, 5.57%, 6/3/97 ................ 16,000 15,995
GTE Funding, 5.55%, 6/10/97 .............................. 7,000 6,990
Halifax Building Society, 5.50%, 6/6/97 .................. 64,000 63,951
International Lease Finance, 5.57%, 6/4/97 ............... 49,000 48,977
Internationale Nederland, 5.57%, 6/9/97 .................. 2,310 2,307
Island Finance of Puerto Rico
5.55%, 6/16/97 ..... 20,000 19,954
5.57%, 6/11/97 ..... 20,000 19,969
Jefferson Pilot, 5.56%, 6/11/97 .......................... 7,000 6,989
KFW International, 5.50%, 6/27/97 ........................ 45,000 44,821
Kredietbank N.A., 5.55%, 6/13/97 ......................... 22,600 22,558
Lucent Technology, 5.54%, 6/11/97 ........................ 20,000 19,969
Market Street Funding, 5.60%, 6/3 - 6/4/97 ............... 21,156 21,148
Merrill Lynch
5.53%, 6/25/97 ..... 25,000 24,908
5.57%, 6/3 - 6/10/97 ..... 25,000 24,980
5.67%, 6/2/97 ..... 14,128 14,126
Mobil Australia Finance, 4(2), 5.55%, 6/20/97 ............ 1,300 1,296
Morgan Stanley Group, 5.56%, 6/13/97 ..................... 28,000 27,948
National Australia Funding, 5.52%, 6/5/97 ................ 4,000 3,998
National City Credit
5.51%, 6/24 - 6/25/97 ..... 38,000 37,863
5.53%, 6/27/97 ..... 50,000 49,800
5.56%, 6/2/97 ..... 12,000 11,998
<PAGE>
Nordbanken North America, 5.56%, 7/18/97 ................. 36,000 35,739
Novartis Finance
5.54%, 6/6/97 ..... $ 50,000 $ 49,962
5.63%, 6/6/97 ..... 9,600 9,592
Pacific Mutual, 5.55%, 6/3/97 ............................ 25,000 24,992
PPG Holdings B.V., 5.55%, 6/12/97 ........................ 25,000 24,958
Preferred Receivables Funding
5.55%, 6/2/97 ..... 10,000 9,999
5.60%, 6/3/97 ..... 32,000 31,990
Province of Quebec, 5.55%, 6/2/97 ........................ 20,000 19,997
Repeat Offering Security Entity
5.55%, 6/25/97 ..... 20,000 19,926
5.57%, 6/30/97 ..... 1,850 1,841
5.60%, 7/28/97 ..... 13,000 12,885
Repsol International Finance, 5.55%, 6/10/97 ............. 40,000 39,945
RTZ America, 5.57%, 7/14/97 .............................. 7,490 7,440
Southern New England Telecommunications
4(2)
5.55%, 7/7/97 ..... 12,000 11,933
5.58%, 6/23/97 ..... 3,729 3,716
5.60%, 6/25/97 ..... 6,039 6,017
Statoil (Den Norske Stats Oljeselskap)
5.54%, 6/4 - 6/5/97 ..... 60,000 59,968
5.55%, 6/6/97 ..... 15,000 14,988
Toronto-Dominion Holdings (USA), 5.54%, 6/10/9728,000 .... 27,961
Total S.A., 5.54%, 6/27/97 ............................... 15,000 14,940
Transamerica Finance
5.55%, 6/11/97 ..... 32,000 31,951
5.60%, 6/2/97 ..... 6,000 5,999
UBS Finance (Delaware), 5.54%, 6/13/97 ................... 25,000 24,954
Unifunding
5.53%, 6/27/97 ..... 12,700 12,649
5.55%, 6/13 - 7/8/97 ..... 27,390 27,311
Westdeutsche Landesbank Girozentrale, 5.56%, 6/5/97 ...... 57,000 56,965
Woolwich Building Society, 5.28%, 8/21/97 ................ 30,000 29,644
Yale University, 5.55%, 6/11/97 .......................... 25,000 24,961
Total Commercial Paper (Cost ............................. $2,329,354)
2,329,354
MEDIUM-TERM NOTES 9.4%
Associates Corporation of North America, 7.30%, 3/15/98 .. $ 15,000 $ 15,138
Bear Stearns, VR, 5.738%, 6/28/97 ........................ 45,000 45,000
Ford Motor Credit, 6.25%, 2/26/98 ........................ 5,000 5,019
Goldman Sachs Group
VR
5.646%, 6/18/97 ..... 41,930 41,930
5.677%, 6/20/97 ..... 20,000 20,000
5.691%, 11/26/97 ..... 19,900 19,900
<PAGE>
Household Finance, 7.55%, 3/16/98 ........................ 5,000 5,071
John Deere Capital, 7.33%, 11/14/97 ...................... 17,550 17,676
PHH, VR, 5.568%, 6/8/97 .................................. 50,000 49,995
Short Term Card Account Trust, (144a), VR, 5.708%, 6/18/97 56,000 56,000
Smithkline Beecham, Eurodollar, 7.375%, 11/10/97 ......... 5,000 5,034
SMM Trust, (144a)
VR
5.688%, 6/28/97 ..... 75,000 75,000
5.738%, 6/28/97 ..... 35,000 35,000
Tiers Trust, (144a), VR, 5.718%, 6/15/97 ................. 39,850 39,849
Total Medium-Term Notes (Cost ............................ $430,612)
430,612
Total Investments in Securities
100.5% of Net Assets (Cost $4,583,001) ................. $4,583,001
Other Assets Less Liabilities .......................... (21,689)
NET ASSETS ............................................. $4,561,312
Net Assets Consist of:
Accumulated net investment income -
t of distributions ..................................... $814
Accumulated net realized gain/loss -
net of distributions.................................... (1,273)
Paid-in-capital applicable to 4,563,264,310
shares of $0.01 par value capital stock
outstanding; 15,000,000,000 shares authorized........... 4,561,771
NET ASSETS ............................................. $4,561,312
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 N total of such securities at year-end amounts to 4.5%
of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/97
- --------------------------------------------------------------------------------
Investment Income
Interest income $ 237,598
Expenses
Investment management 16,431
Shareholder servicing 10,398
Prospectus and shareholder reports 580
Custody and accounting 313
Registration 93
Legal and audit 40
