<PAGE> 1
1933 Act File No. 2-82592
1940 Act File No. 811-3696
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-------
Pre-Effective Amendment No.
-------- -------
Post-Effective Amendment No. 29 X
-------- -------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-------
Amendment No. 31 X
-------- -------
(Check appropriate box or boxes.)
RESERVE TAX-EXEMPT TRUST
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
810 Seventh Avenue, New York, NY 10019
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 977-9882
-------------------------
Marc C. Cozzolino, Esq., Reserve Tax-Exempt Trust, 810 Seventh Avenue, 17th
Floor,
- --------------------------------------------------------------------------------
New York, NY 10019
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
Immediately upon filing pursuant to paragraph (b) of Rule 485
--------
on _________ __, 1996 pursuant to paragraph (b) of Rule 485
--------
x 75 days after filing pursuant to paragraph (a) of Rule 485
--------
on (date) pursuant to paragraph (a) of Rule 485
--------
----------------------------
The Commission is requested to send copies of all communications to:
Paul F. Roye, Esq.
Dechert Price & Rhoads
1500 K Street, NW
Washington, DC 20005
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 electing to register an indefinite number of shares of
beneficial interest. The notice required by Rule 24f-2 with respect to
Registrant's fiscal year ending May 31, 1996 was filed with the Commission on
June 17, 1996.
This filing contains 53 pages.
<PAGE> 2
RESERVE TAX-EXEMPT TRUST
CROSS REFERENCE SHEET PURSUANT TO RULE 495A(a)
<TABLE>
<CAPTION>
FORM PROSPECTUS AND STATEMENT
N-1A OF ADDITIONAL INFORMATION
ITEM FORM CAPTION CAPTION
- ---- --------------------------------- ---------------------------------------
<S> <C> <C>
1 Cover Page Cover Page
2 Synopsis (omitted)
3 Condensed Financial Information Financial Highlights
4 General Description of Registrant Investment Objective and Policies;
Shares of Beneficial Interest
5 Management of the Fund Management; How to Buy Shares
6 Capital Stock and Other Securities Shares of Beneficial Interest
7 Purchase of Securities Being Offered How to Buy Shares
8 Redemption or Repurchase Redemptions
9 Legal Proceedings (omitted)
10 Cover Page Statement of Additional Information
11 Table of Contents Table of Contents
12 General Information and History (omitted)
13 Investment Objective and Policies Investment Objective and Policies
14 Management of the Registrant Trustees and Executive Officers
15 Control Persons and Principal Trustees and Executive Officers; Shares of Holders of Securities
Beneficial Interest
16 Investment Advisory and Other Investment Management, Distribution,
Service Services and Custodian Agreements
17 Brokerage Allocation Portfolio Turnover, Transaction
Charges and Allocation
18 Capital Stock and Other Securities Shares of Beneficial Interest
19 Purchase, Redemption, and Pricing Purchase, Redemption and Pricing of
Shares; of Securities Being Offered
20 Tax Status Distributions and Taxes
21 Underwriters Investment Management, Distribution,
Service and Custodian Agreements
22 Calculation of Yield Quotations Fund Yield
Of Money Market Funds
23 Financial Statements Financial Statements
</TABLE>
<PAGE> 3
General Information, Purchases and
Redemptions
[RESERVE FUNDS LOGO]
---------------------------------------
24 Hour Yield and Balance Information
---------------------------------------
Nationwide 800-637-1700
TAX-EXEMPT MONEY MARKET FUNDS
FOR RESIDENTS OF
NEW YORK, ARIZONA, CALIFORNIA, CONNECTICUT, FLORIDA, LOUISIANA,
MASSACHUSETTS, MICHIGAN, NEW JERSEY, NORTH CAROLINA, OHIO,
TENNESSEE AND VIRGINIA
The NEW YORK TAX-EXEMPT FUND of Reserve New York Tax-Exempt Trust and the
ARIZONA TAX-EXEMPT, CALIFORNIA TAX-EXEMPT, CONNECTICUT TAX-EXEMPT, FLORIDA
TAX-EXEMPT, LOUISIANA TAX-EXEMPT, MASSACHUSETTS TAX-EXEMPT, MICHIGAN
TAX-EXEMPT, NEW JERSEY TAX-EXEMPT, NORTH CAROLINA TAX-EXEMPT, OHIO TAX-EXEMPT,
TENNESSEE TAX-EXEMPT and VIRGINIA TAX-EXEMPT FUNDS of Reserve Tax-Exempt Trust
(the "Fund(s)") are money market funds whose investment objective is to seek as
high a level of short term interest income exempt from federal, state and local
income taxes, if any, as is consistent with preservation of capital and
liquidity.
- NEW YORK TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of New York and its counties,
municipalities, authorities or other political subdivisions.
- ARIZONA TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of Arizona and its counties,
municipalities, authorities or other political subdivisions.
- CALIFORNIA TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of California and its counties,
municipalities, authorities or other political subdivisions.
- CONNECTICUT TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the State of Connecticut and its
counties, municipalities, authorities or other political subdivisions.
- FLORIDA TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of Florida and its counties,
municipalities, authorities or other political subdivisions.
- LOUISIANA TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of Louisiana and its counties,
municipalities, authorities or other political subdivisions.
- MASSACHUSETTS TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the Commonwealth of Massachusetts and
its counties, municipalities, authorities or other political
subdivisions.
- MICHIGAN TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of Michigan and its counties,
municipalities, authorities or other political subdivisions.
- NEW JERSEY TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of New Jersey and its counties,
municipalities, authorities or other political subdivisions.
- NORTH CAROLINA TAX-EXEMPT FUND invests principally in high-quality
tax-exempt obligations issued by the State of North Carolina and its
counties, municipalities, authorities or other political subdivisions.
- OHIO TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of Ohio and its counties, municipalities,
authorities or other political subdivisions.
- TENNESSEE TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the State of Tennessee and its counties,
municipalities, authorities or other political subdivisions.
- VIRGINIA TAX-EXEMPT FUND invests principally in high-quality tax-exempt
obligations issued by the Commonwealth of Virginia and its counties,
municipalities, authorities or other political subdivisions.
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.
A SINGLE-STATE TAX-EXEMPT FUND CONCENTRATED AS TO A SINGLE ISSURER MAY BE
RISKIER THAN OTHER FUNDS.
This Prospectus sets forth the information about the Funds which a
prospective investor should know before investing. A Statement of Additional
Information dated July 31, 1996, as amended _______ _, ____, providing further
details about the Funds, has been filed with the Securities and Exchange
Commission. It may be obtained and without charge by writing or calling the
Funds at (800) 637-1700. The Statement of Additional Information is incorporated
by reference into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR OBLIGATIONS
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 July 31, 1996, as amended _______ _, ____.
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 4
SHAREHOLDER EXPENSES
The following table illustrates all expenses and fees that a shareholder of
each Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended May 31, 1996.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
NEW YORK ARIZONA CALIFORNIA CONNECTICUT FLORIDA LOUISIANA MASSACHUSETTS MICHIGAN
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND** FUND FUND FUND
---------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases............. None None None None None None None None
Sales Load Imposed on
Reinvested
Dividends............. None None None None None None None None
Redemption Fees*....... None None None None None None None None
Exchange Fees.......... None None None None None None None None
<CAPTION>
NEW JERSEY NORTH CAROLINA OHIO TENNESSEE VIRGINIA
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND
---------- -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases............. None None None None None
Sales Load Imposed on
Reinvested
Dividends............. None None None None None
Redemption Fees*....... None None None None None
Exchange Fees.......... None None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NEW YORK ARIZONA CALIFORNIA CONNECTICUT FLORIDA LOUISIANA MASSACHUSETTS MICHIGAN
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND FUND FUND
---------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees (after
waiver)............... .50% .50% .50% .50% .50% .50% .45% .50%
12b-1 Fees............. .19% .20% .20% .15% .20% .20% .03% .20%
Other Operating
Expenses
Administration and
Operations
Expenses............ .30% .29% .31% .31%
Equipment............. .04% .04% .04% .04%
Other................. .01% .30% .01% .01% .30% .30% .01% .30%
----- ----- ----- ----- ----- ----- ---- -----
Total Operating
Expenses.............. 1.04% 1.00% 1.04% 1.01% 1.00% 1.00% .84% 1.00%
===== ===== ===== ===== ===== ===== ==== =====
<CAPTION>
NEW JERSEY NORTH CAROLINA OHIO TENNESSEE VIRGINIA
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND
---------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Management Fees (after
waiver)............... .50% .50% .50% .50% .50%
12b-1 Fees............. .20% .20% .20% .20% .20%
Other Operating
Expenses
Administration and
Operations
Expenses............ .29%
Equipment............. .04%
Other................. .01% .30% .30% .30% .30%
----- ----- ----- ----- -----
Total Operating
Expenses.............. 1.04% 1.00% 1.00% 1.00% 1.00%
===== ===== ===== ===== =====
</TABLE>
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. These figures reflect a voluntary reduction of the management fee
for the Connecticut, Massachusetts and New Jersey Tax-Exempt Funds by the
investment adviser. If there was no voluntary reduction, the management fee
would be .50% for the Funds. *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.
