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THE RESERVE INSTITUTIONAL TRUST
810 SEVENTH AVENUE -- NEW YORK, N.Y. 10019-5868
(212) 977-9982 - (800) 637-1700
24-HOUR YIELD AND BALANCE INFORMATION
Nationwide 800-637-1700 - www.reservefunds.com
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") describes The Reserve
Institutional Trust ("Trust"). The Trust is presently comprised of four
separate Funds: the Primary Institutional Fund, the U.S. Treasury Institutional
Fund, the U.S. Government Institutional Fund and the Interstate Tax-Exempt
Institutional Fund (each a "Fund", together the "Funds"). This Statement is not
a Prospectus, but provides detailed information to supplement the Prospectus
dated July 31, 1998 and should be read in conjunction with it. A copy of the
Prospectus may be obtained without charge by writing or calling the Funds at
the above address or telephone number. The Securities and Exchange Commission
("SEC") maintains a web site (http://www.sec.gov) that contains the SAI, the
Prospectus, material incorporated by reference & other information regarding
the Fund electronically filed with the SEC. This SAI is dated July 31, 1998.
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TABLE OF CONTENTS PAGE
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Investment Objective and Policies . . . . . . . . . . . . . . . . . . 2
Trustees and Officers of the Trust . . . . . . . . . . . . . . . . . 4
Investment Management, Distribution, and Custodian Agreements . . . 6
Portfolio Turnover, Transaction Charges and Allocation . . . . . . . 8
Shares of Beneficial Interest . . . . . . . . . . . . . . . . . . . . 8
Purchase, Redemption and Pricing of Shares . . . . . . . . . . . . . 9
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . 10
Fund Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reserve Cash Performance Account . . . . . . . . . . . . . . . . . . 13
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 15
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 26
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SHARES OF THE FUNDS ARE NEITHER GUARANTEED NOR INSURED BY THE U.S. GOVERNMENT
AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
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INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of each Fund, with the exception of the
Interstate Fund, is to seek as high a level of current income as is consistent
with preservation of capital and liquidity.
The Interstate Fund's investment objective is to seek as high a level of
short-term interest income exempt from federal income taxes as is consistent
with preservation of capital and liquidity, by investing principally in
obligations issued by states, territories, and possessions of the U.S. and by
their political subdivisions, duly constituted authorities and corporations.
SUPPLEMENTAL INVESTMENT POLICIES. Each Fund's investment objective and the
following investment policies may not be changed without the affirmative vote
of a majority of the outstanding shares of a Fund. A majority of the
outstanding shares of a Fund means the vote of the lesser of (i) 67% or more of
the shares of a Fund present at a meeting, if the holders of more than 50% of
the outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. A Fund cannot:
(1) borrow money except as a temporary or emergency measure and not in an
amount to exceed 5% of the market value of its total assets;
(2) issue securities senior to its capital stock;
(3) act as an underwriter with respect to the securities of others;
(4) concentrate investments in any particular industry except to the
extent that its investments are concentrated exclusively in U.S.
government securities, bank obligations, including obligations of
foreign branches of domestic banks where the domestic parent would be
unconditionally liable in the event that the foreign branch failed to
pay on its instruments for any reason, and Municipal Obligations or
instruments secured by such obligations;
(5) purchase, sell or otherwise invest in real estate or commodities or
commodity contracts; however, the Interstate Fund may purchase
Municipal Obligations secured by interests in real estate;
(6) lend more than 33 1/3% of the value of its total assets except to the
extent its investments may be considered loans;
(7) sell any security short or write, sell or purchase any futures
contract or put or call option;
(8) invest in voting securities or in companies for the purpose of
exercising control;
(9) invest in the securities of other investment companies except in
compliance with the Investment Company Act of 1940 ("1940 Act");
(10) make investments on a margin basis; and
(11) purchase or sell any securities (other than securities of the Fund)
from or to any officer or Trustee of the Fund, the investment Adviser
or affiliated person except in compliance with 1940 Act.
OTHER POLICIES. The Primary and Government Funds may, to increase their income,
lend their securities to brokers, dealers and institutional investors if the
loan is collateralized in accordance with applicable regulatory requirements
(the "Guidelines") and if, after any loan, the value of the securities loaned
does not exceed 25% of the value of its assets. Under the present Guidelines,
the loan collateral must, on each Business Day, at least equal the value of the
loaned securities plus accrued interest and must consist of cash, or securities
of the U.S. government (or its agencies or instrumentalities). The Funds
receive an amount equal to the interest on loaned securities and also receive
negotiated loan fees, interest on securities used as collateral or interest on
short-term debt securities purchased with such collateral, either of which type
of interest may be shared with the borrower. The Funds may also pay reasonable
finders, custodian and administrative fees. Loan arrangements made by a Fund
will comply with all other applicable regulatory requirements including the
rules of the New York Stock Exchange ("NYSE"), which require the borrower,
after notice, to redeliver the securities within the normal settlement time of
three (3) Business Days. While voting rights may pass with the loaned
securities, if a material event occurs affecting an investment on loan, the
loan must be called and the securities voted.
The Primary Institutional Fund may invest in bank obligations which include
certificates of deposit, bankers' acceptances, letters of credit and time
deposits. A certificate of deposit is a negotiable certificate representing a
financial institution's obligation to repay funds deposited with it, earning a
specified rate of interest over a given period. A bankers' acceptance is a
negotiable obligation of a bank to pay a draft which has been drawn on it by a
customer. A time deposit is a non-negotiable deposit in a financial institution
earning a specified interest rate over a given period of time. A letter of
credit is an unconditional guarantee by the issuing bank to pay principal and
interest on a note a corporation has issued.
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The Interstate Fund may, from time to time, invest in taxable short-term
investments ("Taxable Investments") consisting of obligations backed by the
full faith and credit of the U.S. government, its agencies or instrumentalities
("U.S. Governments"); deposit-type obligations, acceptances, and letters of
credit of Federal Deposit Insurance Corporation member banks; and instruments
fully collateralized by such obligations. Unless the Fund has adopted a
temporary defensive position, no more than 20% of the net assets of the Fund
will be invested in Taxable Investments at any time. The Fund may enter into
repurchase agreements with regard to the taxable obligations listed above.
Although the Fund is permitted to make taxable temporary investments, there is
no current intention of generating income subject to federal income tax.
REPURCHASE AGREEMENTS. A repurchase agreement transaction occurs when a Fund
purchases and simultaneously contracts to resell securities at fixed prices
determined by the negotiated yields. Each Fund will limit repurchase agreement
transactions to those domestic financial institutions and securities dealers
who are deemed credit-worthy pursuant to guidelines established by the Fund's
Board of Trustees. The Adviser will follow procedures intended to provide that
all repurchase agreements are at least 100% collateralized as to principal and
interest.
The Fund will make payment for such instruments only upon their physical
delivery to, or evidence of their book-entry transfer to, the account of the
Fund's Custodian. If the seller defaults on the repurchase obligation the Fund
could incur a loss and may incur costs in disposing of the underlying security.
A Fund will not hold more than 10% of its net assets in illiquid securities,
including repurchase agreements with a term greater than seven (7) days. To
assess whether repurchase agreement transactions present more than minimal
credit risk, the Trustees have established guidelines and monitor the
creditworthiness of all entities, including banks and broker-dealers, with
which the Fund proposes to enter into repurchase agreements.
REVERSE REPURCHASE AGREEMENTS. The Primary, Government and Interstate Funds may
sell securities in a reverse repurchase agreement when it is considered
advantageous, such as to cover net redemptions or to avoid a premature outright
sale of its portfolio securities. In a typical reverse repurchase agreement
transaction, the seller (Fund) retains the right to receive interest and
principal payments on the security, but transfers title to and possession of it
to a second party in return for a percentage of its value. By paying back to
this party the value received plus interest, the seller repurchases the
transferred security. It is the Trust's policy that entering into a reverse
repurchase agreement transaction will be for temporary purposes only and, when
aggregated with other borrowings, may not exceed 5% of the value of the net
assets of the Fund at the time of the transaction.
MUNICIPAL OBLIGATIONS (INTERSTATE FUND ONLY). Municipal bonds and municipal
notes are the two major classifications of Municipal Obligations. Such
obligations are generally issued to obtain funds for various public purposes,
including the construction of public facilities such as airports, bridges,
highways, houses, hospitals, mass transportation, schools, streets, and water
and sewer works. In addition, Municipal Obligations may be issues to refund
outstanding debt and obtain funds for general operating expenses.
Municipal bonds, which are long-term instruments and generally have
maturities longer than one year when issued, may be either "general obligation"
or "revenue" issues. General obligation bonds are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from the
proceeds of a special excise tax or other specific revenue source but not from
the general taxing power.
