- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Annual Report
Prime Reserve Fund
- --------------------------------------------------------------------------------
May 31, 1998
- --------------------------------------------------------------------------------
REPORT HIGHLIGHTS
================================================================================
Prime Reserve Fund
* Despite a strong economy and fears that inflation might accelerate, the
Federal Reserve has not tightened monetary policy in more than a year.
* The Prime Reserve Fund's total returns of 2.57% for the six-month period
and 5.16% for the full year outpaced its Lipper peer group's average gains.
* A comparatively long maturity and nimble maturity management helped keep
the fund ahead of its peers.
* We do not anticipate Fed action unless inflation turns upward unexpectedly.
Fellow Shareholders
The year ended May 31, 1998, and in particular the past six months, saw
volatility within short-term interest rates but little net change. Rates shifted
both up and down as investors tried to anticipate the Federal Reserve's
decisions; your fund took advantage of this activity by correctly predicting
that the Fed would make no changes during the period.
<PAGE>
Market Environment
The last time the Fed changed the federal funds target rate was more than a
year ago, in March 1997. A marvelous economic environment, incorporating a
near-ideal blend of steady growth and flat-even declining-inflation, encouraged
the central bank's laissez-faire stance. Despite occasionally voicing concerns
over the sustainability of these conditions, Fed officials did not find enough
troubling data to support a change in policy.
While the target rate did not change, however, there was considerable
fluctuation in other measures of short-term interest rates, as depicted in the
accompanying chart. Investors tried to anticipate Fed action in the wake of two
important trends: increasing economic strength and the crises in Asia.
[Chart showing interest rates for 1-Year Treasury Bills, 90-day Treasury
Bills, and the Federal Funds Target Rate 5/31/97 through 5/31/98.]
Data from many sources suggested that the econ-omy continued to grow above
trend. The national budget has moved into a projected surplus for fiscal year
1998 of $30 billion to $50 billion-a marked differe nce from fiscal years 1997
and 1996, when the budgets reflected net borrowing of $21 billion and $140
billion, respectively. Despite the growth surge, however, an increase in Asian
exports helped put a lid on inflation around the world, including in the U.S. In
addition, many investors thought that Asia's economic slowdowns (and in
particular Japan's harsh recession) would prove a drag on the domestic economy.
These conditions at times made the money market very attractive to U.S.
investors.
The most significant trend in interest rates during the period was a
flattening in the short-term yield curve. One-year yields fell over the past
year, so that the difference between their yields and those of 90-day bills fell
from 77 basis points on May 31, 1997, to only 34 basis points at the period's
end (100 basis points equal one percentage point). This flatness is likely to
persist until the Fed shows a more pronounced inclination to change rates.
Performance and Strategy Review
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 5/31/98 6 Months 12 Months
Prime Reserve Fund 2.57% 5.16%
Lipper Money Market
Funds Average 2.44 4.97
================================================================================
Your fund was able to take advantage of activity in the money market to
maintain its income level and to outperform its peer group. For the six months
ended May 31, 1998, the fund's 2.57% gain outpaced the 2.44% results for the
Lipper Money Market Funds Average. Over the past 12 months, the fund has
produced a similar advantage over its peer group. Dividends per share remained
steady.
<PAGE>
As discussed in previous reports, effective maturity management has been an
important component of our strategy during this stretch of Fed inactivity. We
maintained a "barbell" strategy over the past six months: that is, we held a
significant stake in securities with one-year maturities for their somewhat
higher yield, and balanced their modest additional interest rate risk with more
defensive one-month instruments.
By our estimates, this strategy kept the fund's overall weighted average
maturity about 10 days longer than that of its typical peer. A longer portfolio
generally produces a better income for investors during periods of flat to
declining interest rates. At the period's end, the fund's average maturity was
74 days-just a few days shorter than six months earlier.