The following example illustrates 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. The example
reflects the voluntary reduction of the management fee for the Connecticut,
Massachusetts and New Jersey Tax-Exempt Funds by the investment adviser. **The
Florida Tax-Exempt Fund did not commence operations until June 1996.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
New York Tax-Exempt Fund............................ $ 11 $33 $57 $127
Arizona Tax-Exempt Fund............................. $ 10 $32 $56 $125
California Tax-Exempt Fund.......................... $ 11 $33 $57 $127
Connecticut Tax-Exempt Fund......................... $ 10 $32 $56 $124
Florida Tax-Exempt Fund............................. $ 10 $32 -- --
Louisiana Tax-Exempt Fund........................... $ 10 $32 $56 $125
Massachusetts Tax-Exempt Fund....................... $ 9 $27 $47 $104
Michigan Tax-Exempt Fund............................ $ 10 $32 $56 $125
New Jersey Tax-Exempt Fund.......................... $ 11 $33 $57 $127
North Carolina Tax-Exempt Fund...................... $ 10 $32 $56 $125
Ohio Tax-Exempt Fund................................ $ 10 $32 $56 $125
Tennessee Tax-Exempt Fund........................... $ 10 $32 $56 $125
Virginia Tax-Exempt Fund........................... $ 10 $32 $56 $125
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
2
<PAGE> 5
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Reserve New York
Tax-Exempt Trust -- New York Fund and Reserve Tax-Exempt Trust -- California,
Connecticut, Massachusetts and New Jersey Funds outstanding throughout each
period. It should be read in conjunction with the financial statements and
related notes appearing in the Statement of Additional Information. Such
information has been audited by Coopers & Lybrand L.L.P. as indicated in their
report appearing in the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
NEW YORK TAX-EXEMPT ----------------------------------------------------------------------------------------------------------
FUND 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- -------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year.............. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
investment
operations........ .0381 .0352 .0249 .0281 .0421 .0563 .0616 .0600 .0476 .0454
Expenses............ .0105 .0099 .0099 .0103 .0104 .0105 .0100 .0103 .0102 .0100
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment
income (1)........ .0276 .0253 .0150 .0178 .0317 .0458 .0516 .0497 .0374 .0354
Dividends from net
investment income
(1)............... (.0276) (.0253) (.0150) (.0178) (.0317) (.0458) (.0516) (.0497) (.0374) (.0354)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year........... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return........ 2.76% 2.53% 1.50% 1.78% 3.17% 4.58% 5.16% 4.97% 3.74% 3.54%
<CAPTION>
RATIOS/SUPPLEMENTAL
DATA
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net assets in
thousands, end of
year.............. 125,454 152,906 148,387 149,785 156,567 148,079 120,142 90,378 86,749 84,730
Ratio of expenses to
average net
assets............ 1.04% .98% .98% 1.02% 1.03% 1.01% .98% 1.00% 1.00% .98%
Ratio of net
investment income
to average net
assets............ 2.72% 2.48% 1.48% 1.76% 3.09% 4.43% 5.02% 4.86% 3.66% 3.46%
</TABLE>
<TABLE>
<CAPTION>
CONNECTICUT FOR FISCAL YEARS ENDED MAY 31,
TAX-EXEMPT -------------------------------------------------------------------------------------------------------------------
FUND 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning
of
year..... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
investment
operations... .0368 .0352 .0250 .0269 .0400 .0534 .0615 .0604 .0481 .0449
Expenses... (.0102) .0098(3) .0086(3) .0087(3) .0091(3) .0086(3) .0083(3) .0086(3) .0092(3) .0076(3)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net
investment
income
(1)...... .0266 .0254 .0164 .0182 .0309 .0448 .0532 .0518 .0389 .0373
Dividends
from net
investment
income
(1)...... .0266 (.0254) (.0164) (.0182) (.0309) (.0448) (.0532) (.0518) (.0389) (.0373)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset
value,
end of
year..... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total
Return... 2.66% 2.54% 1.64% 1.82% 3.09% 4.48% 5.32% 5.18% 3.89% 3.73%
<CAPTION>
RATIOS/SUPPLEMENTAL
DATA
- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net assets
in
thousands,
end of
year..... 34,801 26,626 128,693 157,115 191,101 241,790 314,489 247,929 245,588 234,728
Ratio of
expenses
to
average
net
assets... 1.01% .89%(3) .85%(3) .86%(3) .90%(3) .85%(3) .81%(3) .84%(3) .90%(3) .74%(3)
Ratio of
net
investment
income to
average
net
assets... 2.61% 2.33% 1.62% 1.81% 3.05% 4.41% 5.17% 5.05% 3.81% 3.63%
</TABLE>
3
<PAGE> 6
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
--------------------------------------------------- (COMMENCEMENT OF OPERATIONS)
MASSACHUSETTS TAX-EXEMPT FUND 1996 1995 1994 1993 1992 1991 THROUGH MAY 31, 1990
- -------------------------------- ------- ------- ------- ------- ------- ------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.......................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000
------- ------- ------- ------- ------- ------- -------
Income from investment
operations.................... .0362 .0335 .0227 .0257 .0386 .0551 .0209
Expenses (3).................... .0086 .0070 .0052 .0048 .0045 .0032 .0010
------- ------- ------- ------- ------- ------- -------
Net investment income (1)....... .0276 .0265 .0175 .0209 .0341 .0519 .0199
Dividends from net investment
income (1).................... (.0276) (.0265) (.0175) (.0209) (.0341) (.0519) (.0199)(4)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of year.... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $ 1.0000
======= ======= ======= ======= ======= ======= =======
Total Return.................... 2.76% 2.65% 1.75% 2.09% 3.41% 5.19% 5.59%(2)
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net assets in thousands, end of
year.......................... 8,955 10,169 14,824 13,305 7,186 4,652 2,140
Ratio of expenses to average net
assets (3).................... .84% .69% .51% .46% .44% .30% .29%(2)
Ratio of net investment income
to average
net assets.................... 2.71% 2.60% 1.73% 2.04% 3.28% 4.79% 5.53%(2)
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1994
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
CALIFORNIA TAX-EXEMPT FUND MAY 31, 1996 THROUGH MAY 31, 1995
- --------------------------------------------------------------------- ------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period................................. $ 1.0000 $ 1.0000
---------- --------
Income from investment operations.................................... .0379 .0243
Expenses............................................................. .0106 .0062(2)
---------- --------
Net investment income (1)............................................ .0273 .0181
Dividends from net investment income (1)............................. (.0273) (.0181)
---------- --------
Net asset value, end of period....................................... $ 1.0000 $ 1.0000
========== ========
Total Return......................................................... 2.73% 1.81%
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------
<S> <C> <C>
Net assets in thousands, end of period............................... 12,612 11,088
Ratio of expenses to average net assets.............................. 1.04% 1.02%(2)
Ratio of net investment income to average net assets................. 2.67% 2.95%(2)
</TABLE>
<TABLE>
<CAPTION>
JUNE 21, 1994
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
NEW JERSEY TAX-EXEMPT FUND MAY 31, 1996 THROUGH MAY 31, 1995
- ------------------------------------------------------------------------ ------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period.................................... $ 1.0000 $ 1.0000
---------- --------
Income from investment operations....................................... .0369 .0330
Expenses................................................................ .0106 .0087(2)(3)
---------- --------
Net investment income (1)............................................... .0263 .0243
Dividends from net investment income (1)................................ (.0263) (.0243)
---------- --------
Net asset value, end of period.......................................... $ 1.0000 $ 1.0000
========== ========
Total Return............................................................ 2.63% 2.43%
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
<S> <C> <C>
Net assets in thousands, end of period.................................. 41,026 21,607
Ratio of expenses to average net assets................................. 1.04% 1.01%(2)(3)
Ratio of net investment income to average net assets.................... 2.59% 2.82%(2)
</TABLE>
- ---------------
(1) Based on compounding of daily dividends. Not indicative of future results.
(2) Annualized.
(3) During these periods the Manager waived all or a portion of fees and
expenses. If there were no reductions in expenses, the actual expenses for
the Connecticut Tax-Exempt Fund would have been .10% higher and the actual
expenses for the Massachusetts Tax-Exempt Fund would have been .05%, .11%,
.43%, .50%, .50% and .50% higher and .01% higher for the New Jersey
Tax-Exempt Fund.
(4) .01 cent per share represents distributions of taxable income.
4
<PAGE> 7
YIELD
For the seven calendar days ended May 31, 1996, the current yield and the
effective yield for the Funds were as follows:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
New York Tax-Exempt Fund.................................................. 2.60% 2.64%
California Tax-Exempt Fund................................................ 2.54% 2.58%
Connecticut Tax-Exempt Fund............................................... 2.41% 2.44%
Massachusetts Tax-Exempt Fund............................................. 2.67% 2.70%
New Jersey Tax-Exempt Fund................................................ 2.33% 2.36%
</TABLE>
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.
The Funds may also quote tax equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal a Fund's tax-free
yield. A tax equivalent yield is calculated by dividing a Fund's current or
effective yield by the result of one minus a stated federal and/or state and
local tax rate.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of each of the Funds is to seek as high a level of
short term interest income exempt from federal, state and local income taxes, if
any, as is consistent with preservation of capital and liquidity. However,
achievement of this objective cannot be assured. This investment objective may
not be changed without the vote of a majority of the outstanding shares of a
Fund as defined in the Investment Company Act of 1940.
Each Fund seeks to attain its objective by investing principally in
tax-exempt obligations issued by the state for which it is named and the state's
counties, municipalities, authorities or other political subdivisions. There can
be no assurance that any of the Funds will achieve its investment objective.
These securities are 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 may be issued to raise money for various public
purposes such as constructing public facilities. Certain types of Municipal
Obligations are issued to obtain funding for privately operated 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 tolls from 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 a specific type of revenue bond or note backed by the credit
of a private issuer. Each Fund may invest any portion of its assets in
industrial revenue bonds and notes. Municipal Obligations bear fixed, variable
or floating rates of interest. At least 80% of each Fund's assets will be
invested in Municipal Obligations which are exempt from federal, state and, with
respect to the New York Tax-Exempt Fund, local income taxes and, with respect to
the Florida Tax-Exempt Fund, the Florida intangibles tax, unless it has adopted
a temporary defensive position. In addition, during periods when the Funds'
investment adviser believes that Municipal Obligations meeting each respective
Fund's quality standards are not available, a Fund may invest up to 20% of its
assets, or a greater percentage on a temporary basis, in Municipal Obligations
exempt only from federal income taxes.
A 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 Funds may invest any portion of
their assets in floating and variable rate demand notes secured by bank letters
of credit or other credit support arrangements. Use of letters of credit support
arrangements will not adversely affect the tax-exempt status of these Municipal
Obligations. A 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 each of the Funds in industrial revenue
development bonds and notes secured by letters of credit or guarantees of banks,
an investment in a Fund's shares should be made with an understanding of the
characteristics of the banking
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industry and the risks such an investment may entail. Banks are subject to
extensive government regulations which may limit both the amounts and 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 capital 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 might affect a bank's ability to meet its obligations under a
letter of credit.
Each 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. Municipal Obligations
which are not rated may also be purchased provided such securities are
determined to be of comparable quality by the Fund's investment adviser to those
rated securities in which the Funds may invest pursuant to guidelines
established by their Boards of Trustees.
OTHER POLICIES. Certain banks and other municipal securities dealers have
indicated a willingness to sell Municipal Obligations to the Funds accompanied
by a commitment to repurchase the securities, at a 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 standby
commitment and fail to pay the exercise price, a Fund could suffer a potential
loss to the extent that the amount paid by the Fund, if any, for the Municipal
Obligation with a standby commitment exceeded the current value of the
underlying Municipal Obligation. If a bank or other municipal securities dealer
defaults under its standby 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 a Fund's ability to purchase municipal
securities 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, the settlement date occurs within one month of
the purchase of such Municipal Obligations. During the period between the
purchase and settlement dates, no payment is made by a Fund to the issuer and no
interest accrues to a Fund on such securities. To the extent that assets of a
Fund purchasing such securities are not invested prior to the settlement of a
purchase of securities, a Fund will earn no income; however, it is each of the
Fund's intent to be as fully invested as is practicable. While when-issued
securities may be sold prior to settlement date, the Funds intend to purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time a 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. Each 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 a
Fund's net asset value or income will be adversely affected by the purchase of
Municipal Obligations on a when-issued basis.