Certain kinds of industrial development bonds ("IDBs") are issued by or on
behalf of the public authorities to provide funding for various privately
operated industrial facilities such as warehouse, office, plant, and store
facilities. IDBs are, in most cases, revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. The payment of
the principal and interest on IDBs usually depends solely on the ability of the
user of the facilities or other guarantor to meet its financial obligations. If
there is no established secondary market for the IDBs, the IDBs or the
participation interests purchased by the Interstate Fund will be supported by
repurchase commitments or bank letters of credit or guarantees of banks that
meet the quality criteria of the Fund and which may be exercised by the Fund to
provide liquidity.
Municipal notes are usually issued to obtain funds in anticipation of receipt
of taxes, receipt of proceeds of issuances of municipal bonds or other revenue
which will provide funds to repay the notes, and generally have maturities of
one year or less.
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On April 20, 1988, the U.S. Supreme Court in South Carolina v. Baker,
overruled an 1895 case, Pollack v. Farmers' Loan & Company which held that
interest on Municipal Obligations was immune from federal taxation. As a
result, proposals may be introduced before the Congress to eliminate or
restrict the federal income tax exemption for interest on certain Municipal
Obligations.
The Interstate Fund may purchase securities affected by these proposals. If
such proposals are enacted, the availability of Municipal Obligations by the
Fund would be adversely affected. In such event, the Interstate Fund would
reevaluate its investment objective and policies and submit possible changes in
the structure of the Fund for the consideration of shareholders. Investors
should be aware that the quantity of Municipal Obligations available for
purchase by the Fund may be limited, and that factor may affect the amount of
tax-exempt income which can be obtained from an investment in the Interstate
Fund. Substantial reductions in the availability of tax exempt securities might
also cause a reevaluation of the Fund's investment objective and policies.
Subsequent to its purchase by the Interstate Fund, an issue of rated
Municipal Obligations may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. In the event a Municipal
Obligation's rating falls below the second highest rating category of a
nationally recognized statistical rating agency, the Municipal Obligation will
be disposed of within five Business Days of the date the investment Adviser
becomes aware of the new rating absent a finding by the Board of Trustees that
the disposal of the security would not be in the best interest of the Funds.
Should a rated Municipal Obligation cease to be rated, the investment Adviser
will promptly reassess the credit risk of the Municipal Obligation. The ratings
of Moody's and S&P represent their opinions as to the quality of the Municipal
Obligations they rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality.
VARIABLE RATE DEMAND INSTRUMENTS (INTERSTATE FUND ONLY). Variable rate demand
instruments that the Fund may purchase are tax-exempt Municipal Obligations or
participation interests therein that provide for periodic adjustments in the
interest rate paid and permit the holder to demand payment of the principal
balance plus accrued interest upon a specified number of days' notice and,
similarly, the issuer has a corresponding right to prepay upon notice.
The variable rate demand instruments in which the Fund may invest will comply
with Rule 2a-7 under the 1940 Act. The Fund will determine the variable rate
demand instruments it will purchase in accordance with procedures prescribed by
its Board to minimize credit risks. The Fund's investment Adviser may determine
that an unrated variable rate demand instrument meets the Fund's high quality
criteria if it is backed by a suitable bank letter of credit or guarantee.
The variable rate demand instruments that the Interstate Fund may invest in
include participation interests purchased from banks in variable rate tax
exempt Municipal Obligations owned by banks or affiliated organizations. A
participation interest gives the Fund an undivided interest in the Municipal
Obligation in the proportion that the Fund's participation interest bears to
the total principal amount of the Municipal Obligation and provides the
repurchase feature described above. Each participation is backed by an
irrevocable letter of credit or guarantee of an appropriately rated bank. The
Fund has the right to sell the instrument back to the bank and draw on the
letter of credit on demand, after seven days' notice, for all or any part of
the full principal amount of the Fund's participation interest in the bond plus
accrued notice, for all or any part of the full principal amount of the Fund's
participation interest in the bond plus accrued interest. Banks usually retain
a service fee, a letter of credit fee and a fee for issuing repurchase
commitments in an amount equal to the excess of the interest paid on the
Municipal Obligations over the negotiated yield at which the instrument was
purchased by the Fund.
TRUSTEES AND EXECUTIVE OFFICERS
++BRUCE R. BENT, 61, President, Treasurer and Trustee, 810 Seventh Avenue,
New York, NY 10019-5868.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET"), Reserve
New York Tax-Exempt Trust ("RNYTET") and Reserve Private Equity Series
("RPES"), Director, Vice President and Secretary of Reserve Management Company,
Inc. ("RMCI") and Reserve Management Corporation ("RMCI"); and Chairman and
Director of Resrv Partners, Inc. ("RESRV").
+EDWIN EHLERT, JR., 66, Trustee, 125 Elm Street, Westfield, NJ 07091.
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Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency) and Ehlert Travel Associates of Florida, Inc. (travel agency),
and Trustee of RF, RIT, RTET, RNYTET and RPES.
+HENRI W. EMMET, 71, Trustee, 1535 Presidential Drive, Apt. 4A, Columbus, OH
43212.
Mr. Emmet retired as the Managing Director of Servus Associates, Inc. in 1994
and U.S.A. Representative of the First National Bank of Southern Africa in
1996. Since 1995, Mr. Emmet has served as a Principal of Global Interaction,
which provides consulting services to international banking interests. He is
currently Trustee of RF, RIT, RTET, RNYTET and RPES.
+DONALD J. HARRINGTON, C.M., 52, Trustee, St. John's University, Jamaica, NY
11439.
The Reverend Harrington is President of St. John's University, NY, a Trustee
of RF, RIT, RTET, RNYTET and RPES and a Director of the Bear Stearns Companies,
Inc. since 1993.
BRUCE R. BENT II, 32, Senior Vice President and Assistant Secretary, 810
Seventh Avenue, New York, NY 10019-5868.
Mr. Bent joined The Reserve Funds in 1992 and is Senior Vice President and
Assistant Secretary of RF, RIT, RTET, RNYTET and RPES.
MARYKATHLEEN FOYNES, 28, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019-5868.
Ms. Foynes is Counsel and Secretary of RF, RIT, RTET, RNYTET and RPES. Before
joining The Reserve Funds in 1998, Ms. Foynes was a staff attorney at
PaineWebber, Inc.
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+ Messrs. Ehlert, Emmet and Harrington are members of a Review Committee which
performs the functions of an Audit Committee and reviews compliance procedures
and practices.
++ Interested Trustee within the meaning of the 1940 Act. The members of the
Board of Trustees who are not Interested Trustees, will be paid a stipend of
$3,500 for each joint Board meeting that they attend and an annual fee of
$16,000 for service to all of the trusts in the complex.
Under the Declaration of Trust, the Trustees and officers are entitled to be
indemnified by the Trust to the fullest extent permitted by law against all
liabilities and expenses reasonably incurred by them in connection with any
claim, suit or judgment or other liability or obligation of any kind in which
they become involved by virtue of their service as a Trustee or officer of the
Trust, except liabilities incurred by reason of their willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office.
As of May 31, 1998, Trustees and officers directly or indirectly as a group
owned less than 1% of the outstanding shares of the Funds. The Trust does not
pay any pension or retirement benefits.
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COMPENSATION TABLE
FOR FISCAL YEAR ENDED MAY 31, 1998
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AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE, POSITION FROM FUNDS (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE
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Bruce R. Bent, President $ 0 $ 0
Edwin Ehlert, Jr., Trustee $ 2,064 $ 30,000
Henri W. Emmet, Trustee $ 2,064 $ 30,000
Rev. Donald J. Harrington, Trustee $ 2,064 $ 30,000
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INVESTMENT MANAGEMENT, DISTRIBUTION
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("RMCI or
Advisor"), 14 Locust Place, Manhasset, NY 11030, a registered investment
adviser, manages the Funds and provides them with investment advice pursuant to
an Investment Management Agreement. Under the Agreement, RMCI manages the
Funds' investments, including effecting purchases and sales thereof, in
furtherance of each Fund's investment objective and policies, subject to
overall control and direction of the Trustees. RMCI also pays all employee
costs and ordinary operating costs of the Funds. For these services the Funds
periodically pay RMCI a comprehensive management fee at an annual rate of 0.25%
of average daily net assets. Excluded from ordinary operating costs are
interest charges, taxes, brokerage fees and commissions, extraordinary legal
and accounting fees and expenses, and certain operating expenses unique to the
Treasurer's Trust class of shares.
It is expected that the holders of the Treasurer's Trust shares will be wrap
fee accounts, trust accounts, omnibus accounts and other accounts of smaller
investors which require subaccounting and other such services. Because these
additional services will be provided only to the holders of the Treasurer's
Trust shares, payment for these services will be made by the Fund and charged
against the average daily net assets attributable to the Treasurer's Trust
shares, rather than being paid by the Adviser as part of its comprehensive
management fee.