We also attempted to make use of the fluctuations in short-term rates. We
felt fairly confident during the period that the Fed would not change interest
rates, so when investors bid up money market securities in the expectation of a
Fed easing, we took a more defensive approach by reducing average maturity. On
the other hand, when people sold longer securities out of concern the Fed might
raise rates, we increased maturity to become more aggressive. These decisions
proved effective.
Overall, our sector positioning changed only modestly, with commercial
paper and certificates of deposit continuing to dominate the portfolio. We
raised our combined stake in asset-backed securities and asset-backed structured
notes to 22% of assets. Not only do these securities diversify the portfolio,
they also provide high credit quality and comparatively attractive yields.
Relative yield differences also explain why we trimmed some eurodollar CDs in
favor of dollar-denominated foreign CDs, and why the fund's stake in industrial
issues went up at the expense of financial securities. Our exposure to floating
rate obligations declined, as this segment was not priced to our liking.
Outlook
With the troubles in Asia putting pressure on the U.S. economy and domestic
inflation under wraps, we see little likelihood of any tightening by the Fed in
the near future and possibly not through year-end. As long as the central bank
stands pat, we expect to remain somewhat more aggressive than our peers.
However, we plan to keep a close eye on inflation data. If there were any hard
evidence that inflation was starting to pick up, we would become more defensive.
Respectfully submitted,
/s/
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 17, 1998
<PAGE>
T. Rowe Price Prime Reserve Fund
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
Key statistics
11/30/97 5/31/98
- --------------------------------------------------------------------------------
Price Per Share $1.00 $1.00
Dividends Per Share
For 6 months 0.025 0.025
For 12 months 0.049 0.050
Dividend Yield (7-Day Compound) * 5.24% 5.16%
Weighted Average Maturity (days) 77 74
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.
================================================================================
T. Rowe Price Prime Reserve Fund
================================================================================
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
11/30/97 5/31/98
U.S. Negotiable Bank Notes 4% 4%
Certificates of Deposit 31 29
Domestic Negotiable CDs 3 3
Eurodollar Negotiable CDs 11 6
U.S. Dollar Denominated Foreign Negotiable CDs 17 20
Commercial Paper and Medium-Term Notes 62 65
Asset-Backed 10 15
Banking 13 10
Finance and Credit 11 9
Asset-Backed Structured Notes 7 7
Industrial 5 7
All Other 16 17
Canadian Government and Municipalities 1 -
Foreign Government and Municipalities 1 2
Other Assets Less Liabilities 1 -
- --------------------------------------------------------------------------------
Total 100% 100%
Fixed Rate Obligations 90 92
Floating Rate Instruments 10 8
================================================================================
<PAGE>
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.
[Prime Reserve Fund SEC graph 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 5/31/98 1 Year3 Years 5 Years 10 Years
Prime Reserve Fund 5.16% 5.11% 4.58% 5.39%
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>
T. Rowe Price Prime Reserve Fund
====================================================================================================================================
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year 3 Months Year
Ended Ended Ended
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94
<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 ........ 0.050 0.048 0.051 0.047 0.008 0.026
Distributions
Net investment income ........ (0.050) (0.048) (0.051) (0.047) (0.008) (0.026)
NET ASSET VALUE
End of period ...................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Ratios/Supplemental Data
Total returns ...................... 5.16% 4.92% 5.25% 4.85%0.76% 2.60%
Ratio of expenses to
average net assets ................. 0.63% 0.64%0.66% 0.67%0.73% 0.74%
Ratio of net investment
income to average
net assets ......................... 5.06% 4.83% 5.07% 4.76%3.02% 2.56%
Net assets, end of period
(in millions) ...................... $ 4,889 $ 4,561 $ 4,011 $ 3,841 $ 3,627 $ 3,379
<FN>
^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming
reinvestment of all distributions.