The Funds may purchase from financial institutions participation interests
in Municipal Obligations. A participation interest gives a 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 Tax Reform Act of 1986 ("the Act") 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 federal
alternative minimum tax or at least 80% of its income will be tax-exempt. Income
received on such securities is classified as a "tax preference item" which could
subject certain investors in such securities, including shareholders of each of
the Funds, to an increased alternative minimum tax. However as of the date of
this Prospectus, each 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 each of the Funds 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 a 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 a Fund has adopted a temporary
defensive position, no more than 20% of the net assets of each of the Funds will
be invested in Taxable Investments at any time. A Fund may enter into repurchase
agreements with regard to the
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taxable obligations listed above. Although a 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, each
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 each Fund are the
risk of fluctuations in short term interest rates, the risk of default among one
or more issuers of securities which comprise a Fund's assets and the risk of
non-diversification. As a non-diversified investment company, each Fund is
permitted to have all its assets invested in a limited number of issuers.
Accordingly, since a relatively high percentage of a Fund's assets may be
invested in the securities of a limited number of issuers, a 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, each 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.
RISK FACTORS IN CONCENTRATING IN ARIZONA. Arizona's economy has recovered from
the difficulties caused in the late 1980s by a severe drop in real estate values
and a lack of stability of Arizona-based financial institutions which caused
many such institutions to be placed under control of the Resolution Trust
Corporation. However, the border counties, and especially the City of Tucson,
have been adversely affected by the devaluation of the peso and the subsequent
instability in the Mexican economy. In addition, certain taxpayers have filed a
complaint against a school district in Maricopa County, Arizona, alleging that
the accounting method utilized by the district to report revenue from the sale
of capital appreciation bonds misrepresents the liability incurred by the school
district. Such taxpayers specifically alleged that the district must include the
principal amount of capital appreciation bonds, together with the premium from
the sale of such bonds, in calculating the district's total indebtedness. A
superior court granted such taxpayers' motion for summary judgment holding that
the school district inaccurately characterized the revenue received and the debt
incurred from the sale of capital appreciation bonds, which enabled the school
district to incur additional debt in violation of the state constitutional and
statutory debt limitations. If the court's ruling is applied as such to other
school districts, certain obligations of some Arizona school districts could be
deemed in the future to exceed constitutional and statutory debt limits. The
foregoing may also effect the tax exempt status of the interest paid on such
debt securities.
RISK FACTORS IN CONCENTRATING IN CALIFORNIA. You should consider carefully the
special risks inherent in the Fund's investment in California Municipal
Obligations. These risks result from certain amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, as well as from the general financial
condition of the State of California. Since the start of the State's 1990-91
fiscal year, the State has experienced the worst economic, fiscal and budget
conditions since the 1930's. As a result, the State has experienced recurring
budget deficits for the past several fiscal years. By June 30, 1992, according
to California's Department of Finance, the State's General Fund has an
accumulated deficit, on a budget basis, of approximately $2.2 billion. Moreover,
the Governor's Budget for 1993-94, released January 8, 1993, projected a $2.5
billion budget deficit for the fiscal year ending June 30, 1993. By June 30,
1994, according to California's Department of Finance, the State's Reserve for
Economic Uncertainties had an accumulated deficit, on a budget basis, of
approximately $2.0 billion. A further consequence of the large budget imbalances
has been that the State depleted its available cash resources and has had to use
a series of external borrowings to meet its cash needs. To meet its cash flow
needs in the 1994-95 fiscal year, the State issued, in July and August 1994,
$4.0 billion of revenue anticipation warrants and $3.0 billion of revenue
anticipation notes. As a result of the deterioration in the State's budget and
cash situation, between October 1991 and July 1994 the rating on the State's
general obligation bonds was reduced by S&P from AAA, to A, by Moody's from Aaa
to A1 and by Fitch from AAA to A. These and other factors may have the effect of
impairing the ability of the issuers of California Municipal Obligations to pay
interest on, or repay principal of, such California Municipal Obligations.
However, the 1995-1996 Governor's Budget indicates that the state has embarked
on a steady economic recovery since late 1993, somewhat sooner than predicted in
the May 94 revision of the 1994-1995 Governor's Budget. Revised employment data
indicates that California's recession ended in 1993, and following a period of
stability, a recovery is underway. In addition, the gap between the national and
California's jobless rate narrowed from 3.4 percentage points at the beginning
of 1994 to an average of 2 percentage points in October and November of that
same year. You should obtain and review a copy of the Statement of Additional
Information which more fully sets forth these and other risk factors.
RISK FACTORS IN CONCENTRATING IN CONNECTICUT. The Connecticut Tax-Exempt Fund's
concentration in securities issued by the State of Connecticut and its political
subdivisions involves greater risks than a fund broadly invested across many
states and municipalities.
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Specifically, the credit quality of the Connecticut Tax-Exempt Fund will depend
on the continued financial strength of the State of Connecticut and its
political subdivisions. From 1970 to 1992, the number of persons employed in
non-manufacturing industries has increased 60.8% while manufacturing employment
has declined 30.8%. It is expected that these trends will continue in the
future. Defense-related business plays an important role in the Connecticut
economy. Due to reduced defense-related spending, several employers have
announced substantial planned labor force reductions scheduled to occur over the
next several years. For 1993, the rate of unemployment in Connecticut was 7.4%
on a seasonably adjusted basis, and the rate in the United States was 6.0% on a
seasonably adjusted basis. The State Comptroller's annual reports for the fiscal
year ended June 30, 1992, 1993 and 1994 reflected General Fund operating
surpluses of $110 million, $113.5 million and $19.7 million, respectively. The
Computer's monthly report for the period ended August 31, 1994 stated that the
cumulative deficit under GAAP for 1994-95 is approximately $531 million. As a
result of the recent recurring budgetary problems, S&P downgraded the State's
general obligation bonds from AA+ to in April 1990 and to AA- in September 1991.
In March 1990, Moody's downgraded Connecticut's bonds from Aa1 to Aa. In March
1995, Fitch downgraded Connecticut's bonds from AA+ to AA. The Statement of
Additional Information further discusses risk factors in concentrating in
securities issued by the State of Connecticut and its subdivisions.
RISK FACTORS IN CONCENTRATING IN FLORIDA. Yields on Florida municipal
securities depend on a variety of factors, including: the general conditions of
the short-term municipal note market and of the municipal bond market; the size
of the particular offering; the maturity of the obligations; and the rating of
the issue. The ability of the Fund to achieve its investment objective also
depends on the continuing ability of the issuers of Florida municipal securities
and participation interests, or the credit enhancers of either, to meet their
obligations for the payment of interest and principal when due. In addition,
from time to time, the supply of Florida municipal securities acceptable for
purchase by the Fund could become limited. The Fund may invest in Florida
municipal securities which are repayable out of revenue streams generated from
economically related projects or facilities and/or whose issuers are located in
the same state. Sizable investments in these Florida municipal securities could
involve an increased risk to the Fund should any of these related projects or
facilities experience financial difficulties. Obligations of issuers of Florida
municipal securities are subject to the provisions of bankruptcy, insolvency,
and other laws affecting the rights and remedies of creditors. In addition, the
obligations of such issuers may become subject to laws enacted in the future by
Congress, state legislators, or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
such obligations or upon the ability of states or municipalities to levy taxes.
There is also the possibility that, as a result of litigation or other
conditions, the power or ability of any issuer to pay, when due, the principal
of and interest on its municipal securities may be materially affected.
RISK FACTORS IN CONCENTRATING IN LOUISIANA. In 1994, Louisiana's population was
4,315,000, its average personal income was $17,651 and the unemployment rate was
8.0%. Louisiana's economy is based primarily on services. The 1994 unaudited
general fund revenues were $10.55 billion against expenditures of $9.59 billion.
General obligation ratings are Baa1 by Moody's and A by Standard & Poor's.
Shares of the Fund are subject to the Louisiana property tax.
RISK FACTORS IN CONCENTRATING IN MASSACHUSETTS. The Massachusetts Tax-Exempt
Fund's concentration in securities issued by the Commonwealth of Massachusetts
and its political subdivisions involves greater risks than a fund broadly
invested across many states and municipalities. Specifically, the credit quality
of the Massachusetts Tax-Exempt Fund will depend on the continued financial
strength of the Commonwealth of Massachusetts and its political subdivisions.
The Commonwealth's unemployment rate peaked in 1991 at 9.0% and dropped to 6.9%
in 1993. Between 1990 and 1991 manufacturing employment declined 7.1%. Between
1991 and 1992 manufacturing employment declined 4.7%. The economic conditions
have improved somewhat, since 1993. As of June 1995, the Massachusetts
unemployment rate was 5.6% as compared to the national average of 5.6%. Due to
the adverse financial condition of the Commonwealth, Moody's downgraded the
Commonwealth's general obligation bonds from Baa-1 to Baa on March 19, 1990. S&P
downgraded its rating of Commonwealth general obligation bonds from A to BBB on
December 13, 1989. Both Moody's and S&P subsequently raised their ratings of
Commonwealth general obligation bonds to A on September 9, 1992. On October 13,
1993 S&P raised its rating of commonwealth general obligation bonds to A+.
Currently, Massachusetts general obligation bonds are rated by Standard &
Poor's, Fitch and Moody's as A+, A+ and A-1, respectively. There can be no
assurance that these difficulties will not adversely affect the ability of the
Commonwealth of Massachusetts and its political subdivisions to make debt
payments on the Municipal Obligations they issue. The Statement of Additional
Information further discusses risk factors in concentrating in securities issued
by the Commonwealth of Massachusetts and its subdivisions.
RISK FACTORS IN CONCENTRATING IN MICHIGAN. The State of Michigan reported a
balance in the General Funds as of September 30, 1993 of $26.0 million after a
transfer of $283 million to the Michigan Budget Stabilization Fund, which after
such transfer had an accrued balance of $303 million. The State has improved
financially after two consecutive years of deficits in the 1989-90 and 1990-91
fiscal years and draws on the Michigan Budget Stabilization Fund to balance the
1991-92 fiscal year budget. Economically, the State remains closely tied to the
economic cycles of the automobile industry. Current increased automobile
production has led to an unemployment rate which, as of the date of this
Prospectus, is lower than the national average. Currently, Michigan's general
obligation bonds are rated
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A1 by Moody's, AA by Standard & Poor's and AA by Fitch. The Adviser does not
believe that the current economic conditions in Michigan will have a significant
adverse effect on the Fund's ability to invest in high quality Michigan State
Municipal Securities.
RISK FACTORS IN CONCENTRATING IN NEW JERSEY. The Fund's concentration in
securities issued by the State of New Jersey and its political subdivisions
involves greater risks than a fund broadly invested across many states and
municipalities. The state's economy performed strongly for much of the 1980s.