From time to time, RMCI may waive receipt of its fees and/or voluntarily
assume certain expenses of a Fund which would have the effect of lowering the
Fund's expense ratio and increasing yield to investors at the time such amounts
are assumed or waived, as the case may be. RMCI may also make such advertising
and promotional expenditures, using its own resources, as it from time to time
deems appropriate.
For the fiscal year ended May 31, 1998, the Adviser received management fees
of $677,424 from the Trust.
The Investment Management Agreements for the Funds were duly approved by the
sole shareholder on December 18, 1996, and may be renewed annually if
specifically approved by the Board of Trustees and by the vote of a majority of
the Trustees who are not "interested persons" ("disinterested Trustees") cast
in person at a meeting called for the purpose of voting on such renewal. The
Agreements terminate automatically upon their assignment and may be terminated
without penalty upon 60 days' written notice by a vote of the Board of Trustees
or by vote of a majority of outstanding voting shares of a Fund or by RMCI.
DISTRIBUTION AGREEMENT. The Funds' Distributor is Resrv Partners, Inc.
("RESRV"), 810 Seventh Avenue, New York, NY 10019-5868, which is a wholly-owned
subsidiary or the Adviser. The Fund has authorized the Distributor, in
connection with its sale of Fund shares, to give only such information and to
make only such statements and representations as are contained in the
Prospectus. Sales may be made only by the Prospectus. The Distributor may offer
and sell shares of the Fund pursuant to a separate Prospectus applicable to
such Distributor. The Distributor is the "principal underwriter" for the Funds
within the meaning of the 1940 Act, and as such acts as agent in arranging for
the continuous offering of Fund shares. The Distributor has the right to enter
into selected dealer agreements with brokers or other persons of its choice for
the sale of Fund shares. Parties to selected dealer agreements may receive
assistance payments, if they qualify for such payments, under the Distribution
Plan described below. RESRV's principal business is the distribution of mutual
fund shares. The Distributor has retained no underwriting commissions on the
sale of Fund shares during the last three fiscal years. No distribution
assistance payments were made to RESRV.
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The Distribution Agreements may be renewed annually if specifically approved
by the Board of Trustees and by the vote of a majority of the disinterested
Trustees cast in person at a meeting called for the purpose of voting on such
approval or by the vote of a majority of the outstanding voting securities of
the Fund.
DISTRIBUTION PLAN AND SERVICE PLAN. The Funds each maintain a Distribution Plan
and related agreements pursuant to Rule 12b-1 under the 1940 Act, which
provides that investment companies may pay distribution expenses, directly or
indirectly, pursuant to a Distribution Plan adopted by the investment company's
Board and approved by its shareholders. Under the Distribution Plan, each Fund
makes assistance payments to brokers, financial institutions and other
financial intermediaries ("payee(s)") for shareholder accounts ("qualified
accounts") as to which a payee has rendered distribution assistance services to
the Class C and D shares at an annual rate of 0.25% and 0.50%, respectively, of
the average daily net asset value ("NAV") of all Firms' qualified accounts.
Class A, B and Treasurer's Trust shares do not participate in a distribution
plan. Substantially all such monies (together with significant amounts from
RMCI's own resources) are paid by RMCI to Firms for their distribution
assistance with any remaining amounts being used to partially defray other
expenses incurred by RMCI in distributing Fund shares. In addition to the
amounts required by the Distribution Plan, RMCI may, in its discretion, pay
additional amounts from its resources. The rate of any additional amounts that
may be paid will be based upon RESRV's and RMCI's analysis of the contribution
that a Firm makes to the Fund by increasing assets under management and
reducing expenses to the Fund if such services were provided directly by the
Fund or other authorized persons. RESRV and RMCI will also consider the need to
respond to competitive offers of others, which could result in assets being
withdrawn from the Fund and an increase in the expense ratio for the Fund. RMCI
may elect to retain a portion of the distribution assistance payments to pay
for sales materials or other promotional activities. The Trustees have
determined that there is a reasonable likelihood the Distribution Plan will
benefit the Fund and its shareholders.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling, or
distributing securities, although national and state chartered banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. Those persons who wish to provide assistance in the form of
activities not primarily intended to result in the sale of Fund shares (such as
administrative and account maintenance services) may include banks, upon advice
of counsel that they are permitted to do so under applicable laws and
regulations, including the Glass-Steagall Act. In such event, no preference
will be given to securities issued by such banks as investments and the
assistance payments received by such banks under the Distribution Plan may or
may not compensate the banks for their administrative and account maintenance
services for which the banks may also receive compensation from the bank
accounts they service. It is Fund management's position that payments to banks
pursuant to the Distribution Plan for activities not primarily intended to
result in the sale of Fund shares, such as administrative and account
maintenance services, do not violate the Glass-Steagall Act. However, this is
an unsettled area of the law and if a determination contrary to management's
position is made by a bank regulatory agency or court such payments will be
terminated and any shares registered in the bank's name, for its underlying
customer, will be registered in the name of that customer. Financial
institutions providing distribution assistance or administrative services for
the Fund may be required to register as securities dealers in certain states.
Under the Distribution Plan, the Fund's Controller or Treasurer reports
quarterly the amounts and purposes of assistance payments. During the
continuance of the Distribution Plan the selection and nomination of the
disinterested Trustees are at the discretion of the disinterested Trustees
currently in office.
During the fiscal year ended May 31, 1998, $0 was paid under the Plan by the
Fund. Any such payments are intended to benefit the Fund by maintaining or
increasing net assets to permit economics of scale in providing services to
shareholders and to contribute to the stability of such shareholder services.
During the fiscal year ended May 31, 1998, substantially all payments made by
the Fund were to brokers or other financial institutions and intermediaries for
share balances in the Fund. The Distribution Plan and related agreements were
duly approved by shareholders and may be terminated at any time by a vote of a
majority of the outstanding voting securities of each portfolio or by vote of
the disinterested Trustees. The Plan and related agreements may be renewed from
year to year, or amended, if approved by a vote of the majority of the Board of
Trustees, and by a vote of a majority of the disinterested Trustees cast in
person at a meeting called for the purpose of voting on such renewal or
amendment. The Distribution Plan may not be amended to increase materially the
amount to be spent for distribution without shareholder approval. All material
amendments to the Distribution Plan must be approved by a vote of the Board of
Trustees and of the disinterested Trustees, cast in person at a meeting called
for the purpose of such vote.
Under the Service Plan, each Fund may pay Firms a service fee at an annual
rate of up to 0.25% of the average daily net asset value of such Fund's Class
B, Treasurer's Trust, Class C and D shares owned by investors for which such
Firm provides personal
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services, including maintaining shareholder accounts, responding to inquiries,
providing information about investments and providing certain other services.
Class A shares do not participate in the Service Plan.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank, 4
New York Plaza, New York, NY 10004 is Custodian of the Funds' securities and
cash pursuant to a Custodian Agreement as well as, Custodial Trust Co., 28 West
State Street, Trenton, NJ 08608 (excluding Interstate Fund). The Bank of New
York, 48 Wall Street, New York, NY 10015 is a Custodian for the Funds for
limited purposes in connection with certain repurchase agreements.
PricewaterhouseCoopers, LLP, 1301 Avenue of the Americas, New York, NY 10019 is
the Funds' independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by the Funds are normally
principal transactions at net prices, the Fund does not normally incur
brokerage commissions. Purchases of securities from underwriters involve a
commission or concession paid by the issuer to the underwriter and aftermarket
transactions with dealers involve a spread between the bid and asked prices.
The Funds' policies of investing in debt securities maturing within one year,
and the Interstate Fund's policy of investing in debt securities maturing
within 13 months, results in high portfolio turnover. However, because the cost
of these transactions is minimal, high turnover does not have a materially
adverse effect upon the NAV or yield of the Fund.
Subject to the overall supervision of the Officers of the Fund and the Board
of Trustees, RMCI places all orders for the purchase and sale of the Funds'
investment securities, and in general, will seek to obtain prompt and reliable
execution of orders at the most favorable prices and yields. In determining
best price and execution, RMCI may take into account a dealer's operational and
financial capabilities, the type of transaction involved, the dealer's general
relationship with RMCI, and any statistical, research, or other services
provided by the dealer to RMCI. To the extent such non-price factors are taken
into account the execution price paid may be increased, but only in reasonable
relation to the benefit of such non-price factors to the Fund as determined by
RMCI. Brokers or dealers who execute investment securities transactions may
also sell shares of the Fund; however, any such sales will be neither a
qualifying nor disqualifying factor in the selection of brokers or dealers.
