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General Information, Purchases and
Redemptions
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24 Hour Yield and Balance Information
[THE RESERVE FUNDS LOGO]
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Nationwide 1-800-637-1700
PROSPECTUS
The Reserve Institutional Trust is a no-load money market fund with four
investment portfolios: PRIMARY INSTITUTIONAL FUND, U.S. GOVERNMENT INSTITUTIONAL
FUND, U.S. TREASURY INSTITUTIONAL FUND and INTERSTATE TAX-EXEMPT INSTITUTIONAL
FUND ("Funds"). The Reserve Institutional Trust is designed for institutional
investors as a convenient investment vehicle for short-term funds.
The objective of each Fund, except the Interstate Tax-Exempt Institutional
Fund, is to seek as high a level of current income as is consistent with
preservation of capital and liquidity, although achievement of this objective
cannot be assured.
The objective of the Interstate Tax-Exempt Institutional Fund 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; however, achievement
of this objective cannot be assured.
- PRIMARY INSTITUTIONAL FUND invests in (i) obligations backed by the full
faith and credit of the United States government and its agencies or
instrumentalities; (ii) deposit type obligations, acceptances and letters
of credit of FDIC insured institutions and foreign banks with assets in
excess of $25 billion; (iii) short term corporate obligations rated A-1 or
the equivalent thereof; (iv) other similar high quality short term
instruments; and (v) instruments fully collateralized by the foregoing
instruments.
- U.S. GOVERNMENT INSTITUTIONAL FUND invests in obligations backed by the
full faith and credit of the United States government or obligations
collateralized thereby.
- U.S. TREASURY INSTITUTIONAL FUND invests exclusively in full-faith and
credit obligations of the United States government that provide interest
income exempt from state and local income taxes.
- INTERSTATE TAX-EXEMPT INSTITUTIONAL FUND invests principally in
obligations issued by the states, territories, possessions of the United
States and their political subdivisions, duly constituted authorities and
corporations.
Each Fund offers five classes of shares to investors, with each class
subject to differing service fees and distribution fees. In all other respects,
all classes of shares represent the same interest in the income and assets of
each respective Fund.
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.
This Prospectus sets forth the information about each Fund which a
prospective investor should know before investing. A Statement of Additional
Information dated March 16, 1998, as from time to time amended, providing
further details about the Funds, has been filed with the Securities and Exchange
Commission. It may be obtained without charge by writing or calling the Funds at
(800) 637-1700. The Statement of Additional Information is hereby incorporated
by reference into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Prospectus dated March 16, 1998
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 2
SHAREHOLDER EXPENSES
The following tables illustrate all expenses and fees that a shareholder of
each of the Funds will incur directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES FOR ALL FUNDS
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases..................... None
Maximum Sales Load Imposed on Reinvested Dividends.......... None
Redemption Fees*............................................ None
Exchange Fees............................................... None
</TABLE>
- ---------------
* A $2.00 fee is charged on redemption checks issued by the Funds of less than
$100 and a $10 fee is charged for wire redemptions of less than $10,000, for
Treasurer's Trust and Class D shareholders. A $100 fee is charged for
redemption checks and wire redemptions of less than $100,000 for shareholders
of all other classes.
ANNUAL FUND OPERATING EXPENSES FOR ALL FUNDS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TREASURER'S
CLASS A CLASS B TRUST CLASS C CLASS D
------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fee* .25% .25% .25% .25% .25%
12b-1 Fees [None] [None] [None] .25%** .50% **
Shareholder Services Fees [None] .20% .25% .25% .25%
Other Operating Expenses++ 0% 0% .10% 0% 0%
Other Expenses 0% .20% .35% .25% .25%
Total Operating Expenses .25% .45% .60% .75% 1.00%
</TABLE>
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* Each Fund is charged a comprehensive management fee of 0.25% per annum of its
average daily net assets for both advisory and ordinary operating expenses
(other than the Service Fee and Distribution Fee) during the year. However, a
Fund may be charged for certain non-recurring extraordinary expenses. See
"Investment Management Agreement" on page 7.
** Due to these distribution expenses, long-term shareholders may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
++ "Other Operating Expenses" are based on an estimated amount for the current
fiscal year. The purpose of this table is to assist the investor in
understanding the costs and expenses that a shareholder in a Fund will bear
directly or indirectly.
The following examples illustrate the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period for each Fund.
ALL FUNDS
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A..................................................... $ 2.56 $ 8.05 $14.07 $ 31.82
Class B..................................................... $ 4.60 $14.44 $25.20 $ 56.69
Treasurer's Trust........................................... $ 6.13 $19.22 $33.48 $ 75.00
Class C..................................................... $ 7.66 $23.97 $41.69 $ 93.03
Class D..................................................... $10.20 $31.84 $55.25 $122.46
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
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<PAGE> 3
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Reserve Institutional
Trust--Primary, U.S. Government, U.S. Treasury and Interstate Tax-Exempt
Institutional Funds outstanding throughout each period. As of November 30, 1997,
Primary Institutional Fund had only Class A, Class B and Class C shares
outstanding and U.S. Government Institutional Fund had only Class B shares
outstanding. As of that date, no other protfolios or classes of shares were
outstanding. The information below should be read in conjunction with the
Financial Statements and related notes appearing in the Statement of Additional
Information. Such information, for Primary Institutional Fund Class B, has been
audited by Coopers & Lybrand L.P. for the period January 21, 1997 through May
31, 1997 as indicated in their report appearing in the Statement of Additional
Information. Such information for Primary Institutional Fund Class B (except the
period January 21, 1997 through May 31, 1997) and for all other portfolios and
classes for all periods shown is unaudited.
PRIMARY INSTITUTIONAL FUND
(CLASS A SHARES ONLY)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 23, 1997(1)
THROUGH
NOVEMBER 30, 1997
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIODS....................... $ 1.00
Income from investment operations:
Net investment income..................................... $ 0.0057
Net realized and unrealized gains on securities........... --
TOTAL FROM INVESTMENT OPERATIONS.......................... $ 0.0057
LESS DISTRIBUTIONS:
Dividends from net investment income........................ $(0.0057)
Distributions from capital gains............................ --
TOTAL DISTRIBUTIONS......................................... $(0.0057)
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00
Total return(2)............................................. 5.37%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, in thousands, end of period..................... $17,558
Ratio of expenses to average net assets(2).................. 0.25%
Ratio of net investment income to average net assets(2)..... 5.36%
</TABLE>
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(1) The Primary Institutional Fund Class A shares commenced operations on
October 23, 1997.
(2) Annualized for the period October 23, 1997 through November 30, 1997.
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PRIMARY INSTITUTIONAL FUND
(CLASS B SHARES ONLY)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 1, 1997 JANUARY 21, 1997
THROUGH THROUGH
NOVEMBER 30, 1997 MAY 31, 1997(1)
----------------- ----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.00 $ 1.00
Income from investment operations:
Net investment income(2).................................. $ 0.0260 $ 0.0179
Net realized and unrealized gains on securities........... -- --
TOTAL FROM INVESTMENT OPERATIONS.......................... $ 0.0260 $ 0.0179
LESS DISTRIBUTIONS
Dividends from net investment income(2)..................... $(0.0260) $(0.0179)
Distributions from capital gains............................ -- --
TOTAL DISTRIBUTIONS......................................... $(0.0260) $(0.0179)
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00 $ 1.00
Total return(3)............................................. 5.19% 4.95%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, in thousands, end of period..................... $28,102 $2,008
Ratio of expenses to average net assets(3).................. 0.45% 0.48%(4)
Ratio of net investment income to average net assets(2)..... 5.12% 5.18%
</TABLE>
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(1) The Primary Institutional Fund commenced operations on January 21, 1997. The
figures for the period January 21, 1997 through May 31, 1997 have been
audited.
(2) Based on compounding of daily dividends. Not indicative of future results.
(3) Annualized.
(4) During period, the Manager waived a portion of its comprehensive fee. If
there was no reduction the actual fee would have been .02% higher.
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PRIMARY INSTITUTIONAL FUND
(CLASS C SHARES ONLY)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 15, 1997(1)
THROUGH
NOVEMBER 30, 1997
-------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.00
Income from investment operations:
Net investment income..................................... $ 0.0065
Net realized and unrealized gains on securities........... --
TOTAL FROM INVESTMENT OPERATIONS.......................... $ 0.0065
LESS DISTRIBUTIONS:
Dividends from net investment income........................ $(0.0065)
Distributions from capital gains............................ --
TOTAL DISTRIBUTIONS......................................... $(0.0065)
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00
Total return(2)............................................. 5.01%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, in thousands end of period...................... $160,803
Ratio of expenses to average net assets(2).................. 0.60%
Ratio of net investment income to average net assets(2)..... 9.98%
</TABLE>
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(1) The Primary Institutional Fund Class C shares commenced operations on
October 15, 1997.
(2) Annualized for the period October 15, 1997 through November 30, 1997.
U.S. GOVERNMENT INSTITUTIONAL FUND
(CLASS B SHARES ONLY)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 15, 1997
THROUGH
NOVEMBER 30, 1997(1)
--------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.00
Income from investment operations:
Net investment income..................................... $ 0.0106
Net realized and unrealized gains on securities........... --
TOTAL FROM INVESTMENT OPERATIONS.......................... $ 0.0106
LESS DISTRIBUTIONS:
Dividends from new investment income........................ $(0.0106)
Distributions from capital gains............................ --
TOTAL DISTRIBUTIONS......................................... $(0.0106)
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00
Total return(2)............................................. 5.01%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, in thousands, end of period..................... 2,$109
Ratio of expenses to average net assets(2,3)................ 0.45%
Ratio of net investment income to average net assets(2)..... 4.98%
</TABLE>
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(1) The U.S. Government Institutional Fund commenced operations on September 13,
1997.
(2) Annualized for the period September 15, 1997 through November 30, 1997.
(3) Manager waived .15% of its expenses. If there was no waiver, the actual
expenses would have been .75%.
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YIELD
Current yield refers to the income generated by an investment in a Fund over
a seven-day period. This income is then annualized. That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned is assumed to be reinvested. The effective yield will be higher than the
current yield because of this compounding effect.
For the seven calendar days ended November 30, 1997, the current and
effective yields of each Class and Fund were as follows:
<TABLE>
<CAPTION>
CURRENT EFFECTIVE
------- ---------
<S> <C> <C> <C>
Primary Fund Class A........................................................... 5.40% 5.55%
B........................................................... 5.20% 5.34%
C........................................................... 5.05% 5.18%
Government Fund Class B........................................................... 4.93% 5.05%
</TABLE>
The Interstate Tax-Exempt Institutional Fund may also quote its tax
equivalent yield, which shows the taxable yield an investor would have to earn
before taxes to equal the Fund's tax-free yield. The tax equivalent yield is
calculated by dividing the Fund's current or effective yield by the result of
one minus a stated federal tax rate.
In reports or other communications to shareholders of the Trust or in
advertising materials, the Trust may compare its performance with that of other
money market funds listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or other relevant indices and industry
publications.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each Fund, except the Interstate Tax-Exempt
Institutional Fund, is to seek as high a level of current income as is
consistent with preservation of capital and liquidity. The investment objective
of the Interstate Tax-Exempt Institutional Fund 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. There is no assurance that a Fund
will achieve its investment objective. The investment objective may not be
changed, with respect to a Fund, without the vote of a majority of the
outstanding shares of that fund as defined in the Investment Company Act of 1940
("Act").
The Primary Institutional Fund seeks to attain its objective by investing in
U.S. government securities; deposit-type obligations, such as negotiable
certificates of deposit and time deposits, bankers' acceptances and letters of
credit of domestic and foreign banks; savings and loan associations and savings
banks; high quality domestic and foreign commercial paper as determined by any
nationally recognized statistical rating organization or, in the case of any
instrument that is not rated, of comparable quality as determined by the Board
of Trustees; other short term instruments of similar quality; and instruments
fully collateralized by such obligations.
The U.S. Government Institutional Fund seeks to attain its objective by
investing only in securities backed by the full faith and credit of the United
States government or obligations collateralized thereby.
The U.S. Treasury Institutional Fund seeks to attain its objective by
investing only in securities of the United States government that provide
interest income exempt from state and local income taxes.
The Interstate Tax-Exempt Institutional Fund seeks to attain its objective
by investing principally in obligations issued by states, territories, and
possessions of the United States and their subdivisions, duly constituted
authorities and corporations, or participation in such obligations; the interest
on which is exempt from U.S. federal income taxes.