Like much of the Northeast in the 1980s, the state's economy outpaced national
trends. However, from 1989 to 1992 the state's economic performance was weak and
it under performed the rest of the nation. Economic recovery will be slower due
to the weakness in the real estate and construction sectors, the lack of
consumer confidence, and the loss of manufacturing and high level corporate
service jobs. Reflecting the economic downturn, the State's unemployment rate
rose from 3.6% in the first quarter of 1989 to 9.1% in April 1993. Since then,
the unemployment rate fell to 6.9% during the first quarter of 1995. In
addition, evidence of the state's improving economy can be seen in the
construction industry, rises in consumer spending and the decline in the
unemployment rate. Currently, New Jersey state's general obligation bonds are
rated AA+ by Standard & Poor's, AA+ by Fitch, and Aa1 by Moody's. The Statement
of Additional Information further discusses risk factors in concentrating in
securities issued by the State of New Jersey and its political subdivisions. New
Jersey's economic base continues to be strong, fortified by one of the most
diversified structures in the nation. The leading employment sectors are
services, wholesale and retail trade, government and manufacturing.
RISK FACTORS IN CONCENTRATING IN NORTH CAROLINA. The economic profile of the
state consists of a combination of industry, agriculture and tourism. The
labor force has undergone significant changes during recent years. The state
has moved from a predominantly agricultural economy to a service and goods
producing economy. The majority of non-agricultural employment is spread among
manufacturing, retail trade, services and the government sector. In North
Carolina the issuance of municipal debt is overseen by the North Carolina Local
Government Commission. This Commission handles the approval, sale and delivery
of all local bonds and notes issued in North Carolina and monitors fiscal
accounting standards prescribed by the Local Government Budget and Fiscal
Control Act. No unit of local government can incur bonded indebtedness without
the Commission's prior approval. If approved, the obligations are sold by the
Commission on a sealed bid basis. The Commission then monitors the local
unit's debt service through a system of monthly reports. Over the past twenty
years, North Carolina state debt obligations have maintained ratings of Aaa by
Moody's and AAA by S&P. North Carolina state and municipal securities may be
adversely affected by economic and political conditions and developments within
the state of North Carolina. The North Carolina Constitution requires a
balanced budget, and the state has not realized any revenue shortfalls in
recent years. The state has realized budgetary credit balances in the last
several years; however, during the 1989-90 and 1990-91 fiscal years, the state
realized revenue shortfalls requiring the Governor and General Assembly to
mandate significant spending constraints to fulfill the constitutional
requirement of a balanced budget. Therefore, there is no guarantee that
budgetary credit balances will continue to be realized in future periods.
RISK FACTORS IN CONCENTRATING IN OHIO. The Ohio State General Fund had positive
fund and cash balances at the end of the 1995 Fiscal Year of $928.0 million and
$1,312.2 million, respectively. Economic activity in Ohio, as in many other
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Currently, Ohio's general obligation bonds
are rated AA, Aa and AAA by Fitch, Moody's and Standard & Poor's, respectively.
The Adviser does not believe that the current economic conditions in Ohio will
have a significant adverse effect on the Fund's ability to invest in high
quality Ohio Municipal Securities.
RISK FACTORS IN CONCENTRATING IN TENNESSEE. In 1994, Tennessee's population was
5,175,000, its average personal income was $19,482 and the unemployment rate was
4.8%. Tennessee's economic base is reasonably well diversified, with services as
the largest employment sector, and 1994 general fund revenues were $6.02 billion
against expenditures of $5.65 billion. General obligation ratings are Aaa by
Moody's, AA+ By Standard & Poor's and AAA by Fitch. There is no state personal
income tax. Qualified exempt-interest dividends are exempt from the Hall Tax on
interest and dividends.
RISK IN CONCENTRATING IN VIRGINIA. Virginia's economy is based primarily on
manufacturing, the government and service sectors, agriculture, mining and
tourism, and unemployment rates are typically below the national average. The
Commonwealth has a long history of fiscal stability, due in large part to a
conservative financial philosophy, broad-based employment opportunities and
diverse sources of revenue. The 1996-98 biennium budget for the Commonwealth
forecasts economic growth in the Commonwealth will slightly outperform the
nation at large despite federal government downsizing. The Constitution of
Virginia requires a balanced budget and limits the ability of the Commonwealth
to create debt. General obligation debt may be incurred to meet certain
short-term needs, to finance capital projects and, under less stringent
restriction, to finance revenue-producing capital projects. Also, "special
fund" revenue bonds, to which the constitutional debt restrictions do not
apply and that are not general obligations of the Commonwealth may be subject
to economic risks or uncertainties peculiar to the issuers of such securities or
the sources from which they are to be paid.
RISK FACTORS IN CONCENTRATING IN NEW YORK. The New York Tax-Exempt Fund's
concentration in securities issued by the State of New York and its political
subdivisions involves greater risks than a fund broadly invested across many
states and municipalities. Specifically, the credit quality of the New York
Tax-Exempt Fund will depend upon the continued financial strength of the State
of New York, which in turn is directly affected by the financial condition of
numerous public bodies and municipalities, including New York City. New York
State and City continue to face challenges to their fiscal well being, including
shrinking federal assistance, large pension and infrastructure needs, declining
industrial base, and the continuing dependence of several municipal issuers,
such as the Metropolitan Transit Authority and the Housing Finance Agency, for
large operating subsidies. The State's 1993 and 1994 fiscal years, however, were
characterized by national and regional economies that performed better than
projected. After reflecting a 1993 year-end deposit to the State's refund
reserve account of $671 million, reported 1993 General Fund receipts were $45
million higher than originally projected in April 1992. The State completed the
1994 fiscal year with an operating surplus in the General Fund of $914 million.
In September 1994, however, the State projected a General Fund operating deficit
of $690 million for the 1995 fiscal year. There can be no assurance that New
York will not face substantial potential budget gaps in future years. The
1995-1996 budget projects receipts of $33.11 billion. This includes the
gap-closing measures to off-set the $5 billion projected budget gap. After the
implementation of the 1996 gap-closing program, the projected budget gaps for
fiscal years 1997 through 1999 are $888 million, $1.46 billion, and $1.44
billion, respectively. New York State's tax and revenue tax and revenue
anticipation notes issued in April 1992 were rated MIG-2 by Moody's, SP-1 by
Standard & Poor's and F-1 by Fitch Investors, Service, Inc. New York State's
1993 tax and revenue anticipation notes were rated MIG-1 by Moody's, SP-1+ by
S&P, and F-1+ by Fitch. As of March 22, 1992, New York City general obligation
bonds are rated by Fitch and Moody's as A- and Baa1, respectively. As of July
10, 1995, Standard & Poor's revised downward its rating on New York City general
obligation bonds from A- to BBB+. Currently, New York State general obligation
bonds are rated by Standard & Poor's, Fitch and Moody's as A-, A+ and A,
respectively. There is no assurance that any ratings will continue for any
period of time or will not be revised downward or withdrawn entirely by a
ratings agency. The Statement of Additional Information further discusses risk
factors in concentrating in securities issued by the State of New York and its
subdivisions.
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MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENTS. The Boards of Trustees manages each Fund's
business and affairs. Reserve Management Company, Inc. ("Adviser"), 14 Locust
Place, Manhasset, New York 11030, provides each Fund 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 $3 billion. Under the Investment Management Agreements,
the Adviser manages each Fund's investments, including effecting purchases and
sales thereof, in furtherance of the Fund's investment objective and policies,
subject to overall control and direction by each Board of Trustees.
As compensation for these services, the Adviser receives a management fee,
which is a percentage of the average daily assets of each Fund, calculated as
follows: (i) .50% per annum of the first $500 million of average daily net
assets, (ii) .475% per annum of the next $500 million of such assets; (iii) .45%
per annum of the next $500 million of such assets; (iv) .425% per annum of the
next $500 million of such assets; and (v) .40% per annum of such assets in
excess of $2 billion. For the fiscal year ended May 31, 1996, the Adviser
received a management fee of .50% of the average net assets of the California
Tax-Exempt Fund, .50% of the average net assets of the Connecticut Tax-Exempt
Fund, .45% of the average net assets of the Massachusetts Tax-Exempt Fund, .50%
of the average net assets of the New Jersey Tax-Exempt Fund, and .50% of the New
York Tax-Exempt Fund. During the year, the Adviser voluntarily agreed to a
reduction of the management fee for the Massachusetts Tax-Exempt Fund and for
the New Jersey Tax-Exempt Fund.
The Adviser may make such advertising and promotional expenditures, using
its own resources, as it from time to time deems appropriate.
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 as to which the 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.
SERVICE AGREEMENTS. The Adviser furnishes to each Fund, at cost, all personnel
required for the operations of each Fund such as executive, administrative,
clerical, recordkeeping, bookkeeping, and shareholder accounting and servicing,
as well as suitable office space and necessary equipment and supplies used by
such personnel in performing these functions. Operating costs for which each
Fund reimburses the Adviser include salaries and other personnel expense, rent,
depreciation of equipment and facilities, interest and amortization on loans
financing equipment used by the Fund, and all other expenses for the conduct of
each Fund's affairs. Affiliates of the Adviser may provide some of these
services. Each Fund also reimburses the Adviser for: brokerage fees and
commissions; interest charges and taxes; the cost of registering for sale,
issuing and redeeming the Fund's shares and of printing and mailing all
prospectuses, proxy statements and shareholder reports furnished to current
shareholders; and the fees and expenses of the Fund custodians, auditors,
lawyers and Trustees who are not "interested persons" of the Fund.
The Adviser has agreed to repay each Fund promptly any amount which a
majority of disinterested Trustees reasonably determines in its discretion is in
excess of or not properly attributable to the cost of operations or expenses of
a Fund. The Service Agreements are nonassignable and continue until terminated
by either party on 120 days notice.
During the fiscal year ended May 31, 1996, the ratio of expenses to the
average net assets of each Fund was 1.04% for the California Tax-Exempt Fund;
1.01% for the Connecticut Tax-Exempt Fund; .84% for the Massachusetts Tax-Exempt
Fund; 1.04% for the New Jersey Tax-Exempt Fund; and 1.04% for the New York
Tax-Exempt Fund.
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
shareholders of Reserve Tax-Exempt Trust or Reserve New York Tax-Exempt Trust.
TRANSFER AGENT AND DIVIDEND PAYING AGENT. Reserve Tax-Exempt Trust and Reserve
New York Tax-Exempt Trust act as their own transfer agent and dividend paying
agent.
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 and $250 for
subsequent investments ($25 if shares are purchased by Reserve Automatic
Asset-Builder, Reserve Automatic Asset-Builder for U.S. Government Distributions
and $25 if purchased by Reserve Automatic Asset Builder for Payroll or Pension).
An initial purchase must be accompanied by an investment application or
equivalent information. For clients of certain broker-dealers and financial
institutions, shares may be purchased directly through such firm. You can buy
shares of the Funds each business day at the net asset value next determined
after receipt by the Funds of a properly completed
10
<PAGE> 13
order and payment in Federal Funds (member bank deposits with a Federal Reserve
bank). Payments (denominated in U.S. dollars) must be made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810 Seventh
Avenue, New York, N.Y. 10019-5868. You must include your account number
(or Taxpayer Identification number) on the "pay to the order of" line for
each check made payable to The Reserve Funds or within the endorsement
for each check endorsed to The Reserve Funds.
- By wire -- Prior to calling your bank, call the Funds for specific
instructions at 800-637-1700 or the broker-dealer or financial
institution ("firm") from which you received this Prospectus.