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Prime Reserve Fund
================================================================================
May 31, 1998
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
Par Value
In thousands
BANK NOTES 5.3%
Bank America National Trust & Savings, 5.65%, 1/7/99 .... $ 15,000 $14,996
Bankboston N.A., 5.55%, 6/18/98 ......................... 25,000 25,000
Depfa Bank, VR, 5.648%, 7/7/98 .......................... 24,800 24,791
FCC National Bank, 5.71%, 3/5/99 ........................ 45,000 44,984
First National Bank of Boston
5.85%, 7/30/98 .......................... 25,000 25,000
5.87%, 10/14/98 ......................... 25,000 25,005
National Bank of Commerce, VR, 5.738%, 6/24/98 .......... 15,000 15,003
Suntrust Bank, 5.83%, 7/14/98 ........................... 25,000 24,998
Westpac Banking
5.67%, 1/7/99 ........................... 35,000 34,988
5.92%, 8/28/98 .......................... 25,000 25,017
Total Bank Notes (Cost $259,782) ........................ 259,782
BANKERS' ACCEPTANCES 0.3%
Regions Bank B.A ........................................
5.52%, 6/19/98 .......................... 2,000 1,994
5.53%, 6/5 - 6/11/98 .................... 8,825 8,816
5.54%, 6/4/98 ........................... 1,000 1,000
Total Bankers' Acceptances (Cost $11,810) ............... 11,810
CERTIFICATES OF DEPOSIT 28.4%
ABN AMRO, 5.60%, 9/4/98 ................................. 20,000 20,000
Bank of Austria, 5.70%, 3/30/99 ......................... 20,000 19,992
Bank of Montreal, 5.57%, 6/8/98 ......................... 24,500 24,500
Bank of New York, 5.75%, 5/14/99 ........................ 44,500 44,472
Bank of Nova Scotia
5.69%, 3/30/99 .......................... 30,000 29,986
5.75%, 4/27/99 .......................... 25,000 24,989
Bank of Scotland, (London), 5.575%, 6/29/98 ............. 10,000 10,000
Bankers Trust, 5.88%, 7/14/98 ........................... 20,000 20,002
Banque Nationale de Paris
5.87%, 8/20/98 .......................... 9,900 9,902
5.97%, 6/16/98 .......................... 20,000 20,002
Barclays Bank PLC, (London), 5.85%, 7/28/98 ............. 30,000 30,004
Bayerische Hypotheken und Wechsel
5.70%, 3/30/99 .......................... 20,000 19,992
Bayerische Hypotheken und Wechsel
(London), 5.56%, 6/2/98 $ ....................... 40,000 $40,000
Bayerische Landesbank Girozentrale, (London)
5.57%, 6/5/98 ........................... 50,000 50,000
<PAGE>
Bayerische Vereinsbank
5.70%, 10/6/98 - 1/7/99 ................. 62,900 62,933
5.75%, 5/7/99 ........................... 34,500 34,483
Canadian Imperial Bank of Commerce
5.69%, 3/30/99 .......................... 20,000 19,990
5.91%, 8/28/98 .......................... 26,000 26,009
Chase Manhattan Bank, 5.59%, 6/8/98 ..................... 20,000 20,000
Commerzbank
5.90%, 9/10/98 .......................... 9,000 9,003
(London), 6.00%, 7/7/98 ......................... 15,000 15,002
CS First Boston Group
5.80%, 10/13/98 - 4/27/99 ............... 48,000 48,012
Credit Agricole Indosuez
5.70%, 3/30/99 .......................... 30,000 29,988
5.73%, 5/26/99 .......................... 25,000 24,981
5.75%, 4/26/99 .......................... 20,000 19,992
Credit Communal de Belgique, 5.575%, 6/16/98 ............ 50,000 50,000
Creditanstalt Bankverein, 5.71%, 3/30/99 ................ 20,000 19,992
Den Danske, 5.75%, 4/26/99 .............................. 19,700 19,691
Deutsche Bank AG
5.70%, 3/5 - 3/30/99 .................... 59,600 59,575
5.75%, 4/27/99 .......................... 15,000 14,993
(London), 5.85%, 9/18/98 ........................ 30,000 30,008
Dresdner Bank AG, (London), 5.55%, 6/10/98 .............. 15,000 15,000
First Tennessee Bank N.A ................................