When orders to purchase or sell the same security on identical terms are
simultaneously placed for the Fund and other investment companies managed by
RMCI, the transactions are allocated as to amount in accordance with each order
placed for each Fund. However, RMCI may not always be able to purchase or sell
the same security on identical terms for all investment companies affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trust to issue an unlimited number of
full and fractional shares of beneficial interest, and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the Funds. If they deem it advisable and
in the best interests of shareholders, the Trustees may classify or reclassify
any unissued shares of the Fund by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms and conditions of redemption of the stock.
Any changes would be required to comply with any applicable state and Federal
securities laws. These currently require that each class be preferred over all
other classes in respect to assets specifically allocated to such class. It is
anticipated that under most circumstances, the rights of any additional classes
would be comparable, unless otherwise required, to respond to the particular
situation. Upon liquidation of the Fund, shareholders are entitled to share,
pro rata, in the net assets of their respective portfolios available for
distribution to such shareholders. It is possible, although considered highly
unlikely in view of the method of operation of mutual funds, that should the
assets of one class of shares be insufficient to satisfy its liabilities, the
assets of another class could be subject to claims arising from the operations
of the first class of shares. No changes can be made to the Funds' issued
shares without shareholder approval.
Each Fund share, when issued, is fully paid, non-assessable (except as set
forth below), and fully transferable or redeemable at the shareholder's option.
Each share has an equal interest in the net assets of the respective Fund,
equal rights to all dividends and other distributions, and one vote for all
purposes. Shares of all classes vote together for the election of Trustees and
have noncumulative voting rights, meaning that the holders of more than 50% of
the shares voting for the election of Trustees could elect all Trustees if they
so choose, and in such event the holders of the remaining shares could not
elect any person to the Board of Trustees.
8
<PAGE> 9
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the Funds' obligations unless, as in this
instance, the Declaration of Trust provides, in substance, that no shareholder
or trustee shall be personally liable for the Fund's, and each investment
portfolio's, obligations to third parties, and requires that every written
contract made by a Fund contain a provision to that effect. The Declaration of
Trust also requires the Fund to indemnify its shareholders and Trustees against
such liabilities and any related claims or expenses.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Regulations of the SEC provide that if a class is separately affected by a
matter requiring shareholder vote (election of Trustees, ratification of
independent auditor selection, and approval of an underwriting agreement are
not considered to have such separate effect and may be voted upon by the
shareholders of the Fund as a whole), each class will vote separately. Approval
of the Investment Management Agreement, material amendments to the Plan of
Distribution, and changes in the fundamental policies of the Fund requires
approval by a majority of the affected shareholders. For this purpose a
"majority" is constituted by either 50 percent of all shares voting as a group
or 67 percent of the shares voted as a group at an annual meeting of
shareholders at which at least 50 percent of the shares of each group are
represented.
Set forth below is certain information as to persons who owned 5% or more of
the outstanding shares of the Primary Institutional Fund and the U.S.
Government Institutional Fund as of June 30, 1998:
PRIMARY INSTITUTIONAL FUND TREASURER'S TRUST
<TABLE>
<CAPTION>
NAME AND ADDRESS % OF SHARES NATURE OF OWNERSHIP
---------------- ----------- -------------------
<S> <C> <C>
Private Value Fund II, L.P. 11.7% Record
3003 Tamiami Train N.
Napes, FL 34103
</TABLE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASES AND REDEMPTIONS THROUGH OTHERS. Share purchases and redemptions may
also be made through brokers and financial institutions ("Firms") who may
provide varying arrangements for their clients as well as providing other
investment or administrative services. Some of these Firms participate in the
Fund's Plan of Distribution ("Plan") under which payments are made for
distributing Fund shares or other assistance to the Fund.
IF SHARES OF THE FUND ARE PURCHASED BY CHECK OR RESERVE AUTOMATIC TRANSFER,
THE FUND MAY DELAY TRANSMITTAL OF REDEMPTION PROCEEDS UNTIL SUCH TIME AS IT HAS
ASSURED ITSELF THAT GOOD PAYMENT HAS BEEN COLLECTED FOR THE PURCHASE OF SUCH
SHARES, WHICH WILL GENERALLY BE UP TO 10 BUSINESS DAYS.
Redemption payments will normally be made by check or wire transfer but the
Funds are authorized to make payment of redemptions partly or wholly in kind
(that is, by delivery of investment securities valued at the same time as the
redemption net asset value is determined). The Funds have elected to permit any
shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90 day period do not exceed the lesser of
$250,000 or 1% of the net assets of the respective Fund. The election is
irrevocable pursuant to rules and regulations under the 1940 Act unless
withdrawal is permitted by order of the SEC. Redemptions in kind are further
limited by each Fund's practice of holding instruments typically with a minimum
value of $1,000,000 and its intention to redeem in kind only when necessary to
reduce a disparity between amortized cost and market value. In disposing of
such securities, an investor might incur transaction costs and on the date of
disposition might receive an amount less than the net asset value of the
redemption.
NET ASSET VALUE. Shares are offered at their NAV which is calculated at the
close of each Business Day as defined in the Prospectus. The NAV is not
calculated on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Columbus
Day, Thanksgiving Day, Christmas Day and any days the NYSE is closed
9
<PAGE> 10
for trading and regional bank holidays. It is the policy of each Fund to
maintain a stable NAV per share of $1.00, although this share price is not
guaranteed.
The NAV per share of each Fund is determined by adding the value of all of
the Fund's securities, cash and other assets, subtracting its liabilities, and
dividing the result by the number of its shares outstanding. The Board of
Trustees has determined the most practical method currently available for
valuing investment securities is the amortized cost method. This procedure
values a purchased security at cost at the time of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium and
accrual of interest income, irrespective of intervening changes in interest
rates or security market values.
In order to maintain a $1.00 share price the Fund will utilize the following
practices: maintain a dollar-weighted average portfolio maturity of 90 days or
less; purchase only instruments having remaining maturities of 397 days or
less; and invest only in securities determined by the Board of Trustees to be
of high quality with minimal credit risk. In addition, such procedures are
reasonably designed, taking into account current market conditions and the
investment objective of the Fund, to attempt to maintain its net asset value as
computed for the purpose of sales and redemptions at $1.00 per share. Such
procedures will include periodic review by the Trustees, at such intervals as
they may determine reasonable, to ascertain the extent of any difference in the
NAV of a Fund from $1.00 a share determined by valuing its assets at amortized
cost as opposed to valuing them based on market factors. If the deviation
exceeds 1/2 of one percent, the Trustees will promptly consider what action if
any should be initiated. If they believe that the deviation may result in
material dilution or other unfair results to shareholders, the Trustees have
undertaken to apply appropriate corrective remedies which may include the sale
of a Fund's assets prior to maturity to realize capital gains or losses or to
shorten the average maturity of the Fund, withholding dividends, redemption of
shares of the Fund in kind, or reverting to valuation based upon market prices
and estimates.
SHAREHOLDER SERVICE POLICIES. The Fund's policies concerning the shareholder
services are subject to change from time to time. The Fund further reserves the
right to impose special service charges for services provided to individual
shareholders generally including, but not limited to, fees for returned checks,
stop payment orders on official checks and shareholder checks, and special
research services. The Fund's standard service charges as described in the
Prospectus are also subject to adjustment from time to time. In addition, the
Fund reserves the right to increase its minimum initial investment amount at
any time.
CREDITING OF INVESTMENTS. The Funds will only give credit for investments in
the Funds on the day they become available in Federal Funds which is normally
within one or two days of receipt. A Federal Reserve wire system transfer ("Fed
wire") is the only type of wire transfer that is reliably available in federal
funds on the day sent. For a Fed wire to receive same day credit, the Fund must
be notified before 2:00 PM (New York time) (11:00 AM New York time for the
Treasury and Interstate Funds) of the amount to be transmitted and the account
to be credited and the amount received at its bank by 3:00 PM (New York time).
The Funds reserve the right to reject any investment in the Funds for any
reason and may at any time suspend all new investment in the Funds.
IF THE WIRE FOR PURCHASE OF SHARES IS NOT RECEIVED BY THE FUND, THE SHARE
PURCHASE MAY BE CANCELED OR REDEEMED IMMEDIATELY. THE INVESTOR WHO GAVE NOTICE
OF THE INTENDED WIRE WILL BE HELD FULLY RESPONSIBLE FOR ANY LOSSES INCURRED BY
THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THE FUND MAY REDEEM SHARES
FROM ANY ACCOUNT REGISTERED IN THAT PURCHASER'S NAME AND APPLY THE PROCEEDS
THEREFROM TO THE PAYMENT OF ANY AMOUNTS DUE THE FUND.
SHARE CERTIFICATES. Share certificates are not issued by the Trust.