Checks and wires which do not correctly identify the Fund and account to be
credited may be returned or delay the purchase of shares. Because each Fund must
pay for its securities purchases on the same day in Federal funds, only Federal
funds wires and checks drawn on the Fund's bank are eligible for entry as of the
business day received. For Federal funds wires to be eligible for same-day order
entry, a Fund must be notified before 11:00 A.M. (New York time) of the amount
to be transmitted and the account to be credited. Payment by check not
immediately convertible into Federal funds will be entered as of the business
day when covering Federal funds are received or bank checks are converted into
Federal funds. This usually occurs within two business days, but may take
longer. Checks delivered to the Fund's offices after 11:00 A.M. (New York time)
will be considered received the next business day. A fee will be charged if any
check used for investment in your account does not clear.
Any monies which cannot be credited to an account by the end of the business
day following that on which Federal funds become available will be returned as
promptly as possible to the sender or, if this cannot be readily determined, to
the bank from which they came or were drawn. The Funds reserve the right, with
respect to any person or class of persons, under certain circumstances to waive
investment minimums and redemption requirements. The Funds also reserve the
right to suspend the offering of shares from time to time and to reject any
purchase order for any reason. The Funds will only accept purchase checks in
excess of $100 which are payable to The Reserve Fund or payable to the
shareholder/payee of the check and endorsed to The Reserve Fund. The Funds do
not accept travelers checks.
RESERVE AUTOMATIC ASSET-BUILDER PLAN. If you have an account balance of $5,000
or more, you may purchase shares of a Fund ($25 minimum) from a checking, NOW,
or bank money market deposit account or from a U.S. Government distribution ($25
minimum) such as Social Security, federal salary, or certain veteran's benefits,
or other payments from the federal government. Fill out the Reserve Automatic
Asset-Builder form included in the account application or call the Funds at
(800) 637-1700.
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
P.M. New York time) by taking the sum of the value of the 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 distributor of the Arizona, California, Connecticut, Florida,
Louisiana, Massachusetts, Michigan, New Jersey, North Carolina, Ohio, Tennessee
and Virginia Tax-Exempt Funds of Reserve Tax-Exempt Trust and Reserve New York
Tax-Exempt Trust is Resrv Partners, Inc., 810 Seventh Avenue, New York, N.Y.
10019-5868. The distributor is a wholly-owned subsidiary of the Adviser.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve money market funds at net asset value. Shares to be
acquired in an exchange must be registered for sale in the investor's state. The
exchange privilege described under this heading may not be available to clients
of certain firms and some firms may impose conditions on their clients which are
different from those described in this Prospectus. In addition, this exchange
privilege may be modified or terminated at any time, or from time to time, upon
60 days' notice to shareholders.
DISTRIBUTION AND SERVICE PLAN. Purchases may also be made through brokers,
financial intermediaries and financial institutions. Some of these firms
participate in each Fund's Plan of Distribution ("Plan"). Reserve Tax-Exempt
Trust and Reserve New York Tax-Exempt Trust maintain the Plans and related
agreements, as amended, under Rule 12b-1 of the Investment Company Act of 1940
("1940 Act"). Under the Plans, each Fund makes assistance payments at an annual
rate of .20% of the 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 or administrative services
provided the Funds. The investment adviser is required by the Plans to pay an
equivalent amount and may, at its discretion, 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 Funds 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 sources
available to it, for a
11
<PAGE> 14
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. Financial
institutions providing distribution assistance or administrative services for a
Fund may be required to register as securities dealers in certain states.
During the fiscal year ended May 31, 1996, the ratio of expenditures under
the Plans were .20% of the average net assets of the California Tax-Exempt Fund,
.15% of the average net assets of the Connecticut Tax-Exempt Fund, .03% of the
average net assets of the Massachusetts Tax-Exempt Fund, .20% of the average net
assets of the New Jersey Tax-Exempt Fund, and .19% of the average net assets of
the New York Tax-Exempt Fund.
CLIENTS OF FIRMS. Firms provide varying arrangements for their clients with
respect to the purchase and redemption of a Fund's shares and may arrange with
their clients for other investment or administrative services. Firms are
responsible for the prompt transmission of purchase and redemption orders. Some
firms may independently establish and charge additional amounts such as
redemption fees to their clients for their services, which charges would reduce
their clients' yield or return. Firms may also hold a Fund's shares in nominee
or street name as agent for and on behalf of their clients. In such instances,
the Fund's transfer agent 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 firm or may only
be available subject to certain conditions and limitations. Some firms may
participate in a program allowing them access to their client's 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
Reserve Tax-Exempt Trust and Reserve New York Tax-Exempt Trust were
organized as Massachusetts business trusts on January 25, 1983, and July 12,
1983, respectively, and are open-end management investment companies common
known as mutual funds. At the date of this Prospectus, there were six separate
series of Reserve Tax-Exempt Trust authorized and outstanding and one separate
series of Reserve New York Tax-Exempt Trust ("Trust(s)") authorized and
outstanding. Additional series may be added in the future by each Trust's Board
of Trustees. Each 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 non-assessable and will have no preemptive, conversion or
sinking rights. The shareholders of each Trust 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 respective series on liquidation. The Trustees of each Trust 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 of a Fund) or by a Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
may, in certain circumstances, be personally liable for the trust's obligations
to third parties. However, the Declaration of Trust of Reserve Tax-Exempt Trust
and Reserve New York Tax-Exempt Trust provides, in substance, that no
shareholder or a Trustee shall be personally liable for a Trust's, and each
separate investment portfolio's, obligations to third parties, and that every
written contract made by the Trust or a Fund shall contain a provision to that
effect. Each Declaration of Trust also requires a Trust to indemnify
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, each Fund intends to satisfy certain
requirements imposed by the Internal Revenue Code, so as to avoid any federal
income or excise tax to it. Dividends derived from the interest earned on
Municipal Obligations constitute "tax-exempt interest dividends" and are not
subject to
12
<PAGE> 15
federal income taxes. To the extent a Fund invests in Municipal Obligations
issued by its respective state or political subdivision thereof, dividends
derived from the interest thereon is not subject to state and, with respect to
the New York Tax-Exempt Fund, local income taxes. Any distributions of net
realized long term capital gains earned by a Fund are taxable to shareholders as
such regardless of the length of time a Fund's shares have been owned by the
shareholder.
Shareholders of the Florida Tax-Exempt Fund that are subject to the Florida
intangibles tax will not be required to include the value of their Fund shares
in their taxable intangible property if all of the Fund's investments on the
annual assessment date are obligations that would be exempt from such tax if
held directly by such shareholders, such as Florida and U.S. government
obligations. As described earlier, the Fund will normally attempt to invest
substantially all of its assets in securities which are exempt from the Florida
intangibles tax. Accordingly, the value of the Fund shares held by a shareholder
should under normal circumstances be exempt from the Florida intangibles tax.
However, if the portfolio consists of any assets which are not so exempt on
the annual assessment date, only the portion of the shares of the Fund which
relate to securities issued by the United States and its possessions and
territories will be exempt from the Florida intangibles tax, and the remaining
portions of such shares will be fully subject to the intangibles tax, even if
they partly relate to Florida tax exempt securities.
In a majority of states that have an income tax, dividends paid by a mutual
fund attributable to investments in a particular state's municipal obligations
are exempt from both federal and such state's income tax. If Florida were to
adopt an income tax in the future, and assuming that its income tax policy with
respect to mutual funds investing in Florida state and local municipal
obligations would be similar to the general tax policy of other states,
dividends paid by the Fund would be exempt from Florida state income tax. A
constitutional amendment approved by referendum would be required before an
individual income tax could be imposed.
Shareholders are advised to retain all statements received from a Fund to
maintain accurate records of their investments. If any dividends are not exempt
from federal or state and local income taxes, shareholders will be advised of
such percentage by January 31, of the following year. Shareholders should
consult their tax advisers regarding specific questions as to federal, state or
local taxes.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. A Fund's shares are redeemed at their net asset
value next determined after receipt by the Fund of a request in proper form.
Although a Fund has seven days to transmit payment for share redemptions, it
usually transmits payment the same day when redemption requests are received
before 11:00 A.M. (New York time) and the next day for requests received after
11:00 A.M. (New York time). This is not always possible, however, and
transmission of redemption proceeds may be delayed. Unless otherwise specified,
orders received after 11:00 A.M. (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 11:00 A.M.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each written redemption be at least $1,000 and require that
each telephone redemption be at least $1,000, except for redemptions which are
intended to liquidate your account. A shareholder will be charged $2 for
redemption checks issued by a Fund of less than $100. Payments of $10,000 or
more will be wired upon request without charge. A shareholder will be charged
$10 for wires of less than $10,000. 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 800-637-1700. A Fund may be
liable for any losses caused by its failure to employ reasonable procedures. To
reduce the risk of loss, proceeds of a telephone redemption may be sent only to
(1) 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 a Fund were purchased or, if purchased directly
from a Fund it is necessary to send a written request to the Fund 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 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
13
<PAGE> 16
described below 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.
The Fund reserves 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. By completing signature cards (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 draw 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 be presented for 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 Fund
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. 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 P.M. (New
York time) in proper form will be effective the next business day. Oral stop
payment requests are effective for fourteen (14) calendar days, at which time
they will be cancelled unless confirmed in writing. Written stop payment orders
are effective for one year. A fee is charged for this service.
AUTOMATIC WITHDRAWAL PLANS. 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 from your account to make a specified monthly, quarterly or
annual payment of a fixed amount. 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 Fund. 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 PLAN. 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. 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 (2) 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 (7) 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,
which may generally take up to ten (10) business days. Shareholder checks
written against funds which are not yet considered collected will be returned
and a fee charged against the account. When a purchase is made by wire and
subsequently redeemed, the proceeds from such redemption normally will not be
transmitted until two (2) business days after the purchase by wire. Bank
acknowledgment of payment initiated by you may shorten delays.
14
<PAGE> 17
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person or
another, for example a husband or wife, either person is entitled to redeem
shares in the account. The Funds assumes no responsibility to either person for
actions taken by the other person with respect to an account so registered. The
Funds' application provides that persons so registering their account indemnify
and hold the Funds harmless for actions taken by either party.
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) the
Funds are 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, the Funds 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.
USE OF JOINT PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. Although each
Fund is offering only its own shares, it is possible that a Fund might become
liable for any misstatement in the Prospectus and Statement of Additional
Information about the other Funds. However, each Fund has acknowledged that it,
and not any of the other Funds, is liable for any material misstatement or
omission about it in the Prospectus or Statement of Additional Information.
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.
SMALL BALANCES. Because of the expense of maintaining accounts with small
balances (less than $1,000), the Funds will either levy a monthly charge
(currently $5) or redeem the account and remit the proceeds. A firm may
establish variations of minimum balances and fee amounts if such variations are
approved by the Funds.