United States government securities include a variety of securities which
are issued or guaranteed by the U.S. Treasury, various agencies of the federal
government and various instrumentalities which have been established or
sponsored by the U.S. government, and certain interests in the foregoing types
of securities such as U.S. Treasury STRIPS. United States government securities
include direct obligations of the U.S. Treasury (such as Treasury bills,
Treasury notes, and Treasury bonds). Obligations such as securities issued by
the Government National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association
("FNMA"), the Student Loan Marketing Association ("SLMA") and the Federal Home
Loan Bank ("FHLB") are also considered U.S. government securities. Some
obligations of agencies and instrumentalities of the U.S. government, such as
the GNMA, are supported by the full faith and credit of the United States. Other
securities, such as obligations
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<PAGE> 7
issued by the FNMA and SLMA, are supported by the right of the issuer to borrow
from the U.S. Treasury; and others, such as obligations issued by the FHLB and
FHLMC are supported only by the credit of the agency or instrumentality issuing
the obligation. In the case of securities not backed by the full faith and
credit of the United States the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
U.S. Treasury STRIPS permit the separate ownership and trading of the
interest and principal components of direct obligations of the U.S. Treasury.
These obligations may take the form of (i) obligations from which interest
coupons have been stripped; (ii) the interest coupons that are stripped; or
(iii) book entries at a Federal Reserve member bank representing ownership of
obligation components.
Under federal law, the income derived from obligations issued by the U.S.
Treasury and certain of its agencies and instrumentalities is exempt from state
personal income taxes. A substantial majority of the states that tax personal
income permit mutual funds to passthrough this tax exemption to shareholders. It
is anticipated that a substantial portion of the dividends paid to shareholders
of the U.S. Treasury Institutional Fund residing in these states will qualify
for this exemption from state taxation. However, a state or local taxing
authority may seek, in the future, to tax a shareholder on all or a portion of
the interest income of a security held by the U.S. Treasury Institutional Fund.
The Interstate Tax-Exempt Institutional Fund invests in securities generally
known as "municipal bonds" or "municipal notes" and the interest on them is
exempt from federal income tax in the opinion of either bond counsel for the
issuers, or in some instances, the issuer itself ("Municipal Obligations"). They
are issued to raise money for various public purposes such as constructing
public or private facilities. General obligation bonds and notes are backed by
the taxing power of the issuer. Revenue bonds and notes are backed by the
revenues of a project or facility such as a toll road or, in some cases, from
the proceeds of a special excise tax, but not by the general taxing power.
Industrial development revenue bonds and notes are backed by the credit of a
private issuer. The Fund may invest any portion of its assets in industrial
revenue bonds and notes. Municipal Obligations bear fixed, variable or floating
rates of interest. Under normal market conditions, at least 80% of the value of
the Fund's assets will be invested in Municipal Obligations, although the Fund
may take a defensive position and invest temporarily without limit in taxable
U.S. government securities and repurchase agreements pertaining to U.S.
government securities. In addition, except during temporary periods of imbalance
in supply and demand in the markets for certain Municipal Obligations, no more
than 25% of the Fund's assets will be invested in Municipal Obligations whose
issuers are located in the same state or in Municipal Obligations the interest
on which is paid from revenues of similar type projects. See "Other Policies"
below for a description of the characteristics and risks of repurchase
agreements.
The Interstate Tax-Exempt Institutional Fund may purchase floating and
variable rate demand notes, which are Municipal Obligations normally having
stated maturities in excess of one year, but which permit the holder to demand
payment of principal and accrued interest at any time, or at specified intervals
not exceeding one year, in each case, usually upon not more than seven days'
notice. The interest rates on these floating and variable rate demand notes
fluctuate from time to time. Frequently, such Municipal Obligations are secured
by letters of credit or other credit-support arrangements provided by banks. The
Interstate Tax-Exempt Institutional Fund may invest any portion of its assets in
floating and variable rate demand notes secured by bank letters of credit or
other credit-support arrangements. Use of letters of credit or other credit
support arrangements will not adversely affect the tax-exempt status of these
Municipal Obligations. The Interstate Tax-Exempt Institutional Fund will not
invest more than 10% of the value of its assets in floating or variable rate
demand notes for which there is no secondary market if the demand feature on
such Municipal Obligations is exercisable on more than seven days' notice.
In view of the investment of the Interstate Tax-Exempt Institutional Fund in
industrial revenue, development bonds and notes secured by letters of credit or
guarantees of banks, an investment in Interstate Tax-Exempt Institutional Fund
shares should be made with an understanding of the characteristics of the
banking industry and the risks such an investment may entail. Banks are subject
to extensive government regulations, which may limit both the amounts and the
types of loans and other financial commitments which may be made and interest
rates and fees which may be charged. The profitability of the banking industry
is largely dependent upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money-market conditions. In
addition, general economic conditions play an important part in the operations
of this industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its obligations
under a letter of credit.
The Interstate Tax-Exempt Institutional Fund will purchase tax-exempt
securities which are rated MIG-1 or MIG-2 by Moody's Investor Services, Inc.
("Moody's"), SP-1 or SP-2 by Standard & Poor's Corporation ("S&P") or the
equivalent thereof and non-rated securities which are determined to be of
comparable quality by the Fund's investment adviser pursuant to guidelines
established by the Board of Trustees.
The Primary Institutional Fund may invest in obligations of U.S. banking
institutions that are insured by the FDIC; commercial paper which is rated, at
the time of investment, P-1 by Moody's Investors Service, Inc. ("Moody's"), A-1
by Standard & Poor's Corporation
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<PAGE> 8
("S&P") or the equivalent thereof if rated by another rating agency; and
obligations of foreign banks which, at the time of investment, have more than
$25 billion (or the equivalent in other currencies) in total assets and which,
in the opinion of the Fund's investment adviser, are of comparable quality to
obligations of United States banks which may be purchased by the Primary
Institutional Fund. Instruments which are not rated may also be purchased by the
Primary Institutional Fund provided such instruments are determined to be of
comparable quality by the Board of Trustees of the Fund to those rated
instruments in which the Primary Institutional Fund may invest.
The Primary Institutional Fund may invest in obligations of U.S. banks,
foreign branches of U.S. banks (Eurodollars), U.S. branches of foreign banks
(Yankee dollars) and foreign branches of foreign banks. Euro and Yankee dollar
investments involve certain risks that are different from investments in
obligations of U.S. banks. These risks may include unfavorable political and
economic developments, possible withholding taxes, seizure of foreign deposits,
currency controls or other governmental restrictions which might affect payment
of principal or interest. In addition, foreign branches of foreign banks are not
regulated by U.S. banking authorities and are generally not bound by financial
reporting standards comparable to U.S. banks. The Primary Institutional Fund
will limit its investment in foreign branches of foreign banks to those banks
located in Australia, Canada, Western Europe and Japan. The Primary
Institutional Fund may also invest in municipal obligations secured by bank
letters of credit, the interest on which is not exempt from federal income
taxation.
OTHER POLICIES. PRIMARY, U.S. GOVERNMENT AND U.S. TREASURY INSTITUTIONAL
FUNDS. The Primary, U.S. Government and U.S. Treasury Institutional Funds may
invest up to 100% of their assets in repurchase agreement transactions. A
repurchase agreement is a transaction by which a Fund purchases a security (U.S.
government or other) and simultaneously commits to resell that security to the
seller at the same price, plus interest at a specified rate. Repurchase
agreements usually have a short duration, often less than one week. The Funds
will limit repurchase agreements to those banks and securities dealers who are
deemed creditworthy pursuant to guidelines adopted by the Funds' Board of
Trustees. The investment adviser will follow procedures to assure that all
repurchase agreements are always fully collateralized as to principal and
interest. The instruments held as collateral are valued daily, and if the value
of the instruments declines, the Funds will require additional collateral. If
the other party to the repurchase agreement defaults on its obligation to
repurchase the underlying securities, a portfolio may incur a loss to the extent
that the proceeds from the sale of the collateral were less than the repurchase
price. In the event of insolvency or bankruptcy of the other party to a
repurchase agreement, a Fund may encounter difficulties and might incur costs or
possible losses of principal and income upon the exercise of its rights under
the repurchase agreement. The U.S. Treasury Institutional Fund will limit its
investment in repurchase agreements with respect to securities backed only by
the full faith and credit of the U.S. government to not more than 5% of its
total assets. Such investment will be for temporary purposes pending the
investment of uninvested cash in U.S. Treasury obligations. Securities subject
to repurchase agreements will be placed in a segregated account and the market
value will be monitored to ensure that the market value of the securities plus
any accrued interest thereon will at least equal the repurchase price.
The Primary and U.S. Government Institutional Funds may from time to time
lend securities on a short-term basis to banks, brokers and dealers (but not
individuals) and receive as collateral cash or securities issued by the U.S.
government or its agencies or instrumentalities (or any combination thereof),
which collateral will be required to be maintained at all times in an amount
equal to at least 100% of the current value of the loaned securities plus
accrued interest. In determining whether to lend securities to a particular
broker-dealer or financial institution, the Fund will consider all relevant
facts and circumstances, including the creditworthiness of the broker-dealer or
financial institution. A Fund may pay reasonable finders, administrative and
custodial fees in connection with a loan. During the time portfolio securities
are on loan the borrower will pay the Fund an amount equivalent to any interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest from the
borrower who has delivered equivalent collateral or secured a letter of credit.
The value of the securities loaned cannot exceed 25% of the Fund's total assets.
Loans of securities involve risks of delay in receiving additional collateral or
in recovering the securities lent or even loss of rights in the collateral in
the event of insolvency of the borrower of the securities. The Statement of
Additional Information further explains the Funds' securities-lending policies.
The Primary, U.S. Government and U.S. Treasury Institutional Funds may
invest, without limitation, in U.S. government securities and in instruments
secured or collateralized by U.S. government securities. A Fund will not invest
more than 10% of its net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after notice. A Fund
will not concentrate (i.e., invest 25% or more of its total assets) in the
securities of issuers in a single industry, except that the Primary
Institutional Fund may invest 25% or more of its total assets in the banking
industry. In addition, a Fund will not invest more than 5% of its total assets
in the securities of any single issuer (except U.S. government securities or
repurchase agreements collateralized by U.S. government securities). Each Fund
has the authority to borrow money (including reverse purchase agreements), for
extraordinary or emergency purposes but not in an amount exceeding 5% of its
total assets. Reverse repurchase agreements involve sales by a Fund of portfolio
securities concurrently with an agreement by the Fund to repurchase the same
securities at a later date at a fixed price.
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<PAGE> 9
In order to provide liquidity, each Fund utilizes the following practices:
limiting its average maturity to 90 days or less; buying securities which mature
in 397 days or less; and buying only high quality securities.
INTERSTATE TAX-EXEMPT INSTITUTIONAL FUND. Certain banks and other municipal
securities dealers have indicated a willingness to sell Municipal Obligations to
the Fund accompanied by a commitment to repurchase the securities, at the Fund's
option or at a specified date, at an agreed upon price or yield within a
specified period prior to the maturity date of such securities at the amortized
cost thereof. If a bank or other municipal securities dealer were to default
under such stand-by commitment and fail to pay the exercise price, the Fund
could suffer a potential loss to the extent that the amount paid by the Fund, if
any, for the Municipal Obligation with the stand-by commitment exceeded the
current value of the underlying Municipal Obligations. If a bank or other
municipal securities dealer defaults under its stand-by commitment, the
liquidity of the security subject to such commitment may be adversely affected.
Municipal Obligations are sometimes offered on a when-issued or delayed
delivery basis. There is no limit on the Fund's ability to purchase Municipal
Obligations on a when-issued basis. The price of when-issued securities, which
is generally expressed in yield terms, is fixed at the time the commitment to
purchase is made but delivery and payment for the when-issued securities takes
place at a later date normally, within one month and no interest accrues in the
interim. To the extent that assets of the Fund purchasing such securities are
not invested prior to the settlement of a purchase of securities, the Fund will
earn no income; however, it is the Fund's intent to be as fully invested as is
practicable. While when-issued securities may be sold prior to settlement date,
the Fund intends to purchase such securities with the purpose of actually
acquiring them unless a sale appears desirable for investment reasons. At the
time the Fund makes the commitment to purchase a Municipal Obligation on a
when-issued basis, it will record the transaction and reflect the value of the
security in determining its net asset value. The Fund will also maintain readily
marketable assets at least equal in value to commitments for when-issued
securities specifically for the settlement of such commitments. The investment
adviser does not believe that the Fund's net asset value or income will be
adversely affected by the purchase of Municipal Obligations on a when-issued
basis.
The Fund may purchase from financial institutions participation interests in
Municipal Obligations. 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. These instruments may have fixed, floating or variable rates of
interest. Frequently, such instruments are secured by letters of credit or other
credit support-arrangements provided by banks.
The Internal Revenue Code of 1986, as amended, subjects interest received on
certain otherwise tax-exempt securities ("private activity bonds") to a federal
alternative minimum tax. It is the position of the Securities and Exchange
Commission that in order for a fund to call itself "tax-free," not more than 20%
of its net assets may be invested in municipal securities subject to the federal
alternative minimum tax or at least 80% of its income must be free of both
regular income tax and alternative minimum tax. Income received on such
securities is classified as a "tax preference item" which could subject certain
investors in such securities, including shareholders of the Fund, to an
increased alternative minimum tax. However, as of the date of this Prospectus,
the Fund does not purchase such securities, but reserves the right to do so
depending on market conditions in the future.