DISTRIBUTIONS AND TAXES
PRIMARY, GOVERNMENT AND TREASURY FUNDS. Each Fund intends to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 , as amended ("the Code"), so long as such qualification is in the best
interests of shareholders. In order to qualify as a regulated investment
company under the Code, each Fund must, among other things, in each fiscal year
distribute at least 90 percent of its investment company taxable income (which
includes, among other items, interest income and net short-term capital gains
in excess of net long-term capital losses) and its net tax-exempt interest
income to shareholders; derive at least 90 percent of its gross income from
dividends, interest, payments with respect to securities loans and
10
<PAGE> 11
gains from the sale or other disposition of stock, securities or foreign
currencies or other income derived with respect to its business of investing in
such stock, securities or currencies; and meet certain diversification
requirements.
As regulated investment companies, the Funds generally will not be subject to
U.S. federal income tax on the taxable income and net capital gains (the excess
of net long-term capital gains over net short-term capital losses) that they
distribute. The Funds intend to distribute all of their investment company
taxable income and net capital gains, if any, and, therefore, do not expect to
pay federal income tax. Amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To prevent imposition of the excise tax, each Fund must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the one-year period ending on
October 31 of each calendar year, and (3) any ordinary income and capital gains
for previous years that was not distributed during those years. A distribution,
including an "exempt-interest dividend," will be treated as paid on December 31
of the current calendar year if it is declared by a Fund in October, November
or December with a record date in such a month and paid by the Fund during
January of the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which they are received. Dividends paid out of
a Fund's investment company taxable income will be taxable to shareholders as
ordinary income. Because no portion of a Fund's income will be comprised of
dividends from domestic corporations, none of the income distributions from a
Fund will be eligible for the 70% deduction for dividends received by
corporations. Distributions of net capital gains, if any, designated as capital
gain dividends, are taxable to individual shareholders at the applicable 20% or
28% capital gains rate, regardless of how long the shareholder has held the
relevant Fund's shares, and are not eligible for the dividends-received
deduction.
Upon the sale or other disposition of shares of a Fund, in the event that the
Fund does not maintain a constant NAV, per share, a shareholder may realize a
capital gain or loss which will be long-term or short-term, generally depending
upon the shareholder's holding period for the shares. Any loss realized on a
sale or exchange will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending 30 days
after disposition of the shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized by
a shareholder on a disposition of shares of a Fund held by the shareholder for
six months or less will be treated as a long-term capital loss to the extent of
any distributions of net capital gains received by the shareholder with respect
to such shares.
Investments by a Fund in zero coupon or other discount securities (other than
tax-exempt discount securities) will result in income to the Fund equal to a
portion of the excess of the face value of the securities over their issue
price (the "original issue discount") for the period that the securities are
held, even though the Fund receives no cash interest payments. This income is
included in determining the amount of income which the Fund must distribute to
maintain its status as a regulated investment company and to avoid the payment
of federal income tax and the 4% excise tax.
Gains derived by a Fund from the disposition of any market discount bond
(i.e., bonds purchased at other than original issue, where the face value of
the bonds exceeds their purchase price), including tax-exempt market discount
bonds, held by the Fund will be taxed as ordinary income to the extent of the
accrued market discount on the bonds, unless the Fund elects to include the
market discount in income as it accrues.
A Fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders generally are exempt from backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability. THE TREASURY FUND
intends to invest only in U.S. Government securities that, in many states,
provide interest income exempt from state and local personal income taxes, but
may invest up to 5 percent of its assets in taxable repurchase agreements
pending the investment of uninvested cash. Distributions attributable to net
capital gains, if any, are generally subject to state and local taxes. It is
possible that a state or local taxing authority may currently or in the future
seek to tax an investor on a portion of the interest income of an obligation
held by the Treasury Fund.
Dividends derived from investment company taxable income, including
distributions from net realized short-term securities gains, paid by a Fund
with respect to Fund shares beneficially owned by a foreign person generally
are subject to U.S. nonresident withholding taxes at a rate of 30%, unless the
foreign person claims the benefit of a lower rate specified in a tax treaty.
Distributions from net realized long-term securities gains paid by the Fund
with respect to Fund shares beneficially owned by a foreign person
11
<PAGE> 12
generally will not be subject to any U.S. withholding tax. However, such
distributions may be subject to 31% backup withholding, as described in
Prospectus, unless the foreign person certifies his non-U.S. residency status.
THE INTERSTATE FUND. The Fund intends to qualify to pay "exempt-interest
dividends" to its shareholders. To so qualify, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets must consist of
Municipal Obligations. Properly designated exempt-interest dividends
distributed to shareholders are not includable in the shareholder's gross
income for federal income tax purposes. Distributions of net investment income
received by the Fund from investments in debt securities other than Municipal
Obligations and any net realized short-term capital gains distributed by the
Fund will be taxable as ordinary income. Distributions of net long-term
capital gains, if any, will be taxable to individual shareholders at applicable
20% or 28% capital gains rate, regardless of how long a shareholder has held
the Fund's shares. Shareholders will be advised annually as to the federal
income tax consequences of distributions made during the year.
In the event the Fund should hold certain private activity bonds,
shareholders must include as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
their federal alternative minimum taxable income for purposes of determining
any liability for the alternative minimum tax applicable to individuals and
corporations. Shareholders receiving Social Security and certain railroad
retirement benefits should note that exempt-interest dividends will be taken
into account in determining the taxability of such benefits.
With respect to a shareholder who received exempt-interest dividends on
shares held for less than six months, any loss on the sale or exchange of such
shares will, to the extent of the amount of such exempt-interest dividends, be
disallowed.
A shareholder may not deduct that portion of interest in indebtedness
incurred or continued to purchase or carry shares of an investment company
paying exempt-interest dividends (such as those of the Fund) which bears the
same ratio to the total dividends (excluding capital gains dividends) received
by the shareholder. In addition, the purchase of shares may be considered to
have been made with borrowed funds even though the borrowed funds are not
directly traceable to such purchase.
Persons who may be "substantial users" (or "related persons" of substantial
users) of facilities financed by industrial development bonds should consult
their tax advisers before purchasing shares of the Fund. The term "substantial
user" generally includes any "non-exempt person" who regularly uses in his or
her trade or business a part of a facility financed by industrial development
bonds. Generally, an individual will not be a "related person" of a substantial
user unless the person or his or her immediate family owns directly or
indirectly in the aggregate more than 50% equity interest in the substantial
user.
ALL FUNDS. Statements as to the tax status of each investor's dividends and
other distributions will be mailed annually. The annual statements will set
forth the dollar amount of income subject to federal tax. Distributions will be
reported under more than one tax identification number only if a separate
account is established for each number.
Fund shareholders may be subject to state, local and foreign taxes on their
Fund distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations are exempt from taxation.
Shareholders are advised to consult with their tax advisers regarding the
particular tax consequences to them of an investment in the Fund.
FUND YIELD
The current yield of a Fund may differ from its effective yield and
annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by a
fraction having 365 in the numerator and the number of days in the base period
in the denominator. The current yield stated in the prospectus utilizes a seven
(7) day base period. Net change in account value must reflect (i) the value of
additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares;
and (ii) any recurring fees charged to all shareholder accounts, in proportion
to the length of the base period and the Fund's average or median account size.
Net change in account value must exclude realized gains or losses and
unrealized appreciation or depreciation.
12
<PAGE> 13
Effective yield is computed by adding one to the current yield, raising the
sum to a power equal to 365 divided by (days), and subtracting one from the
result according to the following formula: Effective Yield = [(Base Period
Return +1) 365/7]-1. Effective annual yields are a representation of the
effective annual rate of return produced by the monthly compounding of Fund
dividends. Taxable equivalent yield is computed by dividing either current or
effective yield by a denominator equal to one minus a stated income tax rate
according tot he following formula: Taxable Equivalent Yield = Current or
Effective Yield/(1-Income Tax Rate).
Yield information may be useful in reviewing the performance of each Fund,
but because of fluctuations, it may or may not provide a basis for comparison
with bank deposits, other money-market funds or bank accounts which have
fluctuating share values, or other investments which pay a fixed yield for a
stated period of time, such as Treasury bills, bank certificates of deposit,
savings certificates and NOW accounts. When making comparisons, the investor
should also consider the quality and maturity of the portfolio securities of
the various money-market funds. An investor's principal is not guaranteed by
each Fund, nor is it insured by a governmental agency.