RESERVE EASY ACCESS. Easy Access is The Reserve Funds' 24 hour toll-free
telephone service that lets customers use a touch-tone phone to obtain yields
and account balances. To use it, call 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 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 N.O.W. accounts as reported by the
Bank Rate Monitor and other industry publications). An investment in shares of a
Fund is not insured by the Federal Deposit Insurance Corporation.
Yield information is useful in reviewing the Funds' 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.
RESERVE CASH PERFORMANCE ACCOUNT PLUS
The Funds offer a comprehensive package of services which enhances the value
of and access to an investment in them. The Reserve Cash Performance Account
Plus (CPA) services include: (i) any amount checking; and (ii) a comprehensive
monthly and annual 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.
------------------------
15
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
<CAPTION>
PAGE
----
<S> <C>
Shareholder Expenses..................... 2
Financial Highlights..................... 3
Yield.................................... 5
Investment Objective and Policies........ 5
Management............................... 10
How to Buy Shares........................ 10
Shares of Beneficial Interest............ 12
Daily Dividends.......................... 12
Taxes.................................... 12
Redemptions.............................. 13
General Information...................... 15
Reserve Cash Performance Account Plus.... 15
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
Distribution -- Resrv Partners, Inc.
RTET/ST-7/96; 10/96
[THE RESERVE FUNDS LOGO]
Founders of
"America's First
Money Fund"
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND
ARIZONA TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
LOUISIANA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
MICHIGAN TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
NORTH CAROLINA TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
TENNESSEE TAX-EXEMPT FUND
VIRGINIA TAX-EXEMPT FUND
<PAGE> 19
RESERVE TAX-EXEMPT TRUST
ARIZONA TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT FUND
CONNECTICUT TAX-EXEMPT FUND
FLORIDA TAX-EXEMPT FUND
LOUISIANA TAX-EXEMPT FUND
MASSACHUSETTS TAX-EXEMPT FUND
MICHIGAN TAX-EXEMPT FUND
NEW JERSEY TAX-EXEMPT FUND
NORTH CAROLINA TAX-EXEMPT FUND
OHIO TAX-EXEMPT FUND
TENNESSEE TAX-EXEMPT FUND
VIRGINIA TAX-EXEMPT FUND
RESERVE NEW YORK TAX-EXEMPT TRUST
NEW YORK TAX-EXEMPT FUND
810 SEVENTH AVENUE, NEW YORK, N.Y. 10019
(800) 637-1700
-----------------------------
YIELD AND BALANCE INFORMATION
TOLL FREE (800) 637-1700 -- TOUCH TONE PHONE
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information describes the Arizona
Tax-Exempt, California Tax-Exempt, Connecticut Tax-Exempt, Florida Tax-Exempt,
Louisiana Tax-Exempt, Massachusetts Tax-Exempt, Michigan Tax-Exempt, New Jersey
Tax-Exempt, North Carolina Tax-Exempt, Ohio Tax-Exempt, Tennessee Tax-Exempt,
Virginia Tax-Exempt, Funds of Reserve Tax-Exempt Trust and the New York
Tax-Exempt Fund of Reserve New York Tax-Exempt Trust (the "Fund(s)"). This
Statement is not a Prospectus, but provides detailed information to supplement
the Prospectus and should be read in conjunction with the Prospectus. A copy
of the Prospectus may be obtained from the Funds at the above address. This
Statement is dated July 31, 1996, as amended _______ _, ____.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
Investment Objective and Policies 2
Trustees and Executive Officers 3
Investment Management, Distribution,
Service and Custodian Agreements 4
Portfolio Turnover, Transaction
Charges and Allocation 7
Shares of Beneficial Interest 7
Purchase, Redemption and Pricing
of Shares 8
Distributions and Taxes 10
Fund Yield 11
Reserve Cash Performance Account Plus 12
Municipal Obligations 13
Ratings 14
Risk Factors of Concentrating in Arizona 15
Risk Factors of Concentrating in California 15
Risk Factors of Concentrating in Connecticut 17
Risk Factors of Concentrating in Florida 18
Risk Factors of Concentrating in Louisiana 19
Risk Factors of Concentrating in Massachusetts 19
Risk Factors of Concentrating in Michigan 20
Risk Factors of Concentrating in New Jersey 20
Risk Factors of Concentrating in North Carolina
Risk Factors of Concentrating in Ohio 21
Risk Factors of Concentrating in Tennessee 21
Risk Factors of Concentrating in Virginia
Risk Factors of Concentrating in New York 21
Report of Independent Accountants 26
Financial Statements 27
</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> 20
INVESTMENT OBJECTIVE AND POLICIES
The following information provides additional details about the
Funds' investment objectives and policies.
Each Fund's investment objective is to seek as high a level of short
term interest income exempt from federal, state, and, with respect to the New
York Portfolio, local income taxes as is consistent with preservation of
capital and liquidity, by investing principally in municipal securities.
These securities are generally known as "municipal bonds" or
"municipal notes" and the interest on them is exempt from federal income tax in
the opinion of bond counsel for the issuers ("Municipal Obligations").
Municipal Obligations generally include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, street, water and sewer works. Other public purposes
for which Municipal Obligations may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and lending such
funds to other public institutions and facilities. In addition, certain types
of industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide for the construction, equipment, repair
or improvement of privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, industrial, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste
disposal; the interest paid on such obligations may be exempt from federal
income tax. At least 80% of each Fund's assets will be invested in municipal
bonds and notes exempt from federal, state, and with respect to the New York
Tax-Exempt Fund, local income taxes unless the Fund has adopted a defensive
position. During periods when a state's Municipal Obligations meeting a Fund's
quality standards are not available, a Fund may invest up to 20% of its assets,
or a greater percentage on a temporary basis, in Municipal Obligations exempt
only from federal income taxes.
The Funds 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. Municipal
Obligations which are not rated may be purchased provided such securities are
determined to be of comparable quality by the Fund's investment adviser
pursuant to guidelines adopted by the Board of Trustees to those rated
securities in which a Fund may invest.
Subsequent to its purchase by a 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 any
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 quality and 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 which they rate.
It should be emphasized, however, that ratings are relative and subjective and
are not absolute standards of quality.
From time to time, on a temporary basis other than for temporary
defensive purposes, the Funds 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 Funds will not invest
in foreign securities or in taxable commercial paper. Interest earned on
Taxable Investments will be taxable income to investors. Unless a Fund has
adopted a temporary defensive position, no more than 20% of the net assets of a
Fund will be invested in Taxable Investments at any time.
SUPPLEMENTAL INVESTMENT POLICIES. The Funds' investment objective,
and the following supplemental 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 the 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 a Fund. A Fund cannot: (1)
invest in any security other than those discussed herein or in the Prospectus;
(2) borrow
<PAGE> 21
money except as a temporary or emergency measure (but not for the purpose of
purchasing investment securities), and not in an amount to exceed 5% of the
value of its total assets; (3) issue securities senior to its capital stock;
(4) act as an underwriter with respect to the securities of others; (5)
concentrate investments in any particular industry except to the extent that
its investments are concentrated exclusively in Municipal Obligations, U.S.
Governments or instruments secured by such obligations; (6) purchase, sell or
otherwise invest in real estate or commodities or commodity contracts; however,
a Fund may purchase Municipal Obligations secured by interests in real estate;
(7) lend more than 33 1/3% of the value of its total assets to the extent its
investments are considered loans; (8) sell any security short or write, sell or
purchase any futures contract or put or call option; provided, however, a Fund
shall have the authority to purchase Municipal Obligations subject to a
stand-by commitment, at the Fund's option; (9) invest in voting securities or
in companies for the purpose of exercising control; (10) invest in the
securities of other investment companies except in compliance with the
Investment Company Act of 1940; (11) make investments on a margin basis; and
(12) purchase or sell any securities (other than securities of the Fund) from
or to any officer or Trustee of a Fund, the investment adviser or affiliated
person except in compliance with the Investment Company Act of 1940.
OTHER POLICIES. Certain banks and other municipal securities dealers
have indicated a willingness to sell Municipal Obligations to the Funds
accompanied by a stand-by commitment to repurchase the securities, at a 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 AND REVERSE 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 yields negotiated.
Each Fund will limit repurchase agreement transactions to those financial
institutions and securities dealers who are deemed credit worthy pursuant to
guidelines established by each Fund's Board of Trustees. The investment
adviser will follow procedures intended to provide that all acquired repurchase
agreements are at least 100% collateralized as to principal and interest. A
Fund will make payment for such instruments only upon their physical delivery
to, or evidence of their book-entry transfer to, the account of a Fund's
custodian. If the seller defaults on the repurchase obligation, a Fund could
incur a loss, and may incur costs in disposing of the underlying security. The
Funds will not hold more than 10% of their net assets in illiquid securities,
including repurchase agreements with a term greater than seven days.
The 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 the security 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 Funds' policy that
entering into a reverse repurchase agreement will be for temporary purposes
only and, when aggregated with other borrowing, may not exceed 5% of the value
of the total assets of a Fund at the time of the transaction.
TRUSTEES AND EXECUTIVE OFFICERS
*BRUCE R. BENT, President, Treasurer and Trustee, 810 Seventh Avenue, New
York, New York 10019.
Mr. Bent is President, Treasurer, and Trustee of The Reserve Fund ("RF"),
Reserve Institutional Trust ("RIT"), Reserve Tax-Exempt Trust ("RTET") and
Reserve New York Tax-Exempt Trust ("RNYTET"), Director, Vice President and
Secretary of Reserve Management Company, Inc. ("RMCI") and Reserve Management
Corporation, and Chairman and Director of Resrv Partners, Inc. Before 1968, he
was associated with Stone & Webster Securities Corp., and previously, Teachers
Insurance and Annuity Association.
<PAGE> 22
EDWIN EHLERT, JR., Trustee, 125 Elm Street, Westfield, New Jersey 07091.
Mr. Ehlert is President and Director of Ehlert Travel Associates, Inc.
(travel agency formerly called Travelong of Westfield, Inc.) and Ehlert Travel
Associates of Florida, Inc. (travel agency), and Trustee of RF, RIT, RNYTET and
RTET.
HENRI W. EMMET, Trustee, 176 East 71st Street, New York, New York 10021.
Mr. Emmet is the Managing Director of Servus Associates, Inc, and U.S.A.
Representative of the First National Bank of Southern Africa and Trustee of RF,
RET, RNYTET and RTET. Until 1989, he was Senior Vice President of the New York
branch of Banque Nationale de Paris.
*DONALD J. HARRINGTON, C.M, Trustee, St. John's University, Jamaica, New
York 11439.
The Reverend Harrington is President of St. John's University (NY) and a
Trustee of RF, RIT, RNYTET and RTET. The Reverend Harrington served as
President of Niagara University from 1984 to 1989 and was Executive Vice
President of Niagara University from 1981 to 1984.
NIELS W. JOHNSEN, Trustee, 1 Whitehall Street, New York, New York 10004.