5.53%, 6/22/98 .......................... 12,000 12,000
5.55%, 6/29/98 .......................... 10,000 10,000
Harris Trust & Savings Bank, 5.55%, 6/22/98 ............. 2,000 2,000
Ing Bank
(London)
5.87%, 7/29/98 .......................... 10,000 10,000
6.00%, 12/11/98 ......................... 15,000 15,032
Kredietbank N.V .........................................
5.69%, 3/29/99 .......................... 20,000 19,991
5.75%, 4/28/99 .......................... 24,700 24,689
National Australia Bank, 5.735%, 10/13/98 ............... 30,000 29,995
Norddeutsche Landesbank Girozentrale, 5.57%, 1/29/99 .... $30,000 $29,992
Regions Bank, 5.55%, 6/16/98 ............................ 5,000 5,000
Royal Bank of Scotland, 5.86%, 10/5/98 .................. 10,000 10,003
Societe Generale
5.56%, 2/23/99 .......................... 10,000 9,997
5.565%, 2/23/99 ......................... 10,000 9,996
5.77%, 10/7/98 .......................... 9,000 9,000
5.78%, 4/27/99 .......................... 27,000 26,988
6.01%, 6/16/98 .......................... 37,000 37,006
6.02%, 6/16/98 .......................... 1,000 1,000
Svenska Handelsbanken
5.74%, 6/1/99 ........................... 20,000 19,987
(London), 5.58%, 6/25/98 ........................ 5,000 5,000
<PAGE>
Swiss Bank
5.65%, 3/24/99 .......................... 39,500 39,484
5.75%, 5/7/99 ........................... 25,000 24,989
5.80%, 4/30/99 .......................... 20,000 19,989
5.87%, 8/19/98 .......................... 25,000 25,013
Toronto Dominion Bank, (London), 5.51%, 7/20/98 ......... 23,000 23,000
Union Bank, 5.80%, 10/6/98 .............................. 29,900 29,900
Westdeutsche Landesbank, (London), 5.88%, 7/16/98 ....... 16,000 16,000
Wilmington Trust, 5.60%, 11/12/98 ....................... 40,000 40,000
Total Certificates of Deposit (Cost $1,389,544) ........ 1,389,544
COMMERCIAL PAPER 58.4%
Abbey National North America, 5.55%, 6/10/98 ............ 1,000 999
Abbott Laboratories, 5.55%, 6/22 - 6/23/98 .............. 31,790 31,684
American Express Credit, 5.52%, 6/18/98 ................. 4,500 4,488
AON
5.55%, 6/24/98 .......................... 8,199 8,170
5.57%, 6/5/98 ........................... 5,300 5,297
Asset Securitization Cooperative
4(2)
5.50%, 6/16/98 .......................... 23,500 23,446
5.51%, 6/24 - 6/29/98 ................... 41,500 41,332
5.52%, 6/24/98 .......................... 50,000 49,824
5.55%, 6/8/98 ........................... 14,500 14,484
Associates Finance Services, 5.52%, 6/8/98 .............. 1,000 999
Bank of America
5.50%, 6/29/98 .......................... $ 7,500 $ 7,468
5.51%, 6/22/98 .......................... 15,000 14,952
Bank of New York
5.50%, 6/1 - 6/9/98 ..................... 33,480 33,443
BBL North America, 5.51%, 6/12/98 ....................... 31,495 31,442
Becton Dickinson, 5.75%, 6/1/98 ......................... 5,737 5,737
Beta Finance
4(2)
5.50%, 7/15/98 .......................... 8,360 8,304
5.51%, 6/2/98 ........................... 10,000 9,998
5.53%, 6/10/98 .......................... 20,000 19,972
5.55%, 7/23/98 .......................... 14,500 14,384
BMW U.S. Capital
5.51%, 6/2/98 ........................... 19,000 18,997
5.53%, 6/18/98 .......................... 19,700 19,649
5.54%, 6/5/98 ........................... 27,700 27,683
British Telecommunications
5.50%, 6/4 - 6/9/98 ..................... 9,117 9,109
Caisse des Depots et Consignations
4(2)
5.50%, 6/10/98 .......................... 22,673 22,642
5.51%, 6/18/98 .......................... 14,175 14,138
California Pollution Control
5.54%, 6/9/98 ........................... 29,600 29,600
5.56%, 6/17/98 .......................... 15,395 15,395
Chevron, 5.51%, 6/8/98 .................................. 30,000 29,968
<PAGE>
Ciesco L.P. .............................................