Yields on municipal securities depend on a variety of factors, including
general economic and monetary conditions, money-market factors, conditions in
the tax-exempt securities market, size of a particular offering, maturity of the
obligation and rating of the issue. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
From time to time the Fund may invest in taxable short-term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the United States 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.
The Fund's investment adviser uses its reasonable business judgment in
selecting investments in addition to considering the ratings of Moody's and S&P.
This analysis considers, among other things, the financial condition of the
issuer by taking into account present and future liquidity, cash flow and
capacity to meet debt service requirements. Since the market value of debt
obligations fluctuates as an inverse function of changing interest rates, the
Fund seeks to minimize the effect of such fluctuations by investing in
instruments with remaining maturities of 397 days or less and limiting its
average maturity to 90 days or less.
The principal risk factors associated with investment in the Fund are the
risk of fluctuations in short-term interest rates, the risk of default among one
or more issuers of securities which comprise the Fund's assets and the risk of
non-diversification. As a non-diversified investment company, the Fund is
permitted to have all its assets invested in a limited number of issuers.
Accordingly, since a
9
<PAGE> 10
relatively high percentage of the Fund's assets may be invested in the
securities of a limited number of issuers, the Fund's investment securities may
be more susceptible to any single economic, political or regulatory occurrence
than the investment securities of a diversified investment company. However, the
Fund intends to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code. This limits the aggregate value of all investments
(except United States government securities, securities of other regulated
investment companies, cash and cash items) so that, with respect to at least 50%
of its total assets, not more than 5% of such assets are invested in the
securities of a single issuer.
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. The Board of Trustees manages each Fund's
business and affairs. Reserve Management Company, Inc. ("Adviser"), 14 Locust
Place, Manhasset, NY 11030, a New Jersey corporation, provides the Funds with
investment advice pursuant to an Investment Management Agreement. Since November
15, 1971, the Adviser and its affiliates have been advising The Reserve Funds,
which currently have assets in excess of $4.5 billion. Under the Investment
Management Agreement, the Adviser manages each Fund's investments, including
effecting purchases and sales thereof, in furtherance of its investment
objective and policies, subject to overall control and direction by the
Trustees.
Each Fund pays the Adviser a comprehensive management fee calculated on an
annual basis at .25% of its average daily net assets. Under the terms of the
Investment Management Agreement with the Funds, the Adviser pays all employee
and ordinary operating costs of the Funds. Excluded from the definition of
ordinary operating costs are interest, taxes, brokerage fees, extraordinary
legal and accounting fees and expenses, fees under the Distribution Plan and the
Service Plan (discussed below) and certain operating expenses unique to the
Treasurer's Trust 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.
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the Investment Management
Agreement relates, except a loss resulting from the willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder.
The Adviser may make such advertising and promotional expenditures, using
its own resources, as it from time to time deems appropriate.
YEAR 2000. Like other investment companies, financial and business organizations
and individuals around the world, the Trust could be adversely affected if the
computer systems used by the Adviser, the Distributor or other service providers
to the Trust do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The computer system used for the Trust's shareholder accounting
function is already Year 2000 compliant. In addition, the Adviser and the
Distributor are taking steps that they believe are reasonably designed to
address the Year 2000 Problem with respect to computer systems that they use and
the Adviser is taking steps to obtain reasonable assurances that comparable
steps are being taken by the Trust's other service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact to the Trust.
The Year 2000 Problem is expected to impact corporations, which may include
issuers of portfolio securities held by the Trust, to varying degrees based upon
various factors, including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Trust is unable to
predict what impact, if any, the Year 2000 Problem will have on issuers of the
portfolio securities held by the Trust.
TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the Fund's
shareholders.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Reserve Institutional Trust acts
as its own transfer agent and dividend-paying agent.
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<PAGE> 11
HOW TO BUY SHARES
Each Fund offers five classes of shares to investors, with each class
subject to differing service fees and distribution fees, as follows:
<TABLE>
<CAPTION>
MAXIMUM
ANNUAL MAXIMUM MAXIMUM
SHAREHOLDER ANNUAL TOTAL ANNUAL MINIMUM
SERVICES FEE* 12B-1 FEE* OPERATING EXPENSES+ INITIAL INVESTMENT
------------- ---------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A.......................................... 0% 0% .25% $10 million
Class B.......................................... .25% 0% .50% $5 million
Treasurer's Trust................................ .25% 0% .60% None
Class C.......................................... .25% .25% .75% $1 million
Class D.......................................... .25% .50% 1.00% $250,000
</TABLE>
- ---------------
* As a percentage of average daily net assets.
+ As a percentage of average daily net assets (exclusive brokerage fees,
extraordinary legal and accounting fees and expenses).
In all other respects, all classes of shares represent the same interest in
the income and assets of each respective Fund.
Shares of a Fund may be purchased by wire only. Shares are sold at the net
asset value next determined after receipt of a purchase order in the manner
described below. Purchase orders are accepted on any day on which the New York
Stock Exchange and the Federal Reserve Bank of New York are open ("Fund Business
Day"). For Federal Fund wires to be eligible for same-day order entry, the Fund
must be notified before 2:00 PM (New York time for Primary and U.S. Government
Funds) (11:00 AM New York time for Interstate and U.S. Treasury Funds) of the
amount to be transmitted and the account to be credited, and the Fund must
receive the credit at its bank by 3:00 PM (New York time). Orders received by
the Fund after the times specified above will be priced at the public offering
price in effect at 3:00 PM (New York time) on the next business day. The Fund
does not determine net asset value, and purchase orders are not accepted, on the
days those institutions observe the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
To purchase shares of a Fund by Federal Reserve wire, call the Fund at
1-800-637-1700 or call your sales representative. To protect a Fund's
performance and shareholders, the Adviser discourages frequent trading in
response to short-term market fluctuations. The Fund reserves the right to
refuse any investment that, in its sole discretion, would disrupt the Fund's
management.
If the Public Securities Association recommends that the government
securities markets close early, the Fund may advance the time at which it must
receive notification of orders for purposes of determining eligibility for
dividends on that day. Investors who notify the Fund after the advanced time
become entitled to dividends on the following Fund Business Day. If the Fund
receives notification of a redemption request after the advanced time, it
ordinarily will wire redemption proceeds on the next Fund Business Day.
If an investor does not remit Federal Funds, such payment must be converted
into Federal Funds. This usually occurs within one Fund Business Day of receipt
of a bank wire. Prior to receipt of Federal Funds, the investor's monies will
not be invested.
The following procedure will help assure prompt receipt of your Federal
Funds wire:
A. Telephone the Fund, toll free at 1-800-637-1700 and provide the following
information:
Your name
Address
Telephone number
Taxpayer ID number
The amount being wired
The identity of the bank wiring funds.
You will then be provided with a Fund account number. (Investors with
existing accounts must also notify the Fund before wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund as follows:
11
<PAGE> 12
The Fund reserves the right to reject any purchase order for any reason.
SHARE CERTIFICATES. The Fund maintains a share account for each shareholder. The
Trust does not issue share certificates.
ACCOUNT STATEMENTS. Monthly account statements are sent to investors to report
transactions such as purchases and redemptions as well as dividends paid during
the month.
MINIMUM INVESTMENT REQUIRED. The minimum initial investment in each Fund is $10
million for Class A shares, $5 million for Class B shares, $1 million for Class
C shares, and $250,000 for Class D shares. The Treasurer's Trust shares of each
Fund are not subject to any minimum initial investment amount. There is no
minimum subsequent investment for any of the classes of shares. The Fund
reserves the right to waive the minimum investment requirement.
NET ASSET VALUE. Shares are sold to the public at net asset value ("NAV"). The
NAV of each Fund is calculated at the close of each business day (normally 4:00
PM New York time) by taking the sum of the value of each Fund's investments
(amortized cost value is used for this purpose) and any cash or other assets,
subtracting liabilities, and dividing by the total number of shares outstanding.
A "business day" is Monday through Friday exclusive of days the New York Stock
Exchange is closed for trading and bank holidays in New York State which include
Martin Luther King's Birthday and Columbus Day. It is the policy of each Fund to
seek to maintain a stable NAV per share of $1.00, although this share price is
not guaranteed.
DISTRIBUTOR. The Funds' distributor is Resrv Partners, Inc., 810 Seventh Avenue,
New York, NY 10019-5868, which is a wholly-owned subsidiary of the Adviser.
DISTRIBUTION PLAN AND SERVICE PLAN. Purchases may also be made through brokers,
financial intermediaries, and financial institutions. Financial institutions
providing distribution assistance or administrative services for the Fund may be
required to register as securities dealers in certain states. Some of these
firms participate in the Fund's Distribution Plan and Service Plan.
The Reserve Institutional Trust maintains the Distribution Plan and related
agreements pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution
Plan, the Class C and D shares of each Fund make assistance payments at annual
rates of .25% and .50%, respectively, of the average daily net asset value of
broker, financial institution, and financial intermediary shareholder accounts
("qualified accounts"). Substantially all such monies are paid to brokers,
financial institutions and financial intermediaries for distribution assistance
provided to the Fund. The investment adviser, at its discretion, may pay from
its own resources or from other sources available to it, additional amounts and
incentives, including lump-sum payments, based upon the amount of assets
committed to the Fund by such brokers, financial institutions, financial
intermediaries and underwriters. The Plan does not permit the carrying over of
payments from year to year. The investment adviser also reimburses firms, from
its own resources or from other sources available to it for a portion of their
costs of advertising and marketing shares of a Fund. All such arrangements are
designed to facilitate the sale of a Fund's shares. Class A, Class B and
Treasurer's Trust shares do not currently participate in a 12b-1 distribution
plan.
Under the Service Plan, each Fund may pay brokers or other financial
intermediaries 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
Class D shares owned by investors for which such broker or financial
intermediary provides personal 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.
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of Fund shares and may arrange with their
clients for other investment or administrative services. Certain firms which
utilize a centralized purchase method for Fund shares, may have an earlier cut
off for purchase orders than stated above in order to facilitate the
transmission of purchase orders by bulk wire. Firms are responsible for the
prompt transmission of purchase and redemption orders. Some firms may establish
higher minimum investment requirements than set forth above. Some firms may
independently establish and charge additional fees such as redemption fees to
their clients for their services, which charges would reduce their clients'
yield or return. Firms may also hold Fund shares in nominee or street name as
agent for and on behalf of their clients. In such instances, the Funds' transfer
agents will have no information with respect to or control over the accounts of
specific shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their firm. Certain firms may receive
compensation for recordkeeping and other services relating to these nominee
accounts. In addition, certain privileges with respect to the purchase and
redemption of shares (such as check writing redemptions) or the reinvestment of
dividends may not be available through such firms or may only be available
subject to certain conditions or limitations. Some firms may participate in a
program allowing them access to their clients' accounts for servicing including,
without limitation, transfers of registration and dividend payee changes; and
may perform functions such as generation of confirmation statements and
disbursement of cash dividends. The Prospectus should be read in connection with
such firm's material regarding its fees and services.
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<PAGE> 13
SHARES OF BENEFICIAL INTEREST
The Reserve Institutional Trust was originally organized as a Maryland
corporation on February 5, 1981 and reorganized on September 16, 1986 as a
Massachusetts business trust, and is an open-end management investment company
commonly known as a mutual fund. At the date of this Prospectus, there were four
separate series authorized and two series outstanding. Additional series may be
added in the future by the Board of Trustees. The Trust is authorized to issue
an unlimited number of shares of beneficial interest which may be issued in any
number of series. Shares issued will be fully paid and nonassessable and will
have no preemptive, conversion or sinking rights. The shareholders of each
series are entitled to a full vote for each full share held (and fractional
votes for fractional shares) and have equal rights with respect to earnings,
dividends, redemption and in the net assets of their series on liquidation. The
Trustees do not intend to hold annual meetings of shareholders. The Trustees
will call such special meetings of shareholders as may be required under the
1940 Act (e.g., to approve a new investment advisory agreement or changing the
fundamental investment policies) or by the Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the trust's obligations to third parties unless, as
in this instance, the Declaration of Trust provides, in substance, that no
shareholder or Trustee shall be personally liable for the Trust'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 each Fund to indemnify its shareholders and
Trustees against such liabilities and any related claims or expenses.
DAILY DIVIDENDS
Each Fund declares dividends each business day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder. Although none are anticipated, any net
realized long term capital gains will be distributed at least annually.
TAXES
Each Fund intends to maintain its regulated investment company status for
federal income tax purposes. Accordingly, the Funds intend to satisfy certain
requirements imposed by the Internal Revenue Code so as to avoid any federal
income or excise tax to them.
PRIMARY INSTITUTIONAL FUND, U.S. GOVERNMENT INSTITUTIONAL FUND, U.S. TREASURY
INSTITUTIONAL FUND. For federal income tax purposes, distributions out of
interest earned by a Fund and net realized short-term capital gains are taxable
as ordinary income. Any distributions of net long-term capital gains are taxable
to shareholders at the applicable mid-term or long-term capital gains rate,
regardless of the length of time shares have been owned by the shareholder.