RESERVE CASH PERFORMANCE ACCOUNT
The Reserve Cash Performance Account ("CPA") provides a comprehensive package
of additional services to investors in the Interstate Fund. Reserve CPA is a
check arrangement with Bank One, Columbus, NA or the Chase Manhattan Bank
whereby checks are issued to Reserve shareholders which may be used to redeem
shares in their account in any amount. If a bank accepts a check, it will be
paid in the order received by redemption of shares from the investor's Reserve
account. Any check in an amount exceeding the Reserve account balance will be
returned to the payee. Reserve CPA checks can be used in the same manner as any
other bank checks. Paid checks will not be returned but complete information
on such paid checks will be provided monthly.
A VISA Gold Check Card (a debit card) is also available. The VISA card
functions exactly as does a conventional VISA credit card except that the
cardholder's Reserve account is automatically charged for all purchases and
cash advances, thus eliminating the usual monthly finance charges. As with the
checking facility, VISA charges are paid by liquidating shares in the Reserve
Fund account, but any charges that exceed the balance will be rejected. VISA
card issuance is subject to credit approval. Reserve, VISA or the bank may
reject any application for checks or cards and may terminate an account at any
time. Conditions for obtaining a VISA Check Card may be altered or waived by
the Funds either generally or in specific instances. Checks and VISA cards are
intended to provide investors with easy access to their account balances.
A Fund will charge a non-refundable annual CPA plus service fee (currently
$60 which may be charged to the account at the rate of $5 monthly).
Participants will also be charged for specific costs incurred in placing stop
payment orders, obtaining check copies and in processing returned checks. These
charges may be changed at any time upon 30 days' notice. In addition,
broker/dealers or other financial institutions in the CPA program may charge
their own service fees in addition to the annual fee.
VISA cardholders may be liable for the unauthorized use of their card up to
the amount set by governing Federal regulations, currently $50 if the Fund or
the bank is not notified of the theft or loss within two (2) Business Days.
Participants should refer to the VISA Account Shareholder Agreement for
complete information regarding responsibilities and liabilities with respect to
the VISA Gold card. If a card is lost or stolen, the cardholder should report
the loss immediately by telephoning the issuing bank, currently BankOne at
614-248-4242 which can be reached 24 hours a day, seven days a week or the
Funds at 800-631-7784 or 212-977-9880 during normal business hours (9:00 A.M.
to 5:00 P.M., New York time). The use of checks and cards by participants will
be subject to the terms of your Reserve CPA Application and VISA Account
Shareholder Agreement.
RATINGS
The following are the rating designations of short-term instruments and their
respective meanings.
STANDARD & POOR'S CORPORATION. A-1: This designation indicates that the degree
of safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics will be
denoted with a plus (+) sign designation.
MOODY'S INVESTORS SERVICE, INC. Prime-1 (P1): Issuers rated P1 (or supporting
institutions) have a superior ability for repayment of senior short-term debt
obligations. P1 repayment will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure
13
<PAGE> 14
with moderate reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and well-established access to a range of financial markets and assured sources
of alternative liquidity.
DUFF & PHELPS CREDIT RATING CO. Duff-1: Very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor. Those issues determined to have the highest
certainty of timely payment and whose safety is just below risk-free U.S.
Treasury short-term obligations will be denoted with a plus (+) sign
designation. Those issues determined to have a high certainty of timely payment
and whose risk factors are very small will be denoted with a minus (-) sign
designation.
FITCH IBCA. F1: This designation indicates a very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F1+". Those issues determined to possess an
exceptionally strong credit quality will be denoted with a plus (+) sign
designation. Issues assigned the rating of F1+ are regarded as having the
strongest degree assurance for timely payment.
TAX-EXEMPT BOND RATINGS. The highest ratings for municipal bonds are Aaa or Aa
if rated by Moody's Investor Services, Inc. ("Moody's") and AAA or AA if rated
by Standard & Poor's Corporation ("S&P"). Such bonds are judged to be of high
quality and are not considered speculative. Bonds rated A by Moody's are
considered to possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Such bonds have factors giving
security to principal and interest that are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Debt rated A by S&P is considered to have a strong capacity to pay
interest and repay principal although it is more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
TAX-EXEMPT PAPER RATINGS. Moody's tax-exempt paper rating are opinions of the
ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of twelve months. The highest quality obligations
are rated "Prime". Issuers rated Prime-1 have superior ability for repayment of
senior short-term debt obligations. Issuers rated Prime-2 have a strong ability
for repayment of senior short-term debt obligations. Moody's employs the
following two designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated short-term issuers: MIG-1/VMIG-1, Best
Quality and MIG-2/VMIG-2, High Quality. The designation of MIG-1/VMIG-1
indicates there is strong protection by established cash flows, superior
liquidity support, or demonstrated broad-based access to the market for
refinancing. The designation of MIG-2/VMIG-2 indicates margins of protection
ample although not so large as in MIG-1/VMIG-1.
S&P's tax-exempt paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
The highest quality obligations are rated "A". Issues assigned "A" ratings are
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with designations to indicate the relative degree
of safety. The two top such designations are 1 and 2. The "A-1" designation
indicates that the degree of safety regarding timely payment is strong. The
"A-2" designation indicates that capacity for timely payment is satisfactory.
Municipal note ratings by S&P are preceded by the designation SP. Those issues
determined to possess overwhelming safety characteristics are designated SP-1+.
Municipal notes designated SP-1 are considered to have a very strong or strong
capacity to pay principal and interest. Municipal notes designated SP-2 are
considered to have a satisfactory capacity to pay principal and interest.
14
<PAGE> 15
RESERVE INSTITUTIONAL TRUST - PRIMARY INSTITUTIONAL FUND
STATEMENT OF NET ASSETS - MAY 31, 1998
<TABLE>
<CAPTION>
NEGOTIABLE BANK
CERTIFICATES OF % DAYS TO VALUE
DEPOSIT - 47.34% RATE MATURITY (NOTE 1)
---------------- ---- -------- --------
<S> <C> <C> <C>
ABN-AMRO Bank N.V. (a) 5.53 15 $ 9,026,268
Canadian Imperial Bank of Commerce (b) 5.535 23 9,015,221
Chase Manhattan Bank 5.55 4 9,006,938
Crestar Bank 5.555 36 9,015,276
Deutsche Bank AG (a) 5.54 19 9,018,005
Dresdner Bank AG (b) 5.54 29 8,004,924
Harris Trust and Savings Bank 5.53 11 9,029,033
Mellon Bank, N.A. 5.57 3 9,083,550
SouthTrust Bank of Alabama, N.A. 5.57 36 9,036,205
Westdeutsche Landesbank Girozentrale (b) 5.57 36 8,048,273
------------
Total Negotiable Bank Certificates of Deposit 88,283,693
PROMISSORY NOTES - 14.45%
-------------------------
Commerzbank U.S. Finance, Inc. (c) 5.51 22 8,971,073
Hypo U.S. Finance, Inc. (c) 5.505 8 8,990,366
Societe Generale North America, Inc. (c) 5.50 17 8,978,000
------------
Total Promissory Notes 26,939,439
REPURCHASE
AGREEMENTS - 38.09%
-------------------
GNMA 7% due 7/15/27 (Repo with Bear, Stearns &
Co. Inc. dated May 29, 1998, resale amount
$30,014,075) 5.63 1 30,014,075
FMAR due 10/2/24 and FNAR due 2/1/27 to 4/1/34
(Repo with DLJ Securities Corporation dated May
29, 1998, resale amount $16,507,741) 5.63 1 16,507,741
TRIN 3.375% due 1/15/07 (Repo with Prudential
Securities Inc. dated May 29, 1998, resale amount
$24,511,351) 5.56 1 24,511,351
------------
Total Repurchase Agreements (Cost $71,000,000) 71,033,167
------------
Primary Institutional Fund Investments - (99.88%)
(Cost $185,870,636) 186,256,299
Other assets, less liabilities - (.12%) 232,177
------------
NET ASSETS (100%) equivalent to $1.00 net asset