5.51%, 6/25/98 .......................... 20,000 19,927
5.52%, 6/18/98 .......................... 31,000 30,919
Colgate Palmolive, 5.50%, 6/30/98 ....................... 49,500 49,281
Commonwealth Bank of Australia
5.50%, 6/19/98 .......................... 18,048 17,999
5.51%, 6/22/98 .......................... 13,600 13,556
Corporate Asset Funding
4(2)
5.50%, 6/2 - 6/10/98 .................... 45,900 45,861
5.52%, 6/3 - 6/25/98 .................... 54,192 54,007
5.53%, 6/17/98 .......................... 5,000 4,988
Countrywide Funding
5.53%, 6/23/98 .......................... $ 15,200 $ 15,149
5.58%, 6/8/98 ........................... 10,000 9,989
Cregem North America, 5.50%, 6/12/98 .................... 50,000 49,916
CS First Boston Group
5.50%, 7/14/98 .......................... 4,000 3,974
5.51%, 6/1/98 ........................... 39,500 39,500
Daimler-Benz North America
5.52%, 8/20/98 .......................... 11,183 11,046
5.55%, 6/11/98 .......................... 5,300 5,292
Delaware Funding
4(2)
5.50%, 6/4/98 ........................... 12,275 12,270
5.52%, 6/4 - 6/22/98 .................... 34,331 34,258
5.53%, 6/8 - 6/22/98 .................... 101,754 101,541
Deutsche Bank Finance, 5.515%, 6/15 - 6/26/98 ........... 33,500 33,386
Diageo Capital PLC, 5.53%, 6/18/98 ...................... 11,816 11,785
Dover
4(2)
5.52%, 6/11/98 .......................... 9,000 8,986
5.53%, 6/2/98 ........................... 1,319 1,319
5.57%, 6/4/98 ........................... 20,000 19,991
Dresdner U.S. Finance
5.53%, 6/4 - 6/29/98 .................... 69,400 69,221
5.54%, 6/4/98 ........................... 30,000 29,986
EDS Finance, 5.52%, 6/11/98 ............................. 9,000 8,986
Electronic Data Systems, 4(2), 5.52%, 6/3/98 ............ 25,000 24,992
EW Scripps, 5.50%, 6/11/98 .............................. 15,000 14,977
Falcon Asset Securitization
4(2)
5.50%, 6/8/98 ........................... 7,900 7,892
5.51%, 6/8/98 ........................... 15,600 15,583
5.52%, 6/9/98 ........................... 10,500 10,487
5.53%, 6/17/98 .......................... 40,695 40,595
FCAR Owner Trust
5.50%, 6/9/98 ........................... 10,000 9,988
5.51%, 6/4 - 6/11/98 .................... 64,600 64,549
Finova Capital
5.54%, 6/18/98 .......................... 3,900 3,890
5.55%, 6/1 - 7/20/98 .................... 40,665 40,439
<PAGE>
Ford Credit
5.50%, 6/11/98 .......................... $ 25,000 $ 24,962
5.52%, 6/12/98 .......................... 25,000 24,958
General Electric Capital
5.51%, 6/2 - 6/15/98 .................... 109,950 109,856
5.54%, 6/9/98 ........................... 22,000 21,973
General Motors Acceptance Corporation, 5.51%, 6/11/98 ... 30,000 29,954
Golden Managers Acceptance, 5.55%, 7/10/98 .............. 14,937 14,847
IBM, 5.52%, 6/10/98 ..................................... 5,400 5,392
Island Finance of Puerto Rico
5.50%, 6/8 - 6/15/98 .................... 40,500 40,432
5.51%, 6/23/98 .......................... 21,000 20,929
Jefferson Pilot, 5.54%, 6/9/98 .......................... 11,400 11,386