Distributions are taxable to shareholders in the same manner, whether a
shareholder receives such distributions in cash or reinvests them in additional
shares.
The U.S. Treasury Institutional Fund intends to invest only in U.S. Treasury
securities and obligations of those agencies and instrumentalities of the U.S.
government that provide interest income exempt in many states from state and
local income taxes except to the extent uninvested cash is invested in
repurchase agreements. Some states have minimum investment requirements that
must be met by the U.S. Treasury Institutional Fund. 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 U.S. Treasury Institutional Fund. Shareholders should
consult with their own tax advisers with respect to the application of their
state and local tax laws to these distributions.
INTERSTATE TAX-EXEMPT INSTITUTIONAL FUND. Dividends derived from the interest
earned on Municipal Obligations and designated by the Fund as "exempt-interest
dividends" are not subject to federal income taxes. Any distributions of net
short-term capital gains and taxable interest income, if any, are taxable as
ordinary income. Any distributions of net realized long-term capital gains
earned by the Fund are taxable to shareholders at the applicable mid-term or
long-term capital gains rate regardless of the length of time the Fund's shares
have been owned by the shareholder.
ALL FUNDS. A distribution 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.
13
<PAGE> 14
Upon a sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, depending
upon the shareholder's holding period for the shares, in the event that the Fund
does not maintain a constant net asset value per share.
The Funds 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 a
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Backup withholding is not an additional tax. Any amount
withheld may be credit against the shareholder's U.S. federal income tax
liability.
Shareholders of each Fund are advised to retain all statements to maintain
accurate records of their investments. The Reserve Institutional Trust will
report to its shareholders before the end of February of each year as to the
source of dividends and other distributions, if any, paid or declared by each
Fund during the previous calendar year which may be exempt from state income
taxes. Shareholders should consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
Further information relating to tax consequences is contained in the
Statement of Additional Information.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of each Fund are redeemed at their net
asset value next determined after receipt by the Fund of a request in proper
form. Although the Funds have seven days to transmit payment for share
redemptions, they usually transmit payment the same day when redemption requests
are received before 12:00 noon (New York time) (11:00 AM New York time for the
U.S. Treasury Institutional Fund and Interstate Tax-Exempt Institutional Fund)
and the next day for requests received after 12:00 noon (New York time) (11:00
AM New York time for the U.S. Treasury Institutional Fund and Interstate
Tax-Exempt Institutional Fund). This is not always possible, however, and
transmission of redemption proceeds may be delayed. Unless otherwise specified,
orders received after 12:00 noon (New York time) (11:00 AM New York time for the
U.S. Treasury Institutional Fund and Interstate Tax-Exempt Institutional Fund)
are not entered until the next business day to enable shareholders to receive
additional dividends. Payment will normally be made by check or bank transfer.
Shares do not earn dividends on the day a redemption is effected regardless of
whether the redemption order is received before or after 12:00 noon (11:00 AM
for the U.S. Treasury Institutional Fund and Interstate Tax-Exempt Institutional
Fund).
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but not
require) that each written redemption be at least $100,000 and require that each
telephone redemption be at least $100,000, except for redemptions which are
intended to liquidate your account. A shareholder will be charged $100 for
redemption checks issued by the Funds of less than $100,000, except for Class D
shareholders who will be charged $2.00 for redemption checks of less than $100.
Payments of $100,000 or more will be wired upon request without charge, except
for Class D shareholders who can have payments of $10,000 or more. A shareholder
will be charged $100 for wires of less than $100,000, except for Class D
shareholders who will be charged $10 for wires less than $10,000. Shareholders
of Treasurer's Trust shares will not be charged any fees on redemptions by
telephone or wire. The Funds assume no responsibility for delays in the receipt
of wired or mailed funds. The use of a predesignated financial institution, such
as a savings bank, credit union or savings and loan association which is not a
member of the Federal Reserve wire system to receive your wire, could cause such
a delay. If a Fund has previously been advised in writing of your brokerage or
bank account, telephone requests by any person are accepted for payment to such
account by calling 1-800-637-1700. The Funds may be liable for any losses caused
by their failure to employ reasonable procedures. To reduce the risk of loss,
proceeds of telephone redemptions may be sent only (1) to the bank or brokerage
account designated by the shareholder, in writing, on the investment application
or in a letter with the signature(s) guaranteed; or (2) to the address of record
if all the conditions listed below are met. To change the designated brokerage
or bank account it is necessary to contact the firm through which shares of the
Fund were purchased or if purchased directly from the Funds, it is necessary to
send a written request to the Funds with signature(s) guaranteed as described
below. Other redemption orders must be in writing with the necessary
signature(s) guaranteed by a domestic commercial bank; a domestic trust company;
a domestic savings bank, credit union or savings association; or a member firm
of a national securities exchange. Guarantees from notaries public are
unacceptable. The Funds will waive the signature guarantee requirement for Class
D shareholders on a redemption request once every thirty (30) days if ALL of the
following conditions apply: (1) the redemption is for $5,000 or less; (2) the
redemption check is payable to the shareholder(s) of record; and (3) the
redemption check is mailed to the shareholder(s) at the address of record. The
requirement of a guaranteed signature protects against an unauthorized person
redeeming shares and obtaining the redemption proceeds. Redemption instructions
and election of the plans described may be made when your account is opened.
Subsequent elections and changes in instructions must be in writing with the
signature(s) guaranteed. Changes in registration or authorized signatories may
require additional documentation.
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<PAGE> 15
The Funds reserve the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Fund at any time. During times of drastic economic or
market conditions, shareholders may experience difficulty in contacting the
Funds by telephone to request a redemption or exchange of a Fund's shares. In
such cases, shareholders should consider using another method of redemption,
such as a written request or a redemption by check.
REDEMPTION BY CHECK. (Treasurer's Trust and Class D shareholders only) By
completing a signature card (and certain other documentation if the record owner
is a fiduciary, corporation, partnership, trust or other organization) which is
available from the Funds or the firm through which shares of the Funds were
purchased, you can write checks against your account. This privilege may not be
available to clients of certain firms. There is no minimum amount for check
redemptions, however, the Fund, upon proper notice to the shareholder, may
choose to impose a fee if it deems a shareholder's actions to be burdensome to
the Funds. A firm may establish variations of minimum check amounts for their
customers if such variations are approved by the Funds. This procedure lengthens
the time your money earns dividends, since redemptions are not made until the
check is processed by the funds. Because of this, a check cannot completely
liquidate your account, nor may a check be presented for certification or
immediate payment. Otherwise, you may deposit a check in your bank account or
use it to pay any third party obligation not requiring certification.
Shareholder checks written against accounts with insufficient funds, postdated
checks and checks which contain an irregularity in the signature, amount or
otherwise will be returned by the Funds and a fee charged against the account.
Because check redemptions are reported on account statements, they will not be
confirmed separately. A fee is charged for providing check copies.
STOP PAYMENTS. (Treasurer's Trust and Class D shareholders only) The Funds will
honor stop payment requests on unpaid shareholder checks provided the Funds are
advised of the correct check number, payee, check amount and date. Stop payment
requests received by the Funds by 2:00 PM (New York time) in proper form will be
effective the next business day. Oral stop payment requests are effective for 14
calendar days, at which time they will be canceled unless confirmed in writing.
Written stop payment orders are effective for one year. A fee is charged for
this service.
AUTOMATIC WITHDRAWAL PLANS. (Treasurer's Trust and Class D shareholders only) If
you have an account with a balance of at least $5,000 you may make a written
election to participate in either of the following: (i) an Income Distribution
Plan providing for monthly, quarterly or annual payments by redemption of shares
from reinvested dividends or distributions paid to your account during the
preceding period; or (ii) a Fixed Amount Withdrawal Plan providing for the
automatic redemption of a sufficient number of shares of your account to make a
specified monthly, quarterly or annual payment of a fixed amount. Changes to
instructions must be in writing with signature(s) guaranteed. In order for such
payments to continue under either Plan, there must be a minimum of $25 available
from reinvested dividends or distributions. Payments can be made to you or your
designee. An application for the Automatic Withdrawal Plans can be obtained from
the Funds. The amount, frequency and recipient of the payments may be changed by
giving proper written notice to the Funds. The Funds may impose a charge or
modify or terminate any Automatic Withdrawal Plan at any time after the
participant has been duly notified. This privilege may not be available to
clients of certain firms or may be available subject to conditions or
limitations.
RESERVE AUTOMATIC TRANSFER. (Treasurer's Trust and Class D shareholders only)
You may redeem shares of a Fund (minimum $100) without charge by telephone if
you have filed a separate Reserve Automatic Transfer application with the Fund
for Class D shareholders only. The proceeds will be transferred between your
Fund account and the checking, NOW or bank money market deposit account (as
permitted) designated in the application. Only such an account maintained in a
domestic financial institution which is an Automated Clearing House member may
be so designated. Redemption proceeds will be on deposit in your account at the
Automated Clearing House member bank ordinarily two business days after receipt
of the redemption request. The Funds may impose a charge or modify or terminate
this privilege at any time after the participant has been duly notified. This
privilege may not be available to clients of certain firms or may be available
subject to conditions or limitations.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven days only (a) when the New York Stock Exchange is
closed (other than for customary closings), (b) when, as determined by the
Securities and Exchange Commission ("SEC"), trading on the Exchange is
restricted or an emergency exists making it not reasonably practicable to
dispose of securities owned by a Fund or for it to determine fairly the value of
its net assets, or (c) for such periods as the SEC may by order permit. If
shares of a 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. The
Fund may delay payment until the checks for the purchase of shares have cleared
or for up to ten (10) business days, whichever occurs first. Shareholder checks
written against Funds which are not yet considered collected will be returned
and a fee charged against the account (for Treasurer's Trust and Class D
shareholders only). When a purchase is made by wire and subsequently redeemed,
the proceeds from such redemptions normally will not be transmitted until two
business days after the purchase by wire.
15
<PAGE> 16
GENERAL INFORMATION
JOINT OWNERSHIP. (Treasurer's Trust and Class D shareholders only) When an
account is registered in the name of one person and another, for example a
husband and wife, either person is entitled to redeem shares in the account. The
Funds assume no responsibility to either joint owner for actions taken by the
other joint owner with respect to an account so registered. The investment
application provides that persons so registering their account indemnify and
hold the Fund harmless for actions taken by either party.
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000 for Class D and less than $100,000 for Class A, Class
B and Class C), the Funds may levy a monthly charge (currently $5 for Class D
and $100 for Class A, Class B and Class C). A firm may establish variations of
minimum balances and fee amounts if such variations are approved by the Funds.
Treasurer's Trust shares will not be charged a small balances fee.
BACKUP WITHHOLDING. The Funds are required by federal law to withhold 31% of
dividends and other distributions that are subject to federal income tax if (i)
a correct and certified Taxpayer Identification Number (TIN) is not provided for
your account, (ii) you fail to certify that you have not been notified by the
IRS that you underreported taxable interest or dividend payments or (iii) a Fund
is notified by the IRS (or a broker) that the TIN provided is incorrect or you
are otherwise subject to backup withholding. Amounts withheld and forwarded to
the IRS can be credited as a payment of tax when completing your federal income
tax return. For individual shareholders, the TIN is the social security number.
However, special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. Shareholders should be aware that, under regulations promulgated by
the IRS, a Fund may be fined $50 annually for each account for which a certified
TIN is not provided or is incorrect. In the event that such a fine is imposed
with respect to an account in any year, a corresponding charge will be made
against the account. The Funds will not accept purchase orders for accounts
which a correct and certified TIN is not provided or otherwise subject to backup
withholding unless the accountholder is a non-resident alien.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing audited
financial statements and an unaudited semi-annual report. A statement is sent to
each shareholder at least quarterly. Shareholders who are clients of certain
firms will receive a statement combining transactions in Fund shares with
statements covering other brokerage or mutual fund accounts.
RESERVE EASY ACCESS. Easy Access is The Reserve Institutional Trust's 24 hour
toll-free, telephone service that lets customers use a touch-tone phone to
obtain yields and account balances. To use it, call 1-800-637-1700 and follow
the instructions you will receive.
INQUIRIES. Shareholders should direct their inquiries to the firm from which
they received this Prospectus or the Funds.
SPECIAL SERVICES. The Funds reserve the right to charge shareholder accounts for
specific costs incurred in processing unusual transactions for shareholders.
Such transactions include, but are not limited to, stop payment requests on or
copies of Fund redemption checks or shareholder checks, copies of statements and
special research services.
PERFORMANCE. The Funds may compare their performance to other income producing
alternatives such as (i) money-market funds (based on yields cited by Donoghue's
Money Fund Report and other industry publications); and (ii) various bank
products (based on average rates of bank and thrift institution certificates of
deposit, money-market deposit accounts and NOW accounts as reported by the Bank
Rate Monitor and other industry publications). An investment in shares of funds
is not insured by the Federal Deposit Insurance Corporation.