Mr. Johnsen is Chairman of the Board of International Shipholding Corp.
and Central Gulf Lines, Inc. (ship cargo carrier), Director of Centennial
Insurance Co. and Trustee of The Atlantic companies (insurance), RF, RIT,
RNYTET and RTET.
MARC C. COZZOLINO, Counsel and Secretary, 810 Seventh Avenue, New York,
NY 10019.
Mr. Cozzolino is Counsel and Secretary of RF, RIT, RTET, and RNYTET.
Before joining The Reserve Funds in 1994, Mr. Cozzolino was a staff attorney at
the New Jersey Bureau of Securities.
PAT A. COLLETTI, Controller, 810 Seventh Avenue, New York, New York 10019.
Mr. Colletti is Controller of RF, RIT, RTET and RNYTET. Prior to joining
The Reserve Funds in 1985, Mr. Colletti was Supervisor of Accounting of Money
Market Funds for the Dreyfus Corporation.
- --------------------------------------------------
*Interested Trustee within the meaning of the Investment Company Act of 1940.
Messrs. Ehlert, Emmet, Harrington, and Johnsen are members of a Review
Committee which performs the functions of an Audit Committee and reviews
compliance procedures and practices.
During the fiscal year ended May 31, 1995, the Trustees received the
following fees from the Funds: $83 from the California Tax-Exempt Fund, $1,021
from the Connecticut Tax-Exempt Fund, $282 from the Massachusetts Tax-Exempt
Fund, $204 from the New Jersey Tax-Exempt Fund and $3,306 from the New York
Tax-Exempt Fund. As of June 30, 1995, Trustees and officers as a group owned
less than 1% of the outstanding shares of the California Tax-Exempt,
Connecticut Tax-Exempt, New Jersey Tax-Exempt and New York Tax-Exempt Funds
and shares of the Massachusetts Tax-Exempt Fund. During the year ended May 31,
1995, each Fund held four Board meetings and one Review Committee meeting.
<PAGE> 23
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND FUND COMPLEX
NAME OF TRUSTEE FROM FUND* (4 ADDITIONAL TRUSTS) PAID TO TRUSTEE*
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edwin Ehlert, Jr. $1,444 $16,500
Henri W. Emmet $1,444 $16,500
Rev. Donald J. Harrington $1,444 $16,500
Niels W. Johnsen $1,444 $16,500
</TABLE>
INVESTMENT MANAGEMENT, DISTRIBUTION, SERVICE
AND CUSTODIAN AGREEMENTS
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc.
("RMCI"), 14 Locust Place, Manhasset, N.Y. 11030, of which Messrs. Henry B.R.
Brown and Bruce R. Bent are the Directors, manages each Fund and provides it
with investment advice pursuant to an Investment Management Agreement. Messrs.
Brown and Bent together with their children own RMCI. Under each agreement,
RMCI 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 of the Trustees. RMCI also pays the promotional
expenses related to the sale of each Fund's shares (paying for prospectuses
distributed to potential investors and for other sales literature, but not
paying for prospectuses distributed to current shareholders, distribution
assistance payments paid by a Fund, or registration fees and expenses).
Each of the Funds periodically pays RMCI a management fee at the annual
rate of .50% of the first $500 million of average daily net assets, .475% of
the next $500 million of such assets, .45% of the next $500 million of such
assets, .425% per annum of the next $500 million of such assets, and .40% of
such assets in excess of $2 billion. For the fiscal years ended May 31, 1992,
1993, 1994, 1995, and 1996 RMCI received management fees of $830,684, $886,468,
$591,908, $200,783 and $155,027 respectively from the Connecticut Tax-Exempt
Fund; $0, $0, $8,253, $52,248, and $48,113 from the Massachusetts Tax-Exempt
Fund; and $751,572, $770,031, $803,061, $763,741 and $775,398 from the New
York Tax-Exempt Fund. For the period October 17, 1994 to May 31, 1995 and
fiscal year ending May 31, 1996 RMCI received $24,072 and $50,807 in
management fees from the California Tax-Exempt Fund. For the period of June
21, 1994 to May 31, 1995 and fiscal year ending May 31, 1996, RMCI received
$51,948 and $154,727 in management fees from the New Jersey Tax-Exempt Fund.
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.
The Investment Management Agreements for the Connecticut Tax-Exempt and
New York Tax-Exempt Funds were duly approved by shareholders in 1986 and the
Investment Management Agreement for the Massachusetts Tax-Exempt Fund was duly
approved by shareholders in 1990, and the California Tax-Exempt and New Jersey
Tax-Exempt Fund was duly approved by shareholders in 1994. Each 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 of each Fund or by vote of a majority of outstanding voting
shares of a Fund or by RMCI.
<PAGE> 24
SERVICE AGREEMENT. Under a Service Agreement, RMCI furnishes to each
Fund all personnel required for administrative, clerical, recordkeeping,
bookkeeping, shareholder accounting, and shareholder servicing functions. In
addition, RMCI provides at cost, office space, office equipment (including
computers), office supplies, and direct expenditures which include brokerage
fees and commissions, interest, taxes, issuing and redemption costs,
registration fees, disinterested Trustees' fees, custodial fees, extraordinary
legal expenses, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders, costs of shareholder reports and meetings, and independent
accountants' fees. For all of these items, each Fund reimburses RMCI for its
costs. However, RMCI has agreed to repay promptly any amount reimbursed which
a majority of the disinterested Trustees reasonably determines is in excess of,
or not properly attributable to, the cost of operations or expenses of each
Fund. The Service Agreement is nonassignable and continues until terminated by
either party on 120 days' written notice. Reserve Management Corporation, an
affiliate of RMCI, may provide some of these services.
Pursuant to the Service Agreement, during the fiscal year end May 31,
1996, the California Tax-Exempt, Connecticut Tax-Exempt Fund, Massachusetts
Tax-Exempt Fund, New Jersey Tax-Exempt and New York Tax-Exempt Fund reimbursed
RMCI $33,708, $109,481, $38,921, $104,660 and $528,648, respectively, for
expenses. For the fiscal years ended May 31, 1994 and 1995, RMCI was
reimbursed $0 and $15,416 by the California Tax-Exempt Fund; and $384,106 and
$109,072 for expenses by the Connecticut Tax-Exempt Fund; $0 and $34,840 by
the New Jersey Tax-Exempt Fund; $49,916 and $37,309 by the Massachusetts
Tax-Exempt Fund; and $505,084 and $459,889 by the New York Tax-Exempt Fund,
respectively.
DISTRIBUTION AGREEMENT. The Funds' Distributor is Resrv Partners, Inc.
("RESRV"), 810 Seventh Avenue, New York, N.Y. 10019. The Funds have authorized
the Distributor, in connection with its sale of their 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. A
Distributor may offer and sell shares of the Funds pursuant to a separate
Prospectus applicable to such Distributor. The Distributor is a "principal
underwriter" for the Funds within the meaning of the Investment Company Act of
1940, and as such acts as agent in arranging for the continuous offering of
their shares. The Distributor has the right to enter into selected dealer
agreements with brokers or other persons of its choice for the sale of the
Funds' 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. RESRV has retained no underwriting commissions during the last three
fiscal years. During the fiscal year ended May 31, 1996, the Distributor
received no distribution assistance payments from any of the Funds.
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 renewal or by the vote of a majority of the outstanding voting
securities of the Fund.
PLAN OF DISTRIBUTION. Each Fund maintains a Plan of Distribution
("Plan") and related agreements, as amended, under Rule 12b-1 of the Investment
Company Act of 1940, which provides that investment companies may pay
distribution expenses, directly or indirectly, pursuant to a Plan adopted by
the investment company's Board and approved by its shareholders. Under the
Plan, each Fund makes assistance payments to brokers, financial institutions
and other financial intermediaries ("payee(s)") for shareholder accounts
("qualified accounts") as to which the payee has rendered distribution
assistance services at an annual rate of .20% of the average net asset value of
qualified accounts. Such distribution assistance may include, but may not be
limited to, establishment of shareholder accounts, delivering prospectuses to
prospective investors and processing automatic investment in Fund shares of
client account balances. Substantially all such monies (together with
significant amounts from RMCI's own resources) are paid by RMCI to payees for
their distribution assistance or administrative services with any remaining
amounts being used by RMCI to partially defray other expenses incurred by RMCI
in distributing Fund shares. In addition to the amounts required by the 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 the 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
<PAGE> 25
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 Plan will benefit each 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 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 Plan for activities not primarily intended to result in the sale of a
Fund's 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
Plan, any such payments will be terminated and any shares registered in the
bank's name, for its underlying customer, will be re-registered in the name of
that customer. Financial institutions providing distribution assistance or
administrative services for a Fund may be required to register as securities
dealers in certain states.
Under each Plan, the Trustees are provided quarterly reports of the
amounts and purposes of assistance payments. During the continuance of the
Plan the selection and nomination of the disinterested Trustees are at the
discretion of the disinterested Trustees currently in office.
During the fiscal year ended May 31, 1996, the California Tax-Exempt
Fund, the Connecticut Tax-Exempt Fund, the New Jersey Tax-Exempt fund, the
Massachusetts Tax-Exempt Fund and the New York Tax-Exempt Fund made payments
under each Plan of $20,231, $45,547, $61,458, $2,822 and $299,169, respectively.
Any such payments are intended to benefit a Fund by maintaining or increasing
net assets to permit economies of scale in providing services to shareholders
and to contribute to the stability of such shareholder services. During the
fiscal year ended May 31, 1996, substantially all payments made by a Fund were
to brokers or other financial institutions and financial intermediaries for
share balances in a Fund.
The Plans 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 a Fund or by vote of the disinterested Trustees. The Plans and
related agreements may be renewed from year to year if specifically approved by
the Boards 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 Plans may not be amended to increase materially the amount to be
spent for distribution without shareholder approval. All material amendments
to the Plans 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.
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 Plan, recommending its modification or
discontinuance, or taking any other action.
CUSTODIAL SERVICES AND INDEPENDENT ACCOUNTANT. The Chase Manhattan Bank,
4 New York Plaza, New York, N.Y. 10004 and Bankers Trust Company, One Bankers
Trust Plaza, New York, N.Y. 10015 are Custodians of the Funds securities and
cash pursuant to Custodian Agreements. Coopers & Lybrand L.L.P, 1301 Avenue of
the Americas, New York, N.Y. 10019 is the Funds' independent accountant.
PORTFOLIO TURNOVER, TRANSACTION CHARGES AND ALLOCATION
<PAGE> 26
As investment securities transactions made by each Fund are normally
principal transactions at net prices, the Fund's do 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.
During the past three fiscal years the Funds have not paid any brokerage
commissions.
The Funds' policy of investing in debt securities maturing within one
year 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 a Fund.