Kingdom of Sweden, 5.52%, 6/11/98 ....................... 1,800 1,797
LGE&E Energy Systems, 5.50%, 6/10/98 .................... 14,000 13,981
Market Street Funding
5.51%, 6/18/98 .......................... 6,500 6,483
5.52%, 6/9 - 6/25/98 .................... 38,100 37,982
Merrill Lynch
5.51%, 6/11/98 .......................... 35,835 35,780
5.53%, 6/23/98 .......................... 19,500 19,434
Metlife Funding
5.51%, 6/29/98 .......................... 28,658 28,535
5.52%, 6/24/98 .......................... 4,800 4,783
National City Credit, 5.52%, 6/4 - 6/5/98 ............... 65,000 64,968
National Rural Utilities Cooperative Finance
5.50%, 6/10 - 6/18/98 ................... 22,475 22,426
New Center Asset Trust
5.50%, 6/3/98 ........................... 3,600 3,599
5.51%, 6/4/98 ........................... 12,440 12,434
5.55%, 6/3/98 ........................... 3,645 3,644
5.70%, 6/4/98 ........................... 12,300 12,294
New York State Power
5.51%, 7/14/98 .......................... 5,900 5,861
5.52%, 6/10/98 .......................... 11,687 11,671
5.53%, 7/14/98 .......................... 15,240 15,139
Nordbanken North America, 5.50%, 6/2/98 ................. 17,500 17,497
Paccar Financial, 5.55%, 6/19/98 ........................ 17,000 16,953
Panasonic Finance, 4(2), 5.52%, 6/19/98 ................. 45,550 45,424
Pitney Bowes, 5.52%, 6/9/98 ............................. $ 5,537 $ 5,530
Power Authority of New York, 5.52%, 6/8/98 .............. 6,350 6,343
PPG Holdings B.V., 5.50%, 6/30/98 ....................... 19,000 18,916
Preferred Receivables Funding
5.50%, 6/22/98 .......................... 6,800 6,778
5.51%, 6/2/98 ........................... 24,750 24,746
5.52%, 6/4 - 6/25/98 .................... 27,000 26,980
Progress Capital Holdings, 5.52%, 6/8/98 ................ 4,126 4,122
R.R. Donnelly, 5.55%, 6/1/98 ............................ 1,760 1,760
Repeat Offering Security
5.50%, 7/29/98 .......................... 10,550 10,456
5.55%, 6/9 - 7/27/98 .................... 49,950 49,747
5.56%, 6/17/98 .......................... 2,050 2,045
<PAGE>
Rio Tinto Finance
5.50%, 6/5 - 6/25/98 .................... 39,600 39,517
5.52%, 6/11/98 .......................... 2,000 1,997
Safeco Credit
5.52%, 6/19/98 .......................... 8,700 8,676
5.53%, 6/11 - 7/15/98 ................... 6,100 6,069
5.54%, 6/19 - 7/21/98 ................... 13,900 13,818
5.55%, 6/12 - 8/5/98 .................... 44,400 44,129
5.56%, 7/13/98 .......................... 4,600 4,570
Scotibanc, 5.52%, 6/8/98 ................................ 14,074 14,059
Sears Roebuck Acceptance, 5.51%, 6/18/98 ................ 32,700 32,615
Shell Finance, 5.55%, 6/11/98 ........................... 33,000 32,949
Smith Barney, 5.53%, 6/18/98 ............................ 40,000 39,895
Southern New England Telecommunications, 4(2)
5.51%, 6/16 - 6/17/98 ................... 4,824 4,813
St. Paul Companies
4(2)
5.50%, 6/26/98 .......................... 19,600 19,525
5.52%, 6/10/98 .......................... 30,000 29,959
Statoil (Den Norske Stats Oljeselskap), 5.53%, 6/23/98 .. 15,000 14,949