Yield information is useful in reviewing a Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for a fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
16
<PAGE> 17
RESERVE CASH PERFORMANCE ACCOUNT AND ACCOUNT PLUS
The Fund offers a comprehensive package of services which enhance access to
an investment in the portfolios (Treasurer's Trust and Class D shareholders
only). The Reserve Cash Performance Account and Account Plus ("CPA") services
include: (i) any amount checking; and (ii) a comprehensive monthly statement
which summarizes your CPA activity by payee and expense category and simplifies
budget and tax recordkeeping. These CPA services are provided for a fee and
transaction charges may apply. Participating firms may also charge their own
service fees.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
17
<PAGE> 18
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<PAGE> 19
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<PAGE> 20
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
---
<S> <C>
Shareholder Expenses............................ 2
Financial Highlights............................ 3
Yield........................................... 6
Investment Objective and Policies............... 6
Management...................................... 10
How to Buy Shares............................... 11
Shares of Beneficial Interest................... 13
Daily Dividends................................. 13
Taxes........................................... 13
Redemptions..................................... 14
General Information............................. 16
Reserve Cash Performance Account and Account
Plus.......................................... 17
Investors are advised to read and retain
this Prospectus for future reference.
</TABLE>
[THE RESERVE FUNDS LOGO]
Founders of
"America's First
Money Fund"
810 Seventh Avenue, New York, NY 10019-5868
GENERAL INFORMATION AND 24 HOUR YIELD AND BALANCE INFORMATION
800-637-1700
Distributor -- Resrv Partners, Inc.
[THE RESERVE FUNDS LOGO]
Founders of
"America's First
Money Fund"
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PRIMARY INSTITUTIONAL FUND
U.S. GOVERNMENT INSTITUTIONAL FUND
U.S. TREASURY INSTITUTIONAL FUND
INTERSTATE TAX-EXEMPT
INSTITUTIONAL FUND
<PAGE> 21
THE
RESERVE [Logo]
FUNDS GENERAL INFORMATION, PURCHASES AND REDEMPTIONS
24 HOUR YIELD AND BALANCE INFORMATION
NATIONWIDE 1-800-637-1700
PROSPECTUS
_______ , 1998
Two portfolios of The Reserve Institutional Trust, a no-load money market
fund, are offered by this Prospectus: PRIMARY INSTITUTIONAL FUND and U.S.
GOVERNMENT INSTITUTIONAL FUND ("Funds"). The Reserve Institutional Trust is
designed for institutional investors as a convenient investment vehicle for
short-term funds.
The objective of each Fund is to seek as high a level of current income
as is consistent with preservation of capital and liquidity, although
achievement of this objective cannot be assured.
- - PRIMARY INSTITUTIONAL FUND invests in (i) obligations backed by the full
faith and credit of the United States government and its agencies or
instrumentalities; (ii) deposit type obligations, acceptances and letters of
credit of FDIC insured institutions and foreign banks with assets in excess
of $25 billion; (iii) short term corporate obligations rated A-1 or the
equivalent thereof; (iv) other similar high quality short term instruments;
and (v) instruments fully collateralized by the foregoing instruments.
- - U.S. GOVERNMENT INSTITUTIONAL FUND invests in obligations backed by the full
faith and credit of the United States government or obligations
collateralized thereby.
Each Fund offers Nomura International Trust Co. ("NITC") shares to
investors, subject to a service fee and a distribution fee.
Both the Primary Institutional Fund and the U.S. Government Institutional
Fund offer other classes of share to investors and each class is subject to
differing service fees and distribution fees. In all other respects, all classes
of shares represent the same interest in the income and assets of each
respective Fund. Additional information on these other classes of Shares can be
obtained by contacting the Funds.
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.
This Prospectus sets forth the information about each Fund which a
prospective investor should know before investing. A Statement of Additional
Information dated _________, 1998, as from time to time amended, providing
further details about the Funds, has been filed with the Securities and
Exchange Commission. It may be obtained without charge by writing or calling
the Funds at (800) 637-1700. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------------
Prospectus dated _________, 1998
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 22
SHAREHOLDER EXPENSES
The following tables illustrate all expenses and fees that a shareholder of
each of the Funds will incur directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES FOR ALL FUNDS
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases.............................................. None
Maximum Sales Load Imposed on Reinvested Dividends................................... None
Redemption Fees*..................................................................... None
Exchange Fees........................................................................ None
</TABLE>
- ---------------
* A $2.00 fee is charged on redemption checks issued by the Funds of less than
$100 and a $10 fee is charged for wire redemptions of less than $10,000, for
Class D shareholders. A $100 fee is charged for redemption checks and wire
redemptions of less than $100,000 for shareholders of all other classes.
ANNUAL FUND OPERATING EXPENSES FOR ALL FUNDS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NITC
-------
<S> <C>
Management Fee*.................................... .25%
12b-1 Fees......................................... .50%**
Shareholder Services Fees........................ .25%
Other Operating Expenses++....................... 0%
Other Expenses..................................... .25%
Total Operating Expenses........................... 1.00%
</TABLE>
- ---------------
* Each Fund is charged a comprehensive management fee of 0.25% per annum of its
average daily net assets for both advisory and ordinary operating expenses
(other than the Service Fee and Distribution Fee) during the year. However,
a Fund may be charged for certain non-recurring extraordinary expenses. See
"Investment Management Agreement" on page 7.
** Due to these distribution expenses, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
++ "Other Operating Expenses" are based on an estimated amount for the current
fiscal year. The purpose of this table is to assist the investor in
understanding the costs and expenses that a shareholder in a Fund will bear
directly or indirectly.
The following examples illustrate the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period for each Fund.
ALL FUNDS
<TABLE>
<CAPTION>
10
1 YEAR 3 YEARS 5 YEARS YEARS
------ ------- ------- -------
<S> <C> <C> <C> <C>
NITC................................................... $ 10.20 $ 31.84 $ 55.25 $122.46
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
YIELD
Current yield refers to the income generated by an investment in a Fund
over a seven-day period. This income is then annualized. That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned is assumed to be reinvested. The effective yield will be higher than the
current yield because of this compounding effect.
2
<PAGE> 23
In reports or other communications to shareholders of the Trust or in
advertising materials, the Trust may compare its performance with that of
other money market funds listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or other relevant indices and industry
publications.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each Fund is to seek as high a level of
current income as is consistent with preservation of capital and liquidity.
There is no assurance that a Fund will achieve its investment objective. The
investment objective may not be changed, with respect to a Fund, without the
vote of a majority of the outstanding shares of that fund as defined in the
Investment Company Act of 1940("Act").
The Primary Institutional Fund seeks to attain its objective by investing
in U.S. government securities; deposit-type obligations, such as negotiable
certificates of deposit and time deposits, bankers' acceptances and letters of
credit of domestic and foreign banks; savings and loan associations and savings
banks; high quality domestic and foreign commercial paper as determined by any
nationally recognized statistical rating organization or, in the case of any
instrument that is not rated, of comparable quality as determined by the Board
of Trustees; other short term instruments of similar quality; and instruments
fully collateralized by such obligations.
The U.S. Government Institutional Fund seeks to attain its objective by
investing only in securities backed by the full faith and credit of the United
States government or obligations collateralized thereby.
United States government securities include a variety of securities which
are issued or guaranteed by the U.S. Treasury, various agencies of the federal
government and various instrumentalities which have been established or
sponsored by the U.S. government, and certain interests in the foregoing types
of securities such as U.S. Treasury STRIPS. United States government securities
include direct obligations of the U.S. Treasury (such as Treasury bills,
Treasury notes, and Treasury bonds). Obligations such as securities issued by
the Government National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association
("FNMA"), the Student Loan Marketing Association ("SLMA") and the Federal Home
Loan Bank ("FHLB") are also considered U.S. government securities. Some
obligations of agencies and instrumentalities of the U.S. government, such as
the GNMA, are supported by the full faith and credit of the United States.
Other securities, such as obligations issued by the FNMA and SLMA, are
supported by the right of the issuer to borrow from the U.S. Treasury; and
others, such as obligations issued by the FHLB and FHLMC are supported only by
the credit of the agency or instrumentality issuing the obligation. In the
case of securities not backed by the full faith and credit of the United
States the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment.
U.S. Treasury STRIPS permit the separate ownership and trading of the
interest and principal components of direct obligations of the U.S. Treasury.
These obligations may take the form of (i) obligations from which interest
coupons have been stripped; (ii) the interest coupons that are stripped; or
(iii) book entries at a Federal Reserve member bank representing ownership of
obligation components.
3
<PAGE> 24
The Primary Institutional Fund may invest in obligations of U.S. banking
institutions that are insured by the FDIC; commercial paper which is rated, at
the time of investment, P-1 by Moody's Investors Service, Inc. ("Moody's"), A-1
by Standard & Poor's Corporation ("S&P") or the equivalent thereof if rated by
another rating agency; and obligations of foreign banks which, at the time of
investment, have more than $25 billion (or the equivalent in other currencies)
in total assets and which, in the opinion of the Fund's investment adviser, are
of comparable quality to obligations of United States banks which may be
purchased by the Primary Institutional Fund. Instruments which are not rated may
also be purchased by the Primary Institutional Fund provided such instruments
are determined to be of comparable quality by the Board of Trustees of the Fund
to those rated instruments in which the Primary Institutional Fund may invest.
The Primary Institutional Fund may invest in obligations of U.S. banks,
foreign branches of U.S. banks (Eurodollars), U.S. branches of foreign banks
(Yankee dollars) and foreign branches of foreign banks. Euro and Yankee dollar
investments involve certain risks that are different from investments in
obligations of U.S. banks. These risks may include unfavorable political and
economic developments, possible withholding taxes, seizure of foreign deposits,
currency controls or other governmental restrictions which might affect payment
of principal or interest. In addition, foreign branches of foreign banks are not
regulated by U.S. banking authorities and are generally not bound by financial
reporting standards comparable to U.S. banks. The Primary Institutional Fund
will limit its investment in foreign branches of foreign banks to those banks
located in Australia, Canada, Western Europe and Japan. The Primary
4
<PAGE> 25
Institutional Fund may also invest in municipal obligations secured by bank
letters of credit, the interest on which is not exempt from federal income
taxation.
OTHER POLICIES.
PRIMARY AND U.S. GOVERNMENT FUNDS. The Primary and U.S. Government
Insitutional Funds may invest up to 100% of their assets in repurchase
agreement transactions. A repurchase agreement is a transaction by which a Fund
purchases a security (U.S. government or other) and simultaneously commits to
resell that security to the seller at the same price, plus interest at a
specified rate. Repurchase agreements usually have a short duration, often less
than one week. The Funds will limit repurchase agreements to those banks and
securities dealers who are deemed creditworthy pursuant to guidelines adopted by
the Funds' Board of Trustees. The investment adviser will follow procedures to
assure that all repurchase agreements are always fully collateralized as to
principal and interest. The instruments held as collateral are valued daily, and
if the value of the instruments declines, the Funds will require additional
collateral. If the other party to the repurchase agreement defaults on its
obligation to repurchase the underlying securities, a portfolio may incur a loss
to the extent that the proceeds from the sale of the collateral were less than
the repurchase price. In the event of insolvency or bankruptcy of the other
party to a repurchase agreement, a Fund may encounter difficulties and might
incur costs or possible losses of principal and income upon the exercise of its
rights under the repurchase agreement. Securities subject to repurchase
agreements will be placed in a segregated account and the market value will be
monitored to ensure that the market value of the securities plus any accrued
interest thereon will at least equal the repurchase price.
The Primary and U.S. Government Institutional Funds may from time to time
lend securities on a short-term basis to banks, brokers and dealers (but not
individuals) and receive as collateral cash or securities issued by the U.S.
government or its agencies or instrumentalities (or any combination thereof),
which collateral will be required to be maintained at all times in an amount
equal to at least 100% of the current value of the loaned securities plus
accrued interest. In determining whether to lend securities to a particular
broker-dealer or financial institution, the Fund will consider all relevant
facts and circumstances, including the creditworthiness of the broker-dealer or
financial institution. A Fund may pay reasonable finders, administrative and
custodial fees in connection with a loan. During the time portfolio securities
are on loan the borrower will pay the Fund an amount equivalent to any interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest from the
borrower who has delivered equivalent collateral or secured a letter of credit.
The value of the securities loaned cannot exceed 25% of the Fund's total assets.
Loans of securities involve risks of delay in receiving additional collateral or
in recovering the securities lent or even loss of rights in the collateral in
the event of insolvency of the borrower of the securities. The Statement of
Additional Information further explains the Funds' securities-lending policies.
The Primary and U.S. Government Institutional Funds may invest, without
limitation, in U.S. government securities and in instruments secured or
collateralized by U.S. government securities. A Fund will not invest more than
10% of its net assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice. A Fund will not
concentrate (i.e., invest 25% or more of its total assets) in the securities
of issuers in a single industry, except that the Primary Institutional Fund
may invest 25% or more of its total assets in the banking industry. In
addition, a Fund will not invest more than 5% of its total assets in the
securities of any single issuer (except U.S. government securities or
repurchase agreements collateralized by U.S. government securities). Each Fund
has the authority to borrow money (including reverse purchase agreements), for
extraordinary or emergency purposes but not in an amount exceeding 5% of its
total assets. Reverse repurchase agreements involve sales by a Fund of
portfolio securities concurrently with an agreement by the Fund to repurchase
the same securities at a later date at a fixed price.