value, offering and redemption prices per share
based on 186,488,476 shares of beneficial interest
$.001 par value outstanding $186,488,476
============
</TABLE>
<TABLE>
<CAPTION>
CLASSES NET ASSETS SHARES OUTSTANDING NAV
<S> <C> <C> <C>
Class A $ 4,412,016 4,412,016 $ 1.00
Class B $ 10,376,245 10,376,245 $ 1.00
Class Treasurer's Trust $171,700,215 171,700,215 $ 1.00
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
NEGOTIABLE BANK
CERTIFICATES OF % DAYS TO VALUE
DEPOSIT - 47.34% RATE MATURITY (NOTE 1)
---------------- ---- -------- --------
<S> <C> <C> <C>
AGREEMENTS - 98.19%
GNMA 5% due 11/20/27 (Repo with Goldman
Sachs & Co. dated May 28, 1998, resale amount $3,102,368) 5.50 2 $3,101,895
GNMA 5% due 5/20/28 (Repo with Prudential
Securities Inc. dated May 29, 1998, resale amount
$2,801,276) 5.47 1 2,801,276
GNMA 6.50% due 10/15/27 (Repo with Salomon
Smith Barney Inc. dated May 27, 1998, resale
amount $3,002,760) 5.52 2 3,002,300
----------
Total Institutional Government Fund Investments -
(Cost $8,900,000) 8,905,471
Other assets, less liabilities - (1.81%) 163,959
----------
NET ASSETS (100%) equivalent to $1.00 net
Asset value, offering and redemption prices
per share based on 9,069,430 shares of
beneficial interest $.001 par value
outstanding $9,069,430
==========
</TABLE>
<TABLE>
<CAPTION>
CLASSES NET ASSETS SHARES OUTSTANDING NAV
<S> <C> <C> <C>
Class B $5,808,080 5,808,080 $ 1.00
Class Treasurer's Trust $3,261,350 3,261,350 $ 1.00
</TABLE>
(a) Eurodollar Certificates of Deposit - London Branch, United Kingdom
(b) Yankee Certificates of Deposit
(c) Collateralized by Bank Letter of Credit
GNMA = Government National Mortgage Association Mortgage-Backed Pass-Through
Securities
FMAR = Federal Home Loan Mortgage Corporation (FHLMC) Adjustable Rate
Mortgage-Backed Pass-Through Participation Certificates
FNAR = Federal National Mortgage Association (FNMA) Adjustable Rate
Mortgage-Backed Pass-Through Securities
TRIN = U.S. Treasury STRIPS
16
<PAGE> 17
RESERVE INSTITUTIONAL TRUST - INTERSTATE TAX-EXEMPT INSTITUTIONAL FUND
STATEMENT OF NET ASSETS - MAY 31, 1998
<TABLE>
<CAPTION>
NEGOTIABLE BANK
CERTIFICATES OF % DAYS TO VALUE
DEPOSIT - 47.34% RATE MATURITY (NOTE 1)
---------------- ---- -------- --------
<S> <C> <C> <C>
ALABAMA - 3.59%
Pell City IDA for General Signal Corporation, 3.90% (a) 10/1/2000 500 503,379
ARIZONA - 7.15%
Apache IDA for Tucson Electric Power Company, 3.90% (a) 12/15/2018 500 500,910
Pima IDA PCR for Tucson Electric Project, 3.85% (a) 10/1/2022 500 501,682
CALIFORNIA - 3.57%
Grand Terrace Community Redevelopment Agency, 4.40% (a) 12/1/2011 500 501,572
COLORADO - 7.16%
Englewood HCF for SW Medical Professional Ltd. Series 85, 4.20% (a) 12/1/2010 500 501,438
Eagle Revenue Bonds for Smith Creek Metro District, 3.75% (a) 10/1/2035 500 503,293
FLORIDA - 7.17%
Boca Raton IDA for Parking Garage Project, 4.075% (a) 12/1/2014 500 505,074
St. Lucie PCR for Florida Power & Light , 3.95% (a) 1/1/2026 500 501,592
KENTUCKY - 7.22%
Ohio County PCR for Big River Electric Corporation, 4.35% (a) 6/1/2013 500 510,590
Ohio County PCR for Big River Electric Corporation Project
Series 1985, 4.50%(a) 10/1/2015 500 501,932
MARYLAND - 3.57%
Baltimore IDA for Mayor and City Counsel Project, 4.50% (a) 8/1/2016 500 501,579
MICHIGAN - 7.17%
Jackson EDC for Thrifty Leoni Inc. Project, 3.825% (a) 12/1/2014 500 504,811
Michigan Job Development Authority, 4.10% (a) 1/1/2004 500 501,741
MINNESOTA - 3.58%
New Ulm Commercial Development Authority for Rob Bradley
Project Series 97, 4.10% (a) 10/1/2011 500 501,772
MISSOURI - 3.59%
Cole IDA for Modine Manufacturing Series 85, 4% (a) 12/1/2015 500 503,502
NEW JERSEY - 3.60%
New Jersey EDA for Volvo of America Corp., 4.246% (a) 12/1/2004 500 505,050
NEW YORK - 5.72%
New York City GOB Series E2, 4% (a) 8/1/2020 500 501,603
New York City GOB Series E6, 4% (a) 8/1/2019 300 300,960
NORTH DAKOTA - 3.58%
Minot IDR for Nash-Finch Project Series 93, 4.20% (a) 12/1/2002 500 501,784
OHIO - 3.58%
Toledo Special Obligation Assessment Notes, 3.90% 12/1/1998 500 501,660
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
NEGOTIABLE BANK
CERTIFICATES OF % DAYS TO VALUE
DEPOSIT - 47.34% RATE MATURITY (NOTE 1)
---------------- ---- -------- --------
<S> <C> <C> <C>
OKLAHOMA - 3.59%
Oklahoma IDA for Christian College, 4.625% (a) 7/1/2015 500 503,731
PENNSYLVANIA - 7.16%
Allegheny University Project Series 85, 3.60% (a) 7/1/2015 500 503,168
Northeastern HEF Wyoming Valley HCS Revenue Bonds, 3.85% (a) 1/1/2024 500 501,652
TENNESSEE - 3.57%
Chattanooga IDA for Baylor School Project, 3.90% (a) 11/1/2016 500 501,659
TEXAS - 3.58%
Harris HFC for Greater Houston Project, 3.85% (a) 11/1/2025 500 501,682
UTAH - 3.57%
Salt Lake City HFA for Parkview Plaza Project, 3.95% (a) 12/1/2014 500 501,394
WASHINGTON - 3.58%
Port of Seattle DAI for Douglas Management Corporation, 12/1/2005 500 501,711
3.95% (a)
WISCONSIN - 3.57%
Green Bay IDA for St. Mary Cement Company Ltd., 4% (a) 11/1/2000 500 501,419
-----------
Total Interstate Institutional Fund Investments (98.87%) Cost
$13,800,000) 13,872,340
Other assets, less liabilities (1.13%) 158,596
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value,
offering
and redemption prices per share on 14,030,936 shares of
beneficial interest of $.001 par value outstanding. $14,030,936
===========
</TABLE>
<TABLE>
<CAPTION>
CLASSES NET ASSETS SHARES OUTSTANDING NAV
------- ----------- --------------------- ----
<S> <C> <C> <C>
Class Treasurer's Trust $14,030,936 14,030,936 $ 1.00
</TABLE>
(a) The interest rate is subject to change periodically. The rates shown were
in effect at May 31, 1998. Securities payable on demand are collateralized
by bank letters of credit or other bank credit agreements.
SECURITY TYPE ABBREVIATIONS:
DAI - Development Authority Industrial Development Refunding Bonds
EDA - Economic Development Authority Revenue Bonds
EDC - Economic Development Corporation
GOB - General Obligation Bonds
HCF - Health Care Facility
HCS - Health Care Systems, Inc.
HEF - Health and Educational Facilities Revenue Bonds
HFA - Health Facilities Authority Revenue Bonds
HFC - Housing Finance Corporation
IDA - Industrial Development Authority Revenue Bonds
IDR - Industrial Development Agency Revenue Bonds
PCR - Pollution Control Revenue Bonds
18
<PAGE> 19
RESERVE INSTITUTIONAL TRUST
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
PRIMARY U.S. GOVERNMENT TAX-EXEMPT
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME (Note 1) $ 6,765,370 $ 141,899 $ 28,961
-------------- ----------- --------
EXPENSES (Note 2)
Comprehensive fee
Class A 25,898 0 0
Class B 64,601 10,668 0
Class Treasurer's Trust 570,571 1,325 4,361
------------- ----------- --------
Total Expenses 661,070 11,993 4,361
------------- ----------- --------
NET INVESTMENT INCOME $ 6,104,300 $ 129,906 $ 24,600
============== =========== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 20
RESERVE INSTITUTIONAL TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. GOVERNMENT TAX-EXEMPT
PRIMARY INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
--------------------- ------------- -------------
SEPTEMBER 15, 1997 MAY 13, 1998
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) THROUGH OPERATIONS) THROUGH
MAY 31, 1998 MAY 31, 1997 MAY 31, 1998 MAY 31, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholder as dividends (Note 1) $ (6,104,300) $ (35,795) $ (129,906) $ (24,600)
------------- ---------- ---------- ----------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per
share):
Net proceeds from the sale of 930,964,321 2,876,422 17,950,641 14,845,121
shares of shares
Net asset value of shares issued
on reinvestment of dividends 6,104,300 35,795 129,906 24,600
------------- ---------- ---------- ----------
Subtotal 937,068,621 2,912,217 18,080,547 14,869,721
Cost of shares redeemed (752,587,782) (904,580) (9,011,117) (838,785)
------------- ---------- ---------- ----------
Net increase from capital share 184,480,839 2,007,637 9,069,430 14,030,936
transactions
NET ASSETS:
Beginning of year 2,007,637 0 0 0
------------- ---------- ---------- ----------
End of year $ 186,488,476 $2,007,637 $9,069,430 $14,030,936
============= ========== ========== ===========
</TABLE>
20
<PAGE> 21
RESERVE INSTITUTIONAL TRUST
PRIMARY, U.S. GOVERNMENT AND INTERSTATE TAX-EXEMPT INSTITUTIONAL FUNDS
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES:
The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, open-end investment company. The policies summarized
below are consistently followed in the preparation of its financial
statements in conformity with generally accepted accounting principles.