Tasmanian Public Finance, 5.50%, 6/16/98 ................ 50,000 49,885
Telstra, 5.50%, 6/9 - 6/19/98 ........................... 35,000 34,927
TRW
5.50%, 6/8/98 ........................... 5,000 4,995
5.51%, 6/29/98 .......................... 20,000 19,914
5.53%, 6/16/98 .......................... 3,430 3,422
UBS Finance (Delaware), 5.61%, 6/1/98 ................... $49,428 $49,428
Vermont American, 4(2), 5.52%, 6/29/98 .................. 40,079 39,907
Yale University
5.50%, 6/25/98 .......................... 27,150 27,051
5.55%, 6/15/98 .......................... 13,750 13,720
Yorkshire Building Society, 5.52%, 6/18/98 .............. 12,200 12,168
Total Commercial Paper (Cost $2,855,883) ................ 2,855,883
MEDIUM-TERM NOTES 6.8%
Bear Stearns, 5.80%, 4/27/99 ............................ 14,800 14,800
BT Securities, VR, 5.926%, 6/1/98 ....................... 10,000 10,007
Campbell Soup, 5.50%, 1/8/99 ............................ 2,217 2,214
Ford Capital, 9.00%, 8/15/98 ............................ 14,420 14,508
Goldman Sachs Group L.P. ................................
VR
5.648%, 6/26/98 ......................... 19,900 19,900
5.656%, 6/1 - 6/17/98 ................... 44,850 44,850
Hydro Quebec, 9.30%, 10/28/98 ........................... 1,000 1,014
IBM Credit, 6.60%, 5/10/99 .............................. 1,000 1,006
Quebec Province, 9.375%, 4/1/99 ......................... 5,720 5,883
Rabobank, VR, 5.656%, 6/17/98 ........................... 73,302 73,302
SMM Trust, VR, 5.656%, 6/5/98 ........................... 75,000 75,000
STINT Trust, VR, 5.688%, 6/30/98 ........................ 25,000 25,000
Tiers Trust, VR, (144a), 5.656%, 6/15/98 ................ 39,850 39,850
Transamerica Finance, 6.80%, 3/15/99 .................... 5,485 5,536
Total Medium-Term Notes (Cost $332,870) ................. 332,870
<PAGE>
U.S. GOVERNMENT AGENCY OBLIGATIONS 0.0%
Federal Home Loan Mortgage, Disc. Notes, 5.55%, 6/1/98 .. 925 925
Total U.S. Government Agency Obligations (Cost $925) .... 925
FUNDING AGREEMENTS 0.8%
General American Life Insurance, VR, 5.86%, 6/1/98 + .... 39,850 39,850
Total Funding Agreements (Cost $39,850) ................. 39,850
Total Investments in Securities
100.0% of Net Assets (Cost $4,890,664) ................... $4,890,664
Other Assets Less Liabilities ............................ (1,395)
NET ASSETS ............................................... $4,889,269
Net Assets Consist of:
Accumulated net investment income -
net of distributions ...................................... $814
Accumulated net realized gain/loss -
net of distributions ...................................... 85
Paid-in-capital applicable to 4,889,867,337
shares of $0.01 par value capital stock
outstanding; 15,000,000,000 shares authorized ............. 4,888,370
NET ASSETS ................................................ $4,889,269
NET ASSET VALUE PER SHARE ................................. $ 1.00
+ Private Placement
VR Variable Rate
4(2) Commercial Paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors".