In order to provide liquidity, each Fund utilizes the following practices:
limiting its average maturity to 90 days or less; buying securities which mature
in 397 days or less; and buying only high quality securities.
5
<PAGE> 26
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. The Board of Trustees manages each Fund's
business and affairs. Reserve Management Company, Inc. ("Adviser"), 14 Locust
Place, Manhasset, NY 11030, a New Jersey corporation, provides the Funds with
investment advice pursuant to an Investment Management Agreement. Since
November 15, 1971, the Adviser and its affiliates have been advising The
Reserve Funds, which currently have assets in excess of $4.5 billion. Under the
Investment Management Agreement, the Adviser manages each Fund's investments,
including effecting purchases and sales thereof, in furtherance of its
investment objective and policies, subject to overall control and direction by
the Trustees.
Each Fund pays the Adviser a comprehensive management fee calculated on an
annual basis at .25% of its average daily net assets. Under the terms of the
Investment Management Agreement with the Funds, the Adviser pays all employee
and ordinary operating costs of the Funds. Excluded from the definition of
ordinary operating costs are interest, taxes, brokerage fees, extraordinary
legal and accounting fees and expenses and fees under the Distribution Plan and
the Service Plan (discussed below).
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the Investment Management
Agreement relates, except a loss resulting from the willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from reckless disregard by it of its duties and obligations
thereunder.
The Adviser may make such advertising and promotional expenditures, using
its own resources, as it from time to time deems appropriate.
YEAR 2000. Like other investment companies, financial and business organizations
and individuals around the world, the Trust could be adversely affected if the
computer systems used by the Adviser, the Distributor or other service providers
to the Trust do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The computer system used for the Trust's shareholder accounting
function is already Year 2000 compliant. In addition, the Adviser and the
Distributor are taking steps that they believe are reasonably designed to
address the Year 2000 Problem with respect to computer systems that they use and
the Adviser is taking steps to obtain reasonable assurances that comparable
steps are being taken by the Trust's other service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact to the Trust.
The Year 2000 Problem is expected to impact corporations, which may include
issuers of portfolio securities held by the Trust, to varying degrees based
upon various factors, including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Trust is unable to
predict what impact, if any, the Year 2000 Problem will have on issuers of the
portfolio securities held by the Trust.
TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the Fund's
shareholders.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Reserve Institutional Trust
acts as its own transfer agent and dividend-paying agent.
HOW TO BUY SHARES
Each Fund offers NITC shares to investors, subject to a service fee and a
distribution fee, as follows:
<TABLE>
<CAPTION>
NITC Shares
------------
<S> <C>
Maximum Annual Shareholder Services Fee* .... .25%
Maximum Annual 12b-1 Fee* ................... .50%
Maximum Total Annual Operating Expenses+ .... 1.00%
Minimum Initial Investment .................. None
</TABLE>
- ---------------
* As a percentage of average daily net assets.
+ As a percentage of average daily net assets (exclusive of brokerage fees,
extraordinary legal and accounting fees and expenses).
Shares of a Fund may be purchased by wire only. Shares are sold at the net
asset value next determined after receipt of a purchase order in the manner
described below. Purchase orders are accepted on any day on which the New York
Stock Exchange and the Federal Reserve Bank of New York are open ("Fund Business
Day"). For Federal Fund wires to be eligible for same-day order entry, the Fund
must be notified before 2:00 PM (New York time for Primary and U.S. Government
Funds) (11:00 AM New York time for Interstate and U.S. Treasury Funds) of the
amount to be transmitted and the account to be credited, and the Fund must
receive the credit at its bank by 3:00 PM (New York time). Orders received by
the Fund after the times specified above will be priced at the public offering
price in effect at 3:00 PM (New York time) on the next business day. The Fund
does not determine net asset value, and purchase orders are not accepted, on the
days those institutions observe the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
To purchase shares of a Fund by Federal Reserve wire, call the Fund at
1-800-637-1700 or call your sales representative. To protect a Fund's
performance and shareholders, the Adviser discourages frequent trading in
response to short-term market fluctuations. The Fund reserves the right to
refuse any investment that, in its sole discretion, would disrupt the Fund's
management.
If the Public Securities Association recommends that the government
securities markets close early, the Fund may advance the time at which it must
receive notification of orders for purposes of determining eligibility for
dividends on that day. Investors who notify the Fund after the advanced time
become entitled to dividends on the following Fund Business Day. If the Fund
receives notification of a redemption request after the advanced time, it
ordinarily will wire redemption proceeds on the next Fund Business Day.
6
<PAGE> 27
If an investor does not remit Federal Funds, such payment must be converted
into Federal Funds. This usually occurs within one Fund Business Day of receipt
of a bank wire. Prior to receipt of Federal Funds, the investor's monies will
not be invested.
The following procedure will help assure prompt receipt of your Federal
Funds wire:
A. Telephone the Fund, toll free at 1-800-637-1700 and provide the
following information:
Your name
Address
Telephone number
Taxpayer ID number
The amount being wired
The identity of the bank wiring funds.
You will then be provided with a Fund account number. (Investors with
existing accounts must also notify the Fund before wiring funds.)
B. Instruct your bank to wire the specified amount to the Fund as follows:
An investor may open an account when placing an initial order by telephone,
provided the investor thereafter submits an Account Registration Form by mail.
An Account Registration Form is included with this Prospectus.
The Fund reserves the right to reject any purchase order for any reason.
SHARE CERTIFICATES. The Fund maintains a share account for each shareholder. The
Trust does not issue share certificates.
ACCOUNT STATEMENTS. Monthly account statements are sent to investors to report
transactions such as purchases and redemptions as well as dividends paid during
the month.
MINIMUM INVESTMENT REQUIRED. The NITC shares of each Fund are not subject to
any minimum initial investment amount.
NET ASSET VALUE. Shares are sold to the public at net asset value ("NAV"). The
NAV of each Fund is calculated at the close of each business day (normally 4:00
PM New York time) by taking the sum of the value of each Fund's investments
(amortized cost value is used for this purpose) and any cash or other assets,
subtracting liabilities, and dividing by the total number of shares outstanding.
A "business day" is Monday through Friday exclusive of days the New York Stock
Exchange is closed for trading and bank holidays in New York State which include
Martin Luther King's Birthday and Columbus Day. It is the policy of each Fund to
seek to maintain a stable NAV per share of $1.00, although this share price is
not guaranteed.
DISTRIBUTOR. The Funds' distributor is Resrv Partners, Inc., 810 Seventh
Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of the
Adviser.
DISTRIBUTION PLAN AND SERVICE PLAN. Purchases may also be made through
brokers, financial intermediaries, and financial institutions. Financial
institutions providing distribution assistance or administrative services for
the Fund may be required to register as securities dealers in certain states.
Some of these firms participate in the Fund's Distribution Plan and Service
Plan.
The Reserve Institutional Trust maintains the Distribution Plan and related
agreements pursuant to Rule 12b-1 under the 1940 Act. Under the Distribution
Plan, the NITC shares of each Fund make assistance payments at annual rate of
.50% of the average daily net asset value of shareholder accounts ("qualified
accounts"). Substantially all such monies are paid for distribution assistance
provided to the Fund. The investment adviser, at its discretion, may pay from
its own resources or from other sources available to it, additional amounts and
incentives, including lump-sum payments, based upon the amount of assets
committed to the Fund. The Plan does not permit the carrying over of payments
from year to year. The investment adviser also reimburses, from its own
resources or from other sources available to it for a portion of costs of
advertising and marketing shares of a Fund. All such arrangements are designed
to facilitate the sale of a Fund's shares.
Under the Service Plan, each Fund may pay a service fee at an annual rate
of up to 0.25% of the average daily net asset value of such Fund's NITC shares
owned by investors for which personal services are provided, including
maintaining shareholder accounts, responding to inquiries, providing
information about investments and providing certain other services.
7
<PAGE> 28
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of Fund shares and may arrange with their
clients for other investment or administrative services. Certain firms which
utilize a centralized purchase method for Fund shares, may have an earlier cut
off for purchase orders than stated above in order to facilitate the
transmission of purchase orders by bulk wire. Firms are responsible for the
prompt transmission of purchase and redemption orders. Some firms may establish
higher minimum investment requirements than set forth above. Some firms may
independently establish and charge additional fees such as redemption fees to
their clients for their services, which charges would reduce their clients'
yield or return. Firms may also hold Fund shares in nominee or street name as
agent for and on behalf of their clients. In such instances, the Funds' transfer
agents will have no information with respect to or control over the accounts of
specific shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their firm. Certain firms may receive
compensation for recordkeeping and other services relating to these nominee
accounts. In addition, certain privileges with respect to the purchase and
redemption of shares (such as check writing redemptions) or the reinvestment of
dividends may not be available through such firms or may only be available
subject to certain conditions or limitations. Some firms may participate in a
program allowing them access to their clients' accounts for servicing including,
without limitation, transfers of registration and dividend payee changes; and
may perform functions such as generation of confirmation statements and
disbursement of cash dividends. The Prospectus should be read in connection with
such firm's material regarding its fees and services.
SHARES OF BENEFICIAL INTEREST
The Reserve Institutional Trust was originally organized as a Maryland
corporation on February 5, 1981 and reorganized on September 16, 1986 as a
Massachusetts business trust, and is an open-end management investment company
commonly known as a mutual fund. At the date of this Prospectus, there were four
separate series authorized and two series outstanding. Additional series may be
added in the future by the Board of Trustees. The Trust is authorized to issue
an unlimited number of shares of beneficial interest which may be issued in any
number of series. Shares issued will be fully paid and nonassessable and will
have no preemptive, conversion or sinking rights. The shareholders of each
series are entitled to a full vote for each full share held (and fractional
votes for fractional shares) and have equal rights with respect to earnings,
dividends, redemption and in the net assets of their series on liquidation. The
Trustees do not intend to hold annual meetings of shareholders. The Trustees
will call such special meetings of shareholders as may be required under the
1940 Act (e.g., to approve a new investment advisory agreement or changing the
fundamental investment policies) or by the Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the trust's obligations to third parties unless, as
in this instance, the Declaration of Trust provides, in substance, that no
shareholder or Trustee shall be personally liable for the Trust'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 each Fund to indemnify its shareholders and
Trustees against such liabilities and any related claims or expenses.
DAILY DIVIDENDS
Each Fund declares dividends each business day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder. Although none are anticipated, any net
realized long term capital gains will be distributed at least annually.
TAXES
Each Fund intends to maintain its regulated investment company status for
federal income tax purposes. Accordingly, the Funds intend to satisfy certain
requirements imposed by the Internal Revenue Code so as to avoid any federal
income or excise tax to them.
PRIMARY INSTITUTIONAL FUND AND U.S. GOVERNMENT INSTITUTIONAL FUND. For federal
income tax purposes, distributions out of interest earned by a Fund and net
realized short-term capital gains are taxable as ordinary income. Any
distributions of net long-term capital gains are taxable to shareholders at the
applicable mid-term or long-term capital gains rate, regardless of the length
of time shares have been owned by the shareholder. Distributions are taxable to
shareholders in the same manner, whether a shareholder receives such
distributions in cash or reinvests them in additional shares.
8
<PAGE> 29
ALL FUNDS. A distribution 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.
Upon a sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, depending
upon the shareholder's holding period for the shares, in the event that the
Fund does not maintain a constant net asset value per share.
The Funds 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 a Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Backup withholding is not an additional tax.
Any amount withheld may be credit against the shareholder's U.S. federal income
tax liability.
Shareholders of each Fund are advised to retain all statements to
maintain accurate records of their investments. The Reserve Institutional Trust
will report to its shareholders before the end of February of each year as to
the source of dividends and other distributions, if any, paid or declared by
each Fund during the previous calendar year which may be exempt from state
income taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
Futher information relating to tax consequences is contained in the
Statement of Additional Information.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of each Fund are redeemed at their net
asset value next determined after receipt by the Fund of a request in proper
form. Although the Funds have seven days to transmit payment for share
redemptions, they usually transmit payment the same day when redemption
requests are received before 12:00 noon (New York time) and the next day for
requests received after 12:00 noon (New York time). This is not always
possible, however, and transmission of redemption proceeds may be delayed.
Unless otherwise specified, orders received after 12:00 noon (New York time)
are not entered until the next business day to enable shareholders to receive
additional dividends. Payment will normally be made by check or bank transfer.