A. The Fund's authorized shares of beneficial interest are unlimited and
divided into four series with four classes of shares, Primary
Institutional, U.S. Government Institutional, U.S. Treasury
Institutional and Interstate Tax-Exempt Institutional Funds. These
financial statements and notes apply only to all classes of Primary
Institutional Fund, Class B and Treasurer's Trust classes of U.S.
Government Institutional Fund and to Treasurer's Trust class of
Interstate Institutional Fund.
B. Securities are stated at value which represents cost plus interest
accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Fund uses amortized cost to value the portfolio, by which
investments are valued at cost and the difference between the cost of
each instrument and its value at maturity is accrued into income on a
straight line basis over the days to maturity irrespective of
intervening changes in interest rates or market value of investments.
The maturity of floating or variable rate instruments in which the
Fund may invest will be deemed to be, for floating rate instruments
(1) following, and for variable rate instruments the longer of (1) or
(2) following: (1) the notice period required before the Fund is
entitled to receive payment of the principal amount of the instrument;
(2) the period remaining until the instrument's next rate adjustment,
for purposes of Rule 2a-7 and for computing the portfolio's average
weighted life to maturity.
C. It is the Fund's policy to comply with Subchapter M of the Internal
Revenue Code and to distribute all of its taxable income to its
shareholders. Accordingly, no Federal income tax provision is
required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued,
premium amortized and discount accreted.
E. Net investment income on investments is distributed to shareholders
daily and automatically reinvested in additional Fund shares.
F. The Funds may enter into repurchase agreements with financial
institutions deemed to be creditworthy by the Funds Investment
Advisor, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon price. However, in the event of
default or bankruptcy by the seller, realization and/or retention of
the collateral may be subject to legal proceedings.
(2) MANAGEMENT FEE, SHAREHOLDER SERVICING COST AND TRANSACTIONS WITH
AFFILIATES:
Under the Management Agreement, Reserve Management Company, Inc. ("RMCI"),
manages the Fund's investments, effects purchases and sales thereof. RMCI
receives a comprehensive fee from the Funds at an annual rate of .25%
Class A, .45% Class B (as amended February 3, 1997) and .60% Class
Treasurer's Trust of the average daily net assets of each of the Funds.
For the year ended May 31, 1998, the Primary, U.S. Government and
Interstate Institutional Funds had accrued expenses due to RMCI of $8,938,
$376 and $692, respectively.
(3) MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income
and expenses during the reporting period. Actual results could differ from
those estimates.
21
<PAGE> 22
(4) CAPITAL SHARE TRANSACTIONS
Transactions in capital stock of each Fund for the year ended May 31, 1998,
were as follows:
<TABLE>
<CAPTION>
CLASS
TREASURER'S
PRIMARY INSTITUTIONAL FUND CLASS A CLASS B TRUST
-------------------------- -------- -------- --------------
<S> <C> <C> <C>
Sold 80,769,940 46,220,750 803,973,631
Reinvest 562,364 748,323 4,793,613
Redeemed (76,920,288) (38,600,465) (637,067,029)
------------ ------------ -------------
Net Increase 4,412,016 8,368,608 171,700,215
============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
CLASS
TREASURER'S
U.S. GOVERNMENT INSTITUTIONAL FUND CLASS B TRUST
----------------------------------- ------- --------------
<S> <C> <C>
Sold 14,076,079 3,874,563
Reinvest 119,220 10,685
Redeemed (8,387,219) (623,898)
----------- ----------
Net Increase 5,808,080 3,261,350
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
CLASS
TREASURER'S
INTERSTATE TAX-EXEMPT INSTITUTIONAL FUND TRUST
---------------------------------------- --------------
<S> <C>
Sold 14,845,121
Reinvest 24,600
Redeemed (838,785)
----------
Net Increase 14,030,936
==========
</TABLE>
22
<PAGE> 23
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS TREASURER'S TRUST
---------------------- -------------------------------------- -----------------------
OCTOBER 23, 1997 JANUARY 21, 1997 OCTOBER 15, 1997
(COMMENCEMENT OF (COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO YEAR ENDED OPERATIONS) TO OPERATIONS) TO
MAY 31, 1998 MAY 31, 1998 MAY 31, 1997 MAY 31, 1998
---------------------- ------------- ----------------------- -------------------
PRIMARY INSTITUTIONAL FUND
<S> <C> <C> <C> <C>
Net asset value, beginning of period $1.0000 $1.0000 $1.0000 $ 1.0000
------- ------- ------- ---------
Income from investment operations .0333 .0534 .0196 .0351
Expenses .0001 .0005 .0017 .0029
------ ------ ------ ---------
Net investment income (1) .0332 .0529 .0179 .0322
Dividends from net investment income (1) (.0332) (.0529) (.0179) (.0322)
------ ------ ------ ---------
Net asset value, end of period $1.0000 $1.0000 $1.0000 $ 1.0000
======= ======= ======= =========
Total Return 5.49%(2) 5.29% 4.95%(2) 5.13%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of 4,412 10,376 2,008 171,700
period
Ratio of expenses to average net
assets .25%(2) .45% .48%(2)(3) .60%(2)
Ratio of net investment income
to average net assets 5.35%(2) 5.16% 4.83%(2) 5.00%(2)
</TABLE>
23
<PAGE> 24
FINANCIAL HIGHLIGHTS - (CONTINUED)
<TABLE>
<CAPTION>
CLASS TREASURER'S
CLASS B TRUST
------- -----
SEPTEMBER 15, 1997 MAY 5, 1998
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO OPERATIONS) TO
MAY 31, 1998 MAY 31, 1998
------------ ------------
U.S. GOVERNMENT INSTITUTIONAL FUND
<S> <C> <C>
Net asset value, beginning of period $ 1.0000 $ 1.0000
-------- --------
Income from investment operations .0393 .0036
Expenses .0029 .0000
-------- --------
Net investment income (1) .0364 .0036
Dividends from net investment income (1) (.0364) (.0036)
-------- --------
Net asset value, end of period $ 1.0000 $ 1.0000
======== ========
Total Return 5.13%(2) 4.85%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period 5,808 3,261
Ratio of expenses to average net
assets .45%(2) .60%(2)
Ratio of net investment income
to average net assets 5.00%(2) 4.73%(2)
</TABLE>
---------------------------
FEDERAL TAX INFORMATION - (UNAUDITED)
The dividends distributed by the Primary and U.S. Government Institutional
Funds are treated for Federal tax purposes as ordinary income.
24
<PAGE> 25
<TABLE>
<CAPTION>
CLASS TREASURER'S
TRUST
-----
MAY 13, 1998
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31, 1998
------------
INTERSTATE TAX-EXEMPT INSTITUTIONAL FUND
<S> <C>
Net asset value, beginning of period $ 1.0000
--------
Income from investment operations .0021
Expenses .0003
--------
Net investment income (1) .0018
Dividends from net investment income (1) (.0018)
--------
Net asset value, end of period $ 1.0000
========
Total Return 3.39%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets in thousands, end of period 14,031
Ratio of expenses to average net
assets .60%(2)
Ratio of net investment income
to average net assets 3.33%(2)
</TABLE>
1) Based on compounding of daily dividends. Not indicative of future results.
2) Annualized.
3) During the period the manager waived a portion of its comprehensive fee of
the Primary Institutional Fund. If there were no reduction the actual fee
would have been .02% higher for Class B.
The dividends distributed by the Primary & U.S. Government Institutional
Funds are treated for Federal tax purposes as ordinary income. The dividends
distributed by Interstate Tax-Exempt Institutional Fund are tax-exempt for
Federal tax purposes.
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve Institutional Trust:
In our opinion, the accompanying statement of net assets and the related
statement of operations and of changes in net assets and financial highlights
present fairly, in all material respects, the financial position of Reserve
Institutional Trust (comprising the Primary Institutional, U.S. Government
Institutional and Interstate Tax-Exempt Institutional Funds) at May 31, 1998,
the results of its operations for the period then ended, the changes in their
net assets and the financial highlights for the 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 Trust'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 audits 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 brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, NY
July 24, 1998
26