Directors 38
Miscellaneous 56
Total expenses 27,949
Net investment income 209,649
Realized Gain (Loss)
Net realized gain (loss) on securities 828
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $210,477
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
================================================================================
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/97 5/31/96
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations
Net investment income ......................... $ 209,649 $ 201,227
Net realized gain (loss) ...................... 828 778
Change in net unrealized gain or loss ......... N 335
Increase (decrease) in net assets from
operations..................................... 210,477 202,340
Distributions to shareholders
Net investment income ........................ (209,649) (202,178)
Capital share transactions *
Shares sold ................................... 9,635,634 7,790,741
Distributions reinvested ...................... 202,044 196,288
Shares redeemed ............................... (9,288,213) (7,816,950)
Increase (decrease) in net assets from capital
share transactions ............................ 549,465 170,079
<PAGE>
Net Assets
Increase (decrease) during period ............... 550,293 170,241
Beginning of period ............................. 4,011,019 3,840,778
End of period ................................... $ 4,561,312 $ 4,011,019
*Share information
Shares sold ................................ 9,635,634 7,790,743
Distributions reinvested ................... 202,044 196,288
Shares redeemed ............................ (9,288,213) (7,816,950)
Increase (decrease) in shares outstanding .. 549,465 170,081
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The accompanying notes are an integral part of these financial statements.
================================================================================
NOTES TO FINANCIAL STATEMENTS
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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 $1,273,000, which expire in 1998. Capital loss
carryforwards utilized in 1997 amounted to $828,000. The fund intends to retain
gains realized in future periods that may be offset by available capital loss
carryforwards.
<PAGE>
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, 1997. The results of
operations and net assets were not affected by the reclassifications.
================================================================================
Undistributed net realized gain $207,000
Paid-in-capital (207,000)
- --------------------------------------------------------------------------------
At May 31, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $4,583,001,000.
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 $1,456,000 was payable at May 31, 1997. 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 0.30% for assets in excess of $80 billion. At May
31, 1997, and for the year then ended, the effective annual group fee rate was
0.33%. 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, Income, and International 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 $8,577,000 for the year ended May 31, 1997, of which $704,000 was
payable at period-end.
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders 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 financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price Prime Reserve Fund, Inc. (the "Fund") at May 31, 1997, 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, 1997 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 18, 1997
================================================================================
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
Investment Services And Information
- --------------------------------------------------------------------------------
Knowledgeable Service Representatives
BY PHONE 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
IN PERSON Available in T. Rowe Price Investor Centers.
Account Services
CHECKING Available on most fixed income funds ($500 minimum).
AUTOMATIC INVESTING From your bank account or paycheck.
AUTOMATIC WITHDRAWAL Scheduled, automatic redemptions.
<PAGE>
DISTRIBUTION OPTIONS Reinvest all, some, or none of your distributions.
AUTOMATED 24-HOUR SERVICES Including Tele*Access [Registration Mark] and
T. Rowe Price OnLine.
Discount Brokerage*
INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals, and other
securities at a savings over regular commission rates.
Investment Information
COMBINED STATEMENT Overview of your T. Rowe Price accounts.
SHAREHOLDER REPORTS Fund managers' reviews of their strategies and results.
T. ROWE PRICE REPORT 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, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access [Registration Mark]:
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
<PAGE>
Internet address:
www.troweprice.com
T. Rowe Price Associates
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 [Registration Mark.]
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor. F44-050 5/31/97