Shares do not earn dividends on the day a redemption is effected regardless of
whether the redemption order is received before or after 12:00 noon.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but not
require) that each written redemption be at least $100,000 and require that each
telephone redemption be at least $100,000, except for redemptions which are
intended to liquidate your account. A shareholder will be charged $100 for
redemption checks issued by the Funds of less than $100,000. Payments of
$100,000 or more will be wired upon request without charge. A shareholder will
be charged $100 for wires of less than $100,000. The Funds assume no
responsibility for delays in the receipt of wired or mailed funds. The use of a
predesignated financial institution, such as a savings bank, credit union or
savings and loan association which is not a member of the Federal Reserve wire
system to receive your wire, could cause such a delay. If a Fund has previously
been advised in writing of your brokerage or bank account, telephone requests by
any person are accepted for payment to such account by calling 1-800-637-1700.
The Funds may be liable for any losses caused by their failure to employ
reasonable procedures. To reduce the risk of loss, proceeds of telephone
redemptions may be sent only (1) to the bank or brokerage account designated by
the shareholder, in writing, on the investment application or in a letter with
the signature(s) guaranteed; or (2) to the address of record if all the
conditions listed below are met. To change the designated brokerage or bank
account it is necessary to contact the firm through which shares of the Fund
were purchased or if purchased directly from the Funds, it is necessary to send
a written request to the Funds with signature(s) guaranteed as described below.
Other redemption orders must be in writing with the necessary signature(s)
guaranteed by a domestic commercial bank; a domestic trust company; a domestic
savings bank, credit union or savings association; or a member firm of a
national securities exchange. Guarantees from notaries public are unacceptable.
The Funds will waive the signature guarantee requirement for Class D
shareholders on a redemption request once every thirty (30) days if ALL of the
following conditions apply: (1) the redemption is for $5,000 or less; (2) the
redemption check is payable to the shareholder(s) of record; and (3) the
redemption check is mailed to the shareholder(s) at the address of record. The
requirement of a guaranteed signature protects against an unauthorized person
redeeming shares and obtaining the redemption proceeds. Redemption instructions
and election of the plans described may be made when your account is opened.
Subsequent elections and changes in instructions must be in writing with the
signature(s) guaranteed. Changes in registration or authorized signatories may
require additional documentation.
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<PAGE> 30
The Funds reserve the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for telephone redemptions may be
modified or terminated by the Fund at any time. During times of drastic economic
or market conditions, shareholders may experience difficulty in contacting the
Funds by telephone to request a redemption or exchange of a Fund's shares. In
such cases, shareholders should consider using another method of redemption,
such as a written request.
RESTRICTIONS. The right of redemption may be suspended or the date of payment
postponed for more than seven days only (a) when the New York Stock Exchange is
closed (other than for customary closings), (b) when, as determined by the
Securities and Exchange Commission ("SEC"), trading on the Exchange is
restricted or an emergency exists making it not reasonably practicable to
dispose of securities owned by a Fund or for it to determine fairly the value of
its net assets, or (c) for such periods as the SEC may by order permit. If
shares of a 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. The
Fund may delay payment until the checks for the purchase of shares have cleared
or for up to ten (10) business days, whichever occurs first. When a purchase is
made by wire and subsequently redeemed, the proceeds from such redemptions
normally will not be transmitted until two business days after the purchase by
wire.
10
<PAGE> 31
GENERAL INFORMATION
BACKUP WITHHOLDING. The Funds are required by federal law to withhold 31%
of dividends and other distributions that are subject to federal income tax if
(i) a correct and certified Taxpayer Identification Number (TIN) is not provided
for your account, (ii) you fail to certify that you have not been notified by
the IRS that you underreported taxable interest or dividend payments or (iii) a
Fund is notified by the IRS (or a broker) that the TIN provided is incorrect or
you are otherwise subject to backup withholding. Amounts withheld and forwarded
to the IRS can be credited as a payment of tax when completing your federal
income tax return. For individual shareholders, the TIN is the social security
number. However, special rules apply for certain accounts. For example, for an
account established under the Uniform Gift to Minors Act, the TIN of the minor
should be furnished. Shareholders should be aware that, under regulations
promulgated by the IRS, a Fund may be fined $50 annually for each account for
which a certified TIN is not provided or is incorrect. In the event that such a
fine is imposed with respect to an account in any year, a corresponding charge
will be made against the account. The Funds will not accept purchase orders for
accounts which a correct and certified TIN is not provided or otherwise subject
to backup withholding unless the accountholder is a non-resident alien.
REPORTS AND STATEMENTS. Shareholders receive an annual report containing
audited financial statements and an unaudited semi-annual report. A statement is
sent to each shareholder at least quarterly. Shareholders who are clients of
certain firms will receive a statement combining transactions in Fund shares
with statements covering other brokerage or mutual fund accounts.
RESERVE EASY ACCESS. Easy Access is The Reserve Institutional Trust's 24
hour toll-free, telephone service that lets customers use a touch-tone phone to
obtain yields and account balances. To use it, call 1-800-637-1700 and follow
the instructions you will receive.
INQUIRIES. Shareholders should direct their inquiries to the firm from
which they received this Prospectus or the Funds.
SPECIAL SERVICES. The Funds reserve the right to charge shareholder
accounts for specific costs incurred in processing unusual transactions for
shareholders. Such transactions include, but are not limited to, stop payment
requests on or copies of Fund redemption checks, copies of statements and
special research services.
PERFORMANCE. The Funds may compare their performance to other income producing
alternatives such as (i) money-market funds (based on yields cited by Donoghue's
Money Fund Report and other industry publications); and (ii) various bank
products (based on average rates of bank and thrift institution certificates of
deposit, money-market deposit accounts and NOW accounts as reported by the Bank
Rate Monitor and other industry publications). An investment in shares of funds
is not insured by the Federal Deposit Insurance Corporation.
Yield information is useful in reviewing a Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for a fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
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<PAGE> 32
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
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<PAGE> 33
TABLE OF CONTENTS
Page
----
Shareholder Expenses ................................. 2
Yield ................................................ 2
Investment Objective and Policies .................... 3
Management ........................................... 6
How to Buy Shares .................................... 7
Shares of Beneficial Interest ........................ 9
Daily Dividends ...................................... 9
Taxes ................................................ 9
Redemptions .......................................... 10
General Information .................................. 12
Reserve Cash Performance Account and Account Plus ... 12
Investors are advised to read and retain this Prospectus for future
reference.
Founders of "America's First Money Fund"
GENERAL INFORMATION AND 24 HOUR YIELD AND BALANCE INFORMATION
800-637-1700
Distributor - Resrv Partners, Inc.
LOGO Founders of "America's First Money Fund"
______________________________________________________
PRIMARY INSTITUTIONAL FUND
U.S. GOVERNMENT INSTITUTIONAL FUND
(Nomura International Trust Co. shares only)
<PAGE> 34
THE RESERVE INSTITUTIONAL TRUST
810 SEVENTH AVENUE -- NEW YORK, N.Y. 10019
(212) 977-9982
(800) 637-1700
YIELD AND BALANCE INFORMATION
(800) 637-1700 - (TOUCH TONE PHONE)
STATEMENT OF ADDITIONAL INFORMATION
MARCH 16, 1998
This Statement of Additional Information 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 (hereinafter referred to as the "Fund(s)"; the U.S. Treasury
Institutional Fund, the U.S. Government Institutional Fund and the Interstate
Tax-Exempt Institutional Fund are hereinafter referred to as the "Treasury
Fund", "Government Fund", and "Interstate Fund", respectively).
This Statement of Additional Information is not a Prospectus and is only
authorized for distribution when preceded or accompanied by the Trust's
prospectus dated March 16, 1998 (the "Prospectus"). This Statement of
Additional Information contains additional and more detailed information than
that set forth in the Prospectus and should be read in conjunction with the
Prospectus, additional copies of which may be obtained without charge from the
Trust at the above address.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies..................................................... 2
Trustees and Officers of the Trust.................................................... 6
Investment Management, Distribution, and Custodian Agreements......................... 7
Portfolio Turnover, Transaction Charges and Allocation................................ 9
Shares of Beneficial Interest......................................................... 9
Purchase, Redemption and Pricing of Shares............................................ 10
Distributions and Taxes............................................................... 12
Fund Yield............................................................................ 14
Reserve Cash Performance Account...................................................... 15
Financial Statements.................................................................. 15
Ratings............................................................................... 16
</TABLE>
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.
<PAGE> 35
INVESTMENT OBJECTIVES, POLICIES AND RISK
The 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 United States
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 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;
(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 the Investment Company
Act of 1940.
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, which require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. While
voting rights may pass with the loaned
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<PAGE> 36
securities, if a material event will occur affecting an investment on loan, the
loan must be called and the securities voted.
The Primary Institutional Fund may purchase corporate notes collateralized
by a bank letter of credit or securities of the U.S. government, its agencies or
instrumentalities. Collateralized commercial paper purchased by the Fund is
rated A-1 and P-1 by Standard & Poor's Corporation and Moody's Investors
Service, Inc., respectively, or the equivalent thereof if rated by another
ratings agency. The collateral consists of U.S. government securities having a
current market value in excess of the collateralized commercial paper
outstanding. A Trustee is usually appointed by the collateralized commercial
paper issuer to hold the collateral and administer the credit agreement for the
benefit of the holders.
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.
From time to time, on a temporary basis other than for temporary defensive
purposes, the Interstate Fund may invest in taxable short term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the United States government, its agencies and instrumentalities
("U.S. Governments"); deposit-type obligations, acceptances and letters of
credit of Federal Deposit Insurance Corporation member banks; or instruments
fully secured or collateralized by such obligations. The Fund will not invest in
foreign securities or in taxable commercial paper. Interest earned on Taxable
Investments will be taxable income to investors. Unless the Fund has adopted a
temporary defensive position, no more than 20% of its net assets will be
invested in Taxable Investments at any time.
Certain banks and other municipal securities dealers have indicated a
willingness to sell Municipal Obligations to the Interstate Fund accompanied by
a commitment to repurchase the securities, at the Interstate Fund's option or on
a specified date, at an agreed-upon price or yield within a specified period
prior to the maturity date of such securities.
REPURCHASE AGREEMENTS. A repurchase agreement transaction occurs when a Fund
purchases and simultaneously contracts to resell in advance 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 investment 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 providing for settlement in more than seven
days after notice.
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
3
<PAGE> 37
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, as, 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 financed by the bonds or other guarantor to meet its
financial obligations, and in certain instances, the pledge of real and personal
property as security for payment. 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 and 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.
On April 20, 1988, the United States 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. 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 Interstate Fund may purchase are tax-exempt
Municipal Obligations or participation interests therein that provide for
periodic adjustments in the interest rate paid on the instrument and permit the
holder to demand payment of the unpaid principal balance plus accrued interest
upon a specified number of days' notice either from the issuer or by drawing on
a bank letter of credit or guarantee issued with respect to such instrument. The
issuer of the Municipal Obligation may have a corresponding right to prepay in
its discretion the outstanding principal of the instrument plus accrued interest
upon notice comparable to that required for the holder to demand payment.
4
<PAGE> 38
The variable rate demand instruments in which the Fund may invest will
comply with Rule 2a-7 under the Investment Company Act of 1940. The Fund will
determine the variable rate demand instruments it will purchase in accordance
with procedures prescribed by the Fund's 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.
5
<PAGE> 39
TRUSTEES AND OFFICERS OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE'S NAME,
ADDRESS AND AGE POSITION HELD TRUSTEE BIOGRAPHIES
- ----------------------- ----------------------- ---------------------------------------
<S> <C> <C>
BRUCE R. BENT* President, Treasurer Mr. Bent is President, Treasurer and
810 Seventh Avenue and Trustee Trustee of The Reserve Fund ("RF"),
New York, NY 10019 Reserve New York Tax-Exempt Trust
Age: 60 ("RNYTET"), Reserve Tax-Exempt Trust
("RTET") and Reserve Private Equity
Series ("RPES"). Mr. Bent is also
Vice President, Secretary and Director
of both Reserve Management Company Inc.
and Reserve Management Corporation, and
he is Chairman and Director of RESRV
Partners, Inc.
EDWIN EHLERT, JR.+ Trustee Mr. Ehlert is President and Director of
125 Elm Street Ehlert Travel Assoc., Inc. and Ehlert
Westfield, NJ 07091 Travel Assoc. of Florida, Inc. and is a
Age: 66 Trustee of RF, RNYTET, RTET and RPES.
HENRI W. EMMET+ Trustee Since January 1, 1995, Mr. Emmet has
1535 Presidential Drive served as a Principal of Global
Apartment 4A Interaction, which provides consulting
Columbus, OH 43212 services to international banking
Age: 71 interests. From December 1, 1989
through December 31, 1994, Mr. Emmet
served as a Managing Director of Servus
Associates Inc. Mr. Emmet is also a
Trustee of RF, RNYTET, RTET and RPES.
DONALD J. HARRINGTON, Trustee Reverend Harrington is President of St.
CM*+ John's University (NY) and serves as
St. John's University Trustee of RF, RNYTET, RTET and RPES
Jamaica, NY 11439 and a Director of the Bear Stearns
Age: 52 Companies Inc. since 1993.