144a Security was purchased pursuant to Rule 144a under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers - total of such securities at period-end amounts to
0.8% of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Prime Reserve Fund
================================================================================
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/98
Investment Income
Interest income .............................................. $263,233
Expenses
Investment management .................................. 17,281
Shareholder servicing .................................. 10,527
Prospectus and shareholder reports ..................... 742
Custody and accounting ................................. 282
Registration ........................................... 97
Directors .............................................. 39
Legal and audit ........................................ 39
Miscellaneous .......................................... 51
Total expenses ......................................... 29,058
Net investment income ........................................ 234,175
Realized Gain (Loss)
Net realized gain (loss) on securities ....................... 1,358
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ....................................... $235,533
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Prime Reserve Fund
================================================================================
================================================================================
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/98 5/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income ........................... $ 234,175 $ 209,649
Net realized gain (loss) ........................ 1,358 828
Increase (decrease) in net assets from operations 235,533 210,477
Distributions to shareholders
Net investment income ........................... (234,175) (209,649)
Capital share transactions *
Shares sold ..................................... 9,753,613 9,635,634
Distributions reinvested ........................ 225,560 202,044
Shares redeemed ................................. (9,652,574) (9,288,213)
Increase (decrease) in net assets from capital
share transactions .............................. 326,599 549,465
Net Assets
Increase (decrease) during period ..................... 327,957 550,293
Beginning of period ................................... 4,561,312 4,011,019
End of period ......................................... $ 4,889,269 $ 4,561,312
*Share information
Shares sold .................................... 9,753,613 9,635,634
Distributions reinvested ....................... 225,560 202,044
Shares redeemed ................................ (9,652,570 (9,288,213)
Increase (decrease) in shares outstanding ...... 326,603 549,465
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Prime Reserve Fund
================================================================================
May 31, 1998
================================================================================
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.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
VALUATION Securities are valued at amortized cost. Assets and liabilities
for which such valuation procedures are deemed not to reflect fair value are
stated at fair value as determined in good faith by or under the supervision of
the officers of the fund, as authorized by the Board of Directors.
PREMIUMS AND DISCOUNTS Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.
OTHER Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
NOTE 2 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income. At May 31, 1998, the fund had no unused realized capital loss
carryforwards for income tax purposes. Capital loss carryforwards utilized in
fiscal 1998 amounted to $1,273,000.
At May 31, 1998, the aggregate cost of investments for federal income tax
and financial reporting purposes was $4,890,664,000.
<PAGE>
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 $1,508,000 was payable at May 31, 1998. 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, 1998, and for the year ended then ended, the effective annual group fee rate
was 0.32%. 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., 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. The fund incurred expenses pursuant to these
related party agreements totaling approximately $8,734,000 for the year ended
ended May 31, 1998, of which $647,000 was payable at period-end.
Additionally, through August 18, 1997, the fund was one of several T. Rowe
Price-sponsored mutual funds (underlying funds) in which the T. Rowe Price
Spectrum Funds (Spectrum) may invest. Expenses associated with the operation of
Spectrum are borne by each underlying fund to the extent of estimated savings to
it and in proportion to the average daily value of its shares owned by Spectrum,
pursuant to special servicing agreements between and among Spectrum, the
underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum
International, Rowe Price-Fleming International. For the year ended, the fund
was allocated $49,000 of Spectrum expenses, $37,000 of which was payable at year
end.
<PAGE>
T. Rowe Price Prime Reserve Fund
================================================================================
================================================================================
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, 1998, 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, 1998 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 17, 1998
<PAGE>
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
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 5/31/98