MICHELLE L. NEUFELD Counsel and Secretary Prior to becoming Secretary and Counsel
810 Seventh Avenue of RF, RTET, RNYTET and RPES in 1997,
New York, NY 10019 Ms. Neufeld was a staff attorney at
Age: 27 NASD Regulation, Inc.
PAT A. COLLETTI Controller Mr. Colletti has served as Controller
810 Seventh Avenue of each of the Trusts since 1989.
New York, NY 10019
Age: 39
</TABLE>
- ---------------
* Interested Trustee within the meaning of the Investment Company Act of
1940.
+ Messrs. Ehlert, Emmet, and Harrington are members of a Review
Committee which performs the functions of Audit Committee and reviews
compliance procedures and practices.
The members of the Board of Trustees will be paid a stipend of $3,500 for
each Board meeting that they attend.
6
<PAGE> 40
As of February 28, 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.
COMPENSATION TABLE
for fiscal year ended May 31, 1997
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM TRUST AND
COMPENSATION COMPLEX (5 ADDITIONAL
NAME OF PERSON, POSITION FROM TRUST TRUSTS) PAID TO TRUSTEE
- ----------------------------------------------------------- ------------ ------------------------
<S> <C> <C>
Bruce R. Bent, President and Trustee....................... $0 $0
Edwin Ehlert, Jr, Trustee.................................. $0 $39,000
Henri W. Emmet, Trustee.................................... $0 $30,500
Rev. Donald J. Harrington, Trustee......................... $0 $30,000
Niels W. Johnsen, Trustee*................................. $0 $27,000
</TABLE>
- -------------------
* Resigned from the Board of Trustees as of May 9, 1997.
INVESTMENT MANAGEMENT, DISTRIBUTION
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("RMCI"),
14 Locust Place, Manhasset, NY 11030, of which Messrs. Henry B.R. Brown and
Bruce R. Bent are the Directors, manages the Fund and provides it with
investment advice pursuant to a separate Investment Management Agreement for
each portfolio. Messrs. Brown and Bent together with their children own RMCI.
Under the Investment Management Agreements, 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.
Under the terms of the Investment Management Agreements with the Funds,
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 .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 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, 1997, the Adviser received management
fees of $3,295 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. 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 Fund within the meaning of the Investment Company Act of
1940, 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 Plan of Distribution 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.
7
<PAGE> 41
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 Investment
Company Act of 1940, 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, D and NITC
shares at an annual rate of 0.25%, 0.50% and 0.50%, respectively, of the average
daily net asset value of the qualified accounts. Class A, Class 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 payees 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 payee
makes to the Fund by increasing assets under management and reducing expense
ratios and the cost to the Fund if such services were provided directly by the
Fund or other authorized persons. RMCI and RESRV 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 concerning payments to banks contemplated by the
Distribution Plan, any 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.
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 Distribution Plan and related agreements may be renewed from year
to year if approved by a vote of the majority of 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 renewal. 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.
8
<PAGE> 42
The Securities and Exchange Commission had proposed to amend Rule 12b-1
under the Investment Company Act of 1940 in a manner which, among other things,
would effectively prohibit the implementation of compensation plans or any other
plans that do not tie payments by a fund to specific distribution activities. If
such a proposal were implemented, the Board of Trustees would determine, at such
time and in light of the existing circumstances, the appropriateness of
continuing the Distribution Plan, recommending its modification or
discontinuance, or taking any other action.
Under the Service Plan, each Fund may pay brokers or other financial
intermediaries 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,
Class D and NITC shares owned by investors for which such broker or financial
intermediary provides personal 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 Fund's securities and cash
pursuant to a Custodian Agreement. The Bank of New York, 48 Wall Street, New
York, NY 10015 is a Custodian for the Fund for limited purposes in connection
with certain repurchase agreements. Coopers & Lybrand, L.L.P., 1301 Avenue of
the Americas, New York, NY 10019 is the Fund's independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
As investment securities transactions made by the Fund 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 Primary, Treasury and Government Funds' policy 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 material adverse effect upon the net asset value
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
Fund's investment securities. In general, in the purchase and sale of investment
securities RMCI 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 not be either a qualifying or 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 Trustees 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 Fund. 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
9
<PAGE> 43
all other classes in respect of assets specifically allocated to such class. It
is anticipated that under most circumstances, the rights of any additional class
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
another class of shares be insufficient to satisfy its liabilities, the assets
of another class could be subjected to claims arising from the operations of the
first class of shares. No changes can be made to the Fund's issued shares
without shareholder approval.
Each Fund share, when issued, is fully paid, nonassessable (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 from the Fund, 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.
Under Massachusetts law, the shareholders and trustees of a business trust
can be personally liable for the trust's obligations to third parties 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 Securities and Exchange Commission 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. Each class votes separately on such matters as approval of the
Investment Management Agreement, material amendments to the Plan of
Distribution, and changes in the fundamental policies of the Fund. These items
require 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 February 28, 1998:
PRIMARY INSTITUTIONAL FUND CLASS A
<TABLE>
<CAPTION>
NAME AND ADDRESS % OF SHARES NATURE OF OWNERSHIP
- ---------------- ----------- -------------------
<S> <C> <C>
Harry S. Hays 37.8% Beneficial
231 Gardenia Drive
Memphis, Tennessee 38117-2315
Allen & O'Hara, Inc. 36.9% Beneficial
Attn: Paul O. Bower
530 Oak Court Dr., Ste. 300
Memphis, Tennessee 38117-3725
Faith In The Future Fund, Inc. 12.9% Beneficial
c/o Bridgeport Diocese Corp.
Attn: Bernard Reidy
238 Jewett Avenue
Bridgeport, Connecticut 06606-2845
University Towers Raleigh Joint Venture 6.3% Beneficial
Attn: Paul O. Bower
530 Oak Court Dr., Ste. 300
Memphis, Tennessee 38117-3725
</TABLE>
PRIMARY INSTITUTIONAL FUND CLASS B
<TABLE>
<CAPTION>
NAME AND ADDRESS % OF SHARES NATURE OF OWNERSHIP
- ---------------- ----------- -------------------
<S> <C> <C>
810 Seventh Avenue LLC 68.6% Beneficial
Herman Abbott & Beverly Sommer
Attn: Beverly Sommer
810 Seventh Avenue
New York, New York 10019
Vincent J. Mattone 6.3% Beneficial
12 Deep Hollow Drive
Locust, New Jersey 07760
Sher Distributing Co. 5.4% Beneficial
Attn: Ben Sher
8 Vreeland Avenue
Totowa, New Jersey 07512-1167
</TABLE>
PRIMARY INSTITUTIONAL FUND CLASS C
<TABLE>
<CAPTION>
NAME AND ADDRESS % OF SHARES NATURE OF OWNERSHIP
- ---------------- ----------- -------------------
<S> <C> <C>
Miles Collier 9.8% Beneficial
c/o Collier Financial Services
3003 Tamiami Trail North
Naples, Florida 33940-2714
Isabel Collier Read 8.2% Beneficial
c/o Collier Financial Ent.
3003 Tamiami Trail North
Naples, Florida 33940-2714
The Entrepreneurial Value Fund, L.P. 7.8% Beneficial
3003 Tamiami Trail North
Naples, Florida 33940-2714
Barron G. Collier II Trustee 7.7% Beneficial
Barron G. Collier II Revocable Trust
3003 Tamiami Trail North, 3rd Floor
Naples, Florida 33940-2714
</TABLE>
U.S. GOVERNMENT INSTITUTIONAL FUND CLASS B
<TABLE>
<CAPTION>
NAME AND ADDRESS % OF SHARES NATURE OF OWNERSHIP
- ---------------- ----------- -------------------
<S> <C> <C>
Conn. State Medical Society Program 62.4% Beneficial
c/o Marc Sullivan, Controller
160 St. Ronan Street
New Haven, Connecticut 06511-2312
Conn. State Medical Soc. Phys. Health 17.9% Beneficial
and Education Fd.
Attn: Marc Sullivan
160 St. Ronan Street
New Haven, Connecticut 06511-2312
Reserve Management Corp. 16.8% Beneficial
Govt Class B Fee Account
810 Seventh Avenue
New York, New York 10019
</TABLE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments will normally be made by check or wire transfer but the
Fund is 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 Fund has 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 Investment Company Act
of 1940 unless withdrawal is permitted by order of the Securities and Exchange
Commission. Redemptions in kind are further limited by the 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.
10
<PAGE> 44
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.
PURCHASES AND REDEMPTIONS THROUGH OTHERS. Share purchases and redemptions may
also be made through brokers and financial institutions ("firms"). Firms may
provide varying arrangements for their clients with respect to the purchase and
redemption of Fund shares and may arrange with their clients for other
investment or administrative services. Some of these firms participate in the
Fund's Plan of Distribution ("Plan"). Under the Plan, payments are made to
persons who provide assistance in distributing Fund shares or other assistance
to the Fund.
NET ASSET VALUE. Shares are offered at their net asset value. The net asset
value of the Fund is calculated at the close of each business day as defined in
the Prospectus. The net asset value is not calculated on New Year's Day,
Presidents' Day, Good Friday, Memorial Day observed, Independence Day, Labor
Day, Thanksgiving Day, Christmas Day, on other days the New York Stock Exchange
is closed for trading, and on certain regional banking holidays which may
include Martin Luther King's Birthday and Columbus Day. The net asset value of
each Fund is normally maintained at $1.00 per share. Each Fund cannot guarantee
that its net asset value will always remain at $1.00 per share.
The net asset value 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. 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. 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 review
by the Trustees, at such intervals as they may determine reasonable, to
ascertain the extent of any difference in the net asset value 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 Fund will only give credit for investments in the
Fund 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
11
<PAGE> 45
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. Shares of the Fund may be purchased by wire only.
The Fund reserves the right to reject any investment in the Fund for any
reason and may at any time suspend all new investment in the Fund.
IF THE WIRE FOR PURCHASE OF SHARES IS NOT RECEIVED BY THE FUND, THE SHARE
PURCHASE MAY BE CANCELED OR REDEEMED IMMEDIATELY. THE INVESTOR THAT 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
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 ("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 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 investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses) that they distribute to shareholders. 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 at the applicable mid-term or long-term 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, 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") each year 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
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
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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 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 at applicable mid-term or long-term 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.
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<PAGE> 47
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
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.
Effective yield is computed by adding one to current yield, raising the sum
to a power equal to 365 divided by the number of days in the base period (seven
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.
Yield information may be useful in reviewing the performance of the 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 the
Fund, nor is it insured by a governmental agency.
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RESERVE CASH PERFORMANCE ACCOUNT
The Reserve Cash Performance ("CPA") and Reserve "CPA" Plus accounts
provide a comprehensive package of additional services to investors in the
Interstate Fund for an additional fee. Reserve CPA is a check arrangement with
BankOne Columbus NA or the Chase Manhattan Bank whereby checks are issued to
Reserve shareholders which may be used to redeem shares in the 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. Reserve CPA Plus is a checking
facility described above plus a VISA Gold debit card. 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 changes 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 establishing a CPA or CPA Plus account may be altered or waived
by the Funds either generally or in specific instances. The 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 service fee (currently $60
which may be charged to the account at the rate of $5 monthly) and a
transaction fee of $0.50 for each additional check in excess of five presented
for payment within the statement period. Participants will also be charged for
specific costs incurred in placing stop payment orders, obtaining check copies
and in processing returned checks. The annual service fee and other 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 the governing Federal regulations which is currently $50 if
the Fund or the bank is not notified of the theft or loss within 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 CPA Plus participant
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 Account Application and VISA Account Shareholder
Agreements.
FINANCIAL STATEMENTS
Financial Statements (audited) for the Primary Institutional Fund for the fiscal
year ended May 31, 1997, including notes thereto, are incorporated by reference
in the Statement of Additional Information from the Registrant's Annual Report
dated as of May 31, 1997 filed with the Securities and Exchange Commission on
July 30, 1997.
Financial Statements (unaudited) for the Primary Institutional Fund and the
U.S. Government Institutional Fund for the six-month period ended November 30,
1997, including notes thereto, are incorporated by reference in the Statement
of Additional Information from the Registrant's Semi-Annual Report dated as of
November 30, 1997 filed with the Securities and Exchange Commission on January
28, 1998.
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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 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.
IBCA LTD.
A-1: Obligations supported a very strong capacity for timely repayment.
Those obligations supported by the highest capacity for timely repayment will be
denoted with a plus (+) sign designation.
FITCH INVESTORS SERVICE, INC.
F-1: 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 "F-1 +". Those issues determined to possess and
exceptionally strong credit quality will be denoted with a plus (+) sign
designation. Issues assigned the rating of F-1+ 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 nine months. Moody's employs the following two designations all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: MIG-1/VMIG-1, Best Quality and MIG-1/VMIG-1, High Quality. The
designation of MIG-1/VMIG-1 indicates there is strong protection by established
cash flows, superior liquidity support or demonstrated broad
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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.
Standard & Poor'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 an A
rating 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 Standard & Poor's 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.
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