Subject to the overall supervision of each Fund's officers and the
Boards of Trustees, RMCI places all orders for the purchase and sale of a
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 or 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 Funds as determined in
good faith by RMCI. Brokers or dealers who execute investment securities
transactions may also sell shares of a 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 Funds and other portfolios managed by RMCI, the
transactions are allocated as to amount in accordance with each order placed
for each portfolio. However, RMCI may not always be able to purchase or sell
the same security on identical terms for all portfolios affected.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trusts permit 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 a Fund. If they deem it
advisable and in the best interests of shareholders, the Trustees may classify
or reclassify any unissued shares of each Fund by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms and conditions of
redemption of the stock. Any changes would be required to comply with any
applicable state and federal securities laws. These currently require that
each class be preferred over all other classes in respect 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
a Fund, shareholders are entitled to share pro rata in its net assets. It is
possible, although considered highly unlikely in view of the method of
operation of mutual funds, that should assets of one 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 a 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 Fund share has an equal interest in the net assets of its
portfolio, equal rights to all dividends and other distributions from its
portfolio, 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 Trustee
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, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of a
business trust. The Declaration of Trusts contain an express disclaimer of
shareholder liability for acts or obligations of a Fund and requires that
notices of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The
Declaration of Trusts provide for the indemnification out of the Fund property
of any shareholder held
<PAGE> 27
personally liable for the obligations of a Fund. The Declaration of Trusts
also provide that each Fund shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of a Fund and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of status as a shareholder is limited to
circumstances in which a Fund itself would be unable to meet its obligations.
The Declaration of Trusts further provides that the Trustees will not be
liable for errors of judgement or mistakes of fact or law; but nothing in the
Declarations protect 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 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 at an annual meeting of shareholders at which at least 50 percent of the
shares of each group are represented.
As of June 30, 1996, the following persons owned beneficially or of
record 5 percent of the California Tax-Exempt Fund: Leonard Williams, 1121
Somera Road, Bel Air, CA 90077 (11.9%).
As of June 30, 1996, the following persons owned beneficially or of
record 5 percent of the Connecticut Tax-Exempt Fund: Fudiciary Trust Co., P.O.
Box 3199, Church St. Sta., New York, NY 10036 (13.9%) and Klaus Schleehauf, 33
Maple Avenue, Bloomfield, CT 06002 (6.4%).
As of June 30, 1996, the following persons owned beneficially or of
record 5 percent of the Massachusetts Tax-Exempt Fund: Mitchell & Webb, Inc.,
222 Mill Road, Chemsford, MA 01824 (5.3%) and Catalog Ventures, Inc., 222 Mill
Road, Chemsford, MA 01824 (21.9%).
As of June 30, 1996, the following persons owned beneficially or of
record 5 percent of the New York Tax-Exempt Fund: Fiduciary Trust Co., P.O. Box
3199, Church St. Sta., New York, NY 10036 (13.9%).
PURCHASE, REDEMPTION AND PRICING OF SHARES
Redemption payments will normally be made by check or wire transfer but
each 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 Funds have elected to permit
any shareholder of record to make redemptions wholly in cash to the extent the
shareholder's redemptions in any 90-day period do not exceed the lesser of
$250,000 or 1% of the net assets of the 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 Funds' 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.
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, 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 Funds' Plans of Distribution ("Plan"). Under the
Plans, payments are made to persons who provide assistance in distributing Fund
shares or other assistance to a Fund.
<PAGE> 28
NET ASSET VALUE. Shares are offered at net asset value. The net asset
value of the Funds are 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 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. The Funds cannot guarantee
that their net asset value will always remain at $1.00 per share.
The net asset value per share of a Fund is determined by adding the
value of all of its securities, cash and other assets, subtracting its
liabilities, and dividing the results by the number of its shares outstanding.
The Boards 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 Funds 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 Boards 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 a Fund proposes to
enter into repurchase agreements. In addition, the Funds' have adopted
procedures, taking into account current market conditions and the investment
objective, 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 a Fund, withholding dividends, redemption of shares of a
Fund in kind, or reverting to valuation based upon market prices and estimates.
SHAREHOLDER SERVICE POLICIES. The Funds' policies concerning
shareholder services are subject to change from time to time. The Funds
reserve the right to change the $1,000 minimum account size subject to the $5
monthly service charge or involuntary redemption. The Funds further reserve
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 Funds' standard service charges as described in the
Prospectus are also subject to adjustment from time to time. In addition, the
Funds reserve the right to increase their minimum initial investment amount at
any time.
CREDITING OF INVESTMENTS. The Funds will only give credit for
investments in them on the day they become available in federal funds which is
normally within one or two days of receipt. A Federal Reserve wire system
transfer ("Fed wire") is the only type of wire transfer that is reliably
available in federal funds on the day sent. For a Fed wire to receive same day
credit, the Fund must be notified before 11:00 A.M. (New York time) of the
amount to be transmitted and the account to be credited. Checks and other
items submitted to the Funds for investment are only accepted when submitted in
proper form, denominated in United States dollars, and are credited to
shareholder accounts only upon their conversion into federal funds, which
normally takes one or two business days following receipt. Checks delivered to
the Funds after 11:00 AM (New York time) are considered received on the
following business day.
Checks drawn on foreign banks are normally not accepted by the Funds.
In addition, the Funds do not accept cash investments.
The Funds reserve the right to reject any investment in them for any
reason and may at any time suspend all new investment.
<PAGE> 29
IF SHARES PURCHASED ARE TO BE PAID FOR BY WIRE AND THE WIRE IS NOT
RECEIVED BY A FUND OR IF SHARES ARE PURCHASED BY A CHECK WHICH, AFTER DEPOSIT,
IS RETURNED UNPAID OR PROVES UNCOLLECTABLE, THE SHARE PURCHASE MAY BE CANCELLED
OR REDEEMED IMMEDIATELY. THE INVESTOR THAT GAVE NOTICE OF THE INTENDED WIRE OR
SUBMITTED THE CHECK 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 MAY APPLY THE
PROCEEDS THEREFROM TO THE PAYMENT OF ANY AMOUNTS OWED THE FUND.
SHARE CERTIFICATES. Share certificates are not issued by the Funds.
DISTRIBUTIONS AND TAXES
Each of the Funds intend 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 their shareholders. The status
of the Funds as regulated investment companies does not involve government
supervision of management or of investment practices or policies. If they so
qualify, in any fiscal year in which each distributes at least 90 percent of
its net income, a Fund will not be subjected to federal income tax on such
distributed amounts. Although interest derived from Municipal Obligations is
not subject to federal income taxation, any net capital gains realized by a
Fund and distributed to shareholders as regular or capital gains dividends,
whether distributed in cash or in the form of additional shares, will be
taxable to shareholders.
In order to qualify as a regulated investment company under the Code, a
Fund must, among other things, in each fiscal year distribute at least 90
percent of its investment company taxable income to shareholders; derive at
least 90 percent of its gross income from dividends, interest and gains from
the sale or disposition of securities; meet certain diversification
requirements; and derive less than 30 percent of the gross income from the sale
or disposition of securities held for less than three months.
Exempt interest dividends distributed to shareholders are not included
in the shareholder's gross income for federal income tax purposes. The
percentage of income that is tax exempt will be determined for each year and
will be applied uniformly to all dividends declared during that year. This
percentage may differ from the actual tax exempt percentage for any particular
day. Distributions of net investment income received by a Fund from
investments in debt securities other than Municipal Obligations and any net
realized capital gains distributed by a Fund will be taxable as ordinary
income. Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year.
If any dividends are not exempt from federal or state and local income
taxes shareholders will be advised of such percentage by January 31 of the
following year. Distributions will be reported under more than one tax
identification number only if a separate account is established for each
number. If a Fund has both tax exempt and taxable interest income, it will use
the "actual earned method" for determining the percentage that is taxable
income. Under this method, the ratio of taxable income earned during the
period, for which a distribution was made, to total income earned during the
period determines the percentage of the distribution designated taxable and, as
a result, the percentage of the distribution that is tax-exempt may vary from
distribution to distribution.
The identification of the issuer of Municipal Obligations depends on the
terms and conditions of the security. When the assets and revenues of an
agency, authority, instrumentality, or other political subdivision are separate
from those of the government creating the subdivision, such subdivision would
be deemed to be the sole issuer. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of the
nongovernmental users, then such nongovernmental user would be deemed to be the
sole issuer. However, in either case, if the creating government or some other
entity guarantees a security, such a guarantee would be considered a separate
security and is to be treated as an issue of such government or other agency.
<PAGE> 30
The Tax Reform Act of 1986 ( the "Act") provides that in the event a
Fund should hold certain private activity bonds issued after August 7, 1986,
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 the
alternative minimum tax and the environmental tax applicable to corporations.
In the case of corporations, federal alternative minimum taxable income will
also include one-half the excess of the corporation's pre-tax book income
(including all exempt-interest dividends) over the corporation's other federal
alternative minimum taxable income. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.
The Act also provides that, for taxable years beginning after December
31, 1986, every person required to file a tax return must report solely for
information purposes on such return the amount of exempt interest dividends
received from a Fund during the taxable year. In addition, with respect to a
shareholder who receives 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.
The exemption from federal income tax of dividends derived from interest
on Municipal Obligations does not necessary result in exemption under the tax
laws of any state or local taxing authority.
Shareholders are advised to consult with their tax advisers regarding
the applicability of state and local taxes to an investment or income therefrom
in a Fund which may differ from the federal income tax consequences described
above.
FUND YIELD
The current yield of a Fund may differ from the Fund's effective yield
and annualized dividends.
Current yield is calculated by determining the net change (exclusive of
capital changes) in the value of a hypothetical preexisting 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 by 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) /7]365-1. Effective
annual yields are a representative of the effective annual rate of return
produced by the monthly compounding of Fund dividends.
Taxable equivalent yield is computed by dividing either current yield or
effective yield by a denominator equal to one minus a stated income tax rate
according to the following formula: Taxable Equivalent Yield = Current or
Effective Yield - (1 - Income Tax Rate)
Yield information may be useful in reviewing the performance of a Fund,
but because of fluctuations, it may or may not provide a basis for comparison
with bank deposits, other money 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.
RESERVE CASH PERFORMANCE ACCOUNT PLUS
<PAGE> 31
The Reserve Cash Performance Account Plus ("CPA") is a comprehensive
package of additional services offered to investors in the Funds for an
additional fee.
CHECK PLAN. A Check Plan is an arrangement with Bank One, Columbus, NA
("Bank One") whereby checks are issued to the participant which may be used to
redeem shares in any amount in a participant's Fund account. If Bank One
accepts a check for final payment, it will be paid by redemption of shares from
your account. Bank One will process new debits to a CHECK PLAN in order of
receipt against Bank One's determination of the CHECK PLAN "open-to-buy value"
(the sum of the value of the participant's shares transmitted before noon to
Bank One excluding (i) dividends which are accrued daily but including
dividends paid monthly and (ii) checks and wires for the purchase of shares
which have not been verified as described under "Restrictions" below,
hereinafter referred to as the participant's account "liquidity value," minus
previous CHECK PLAN net debits which have not been applied against the
account's value). These debits include outstanding unpaid checks authorized
against the CHECK PLAN open-to-buy value and redemptions from the participant's
account determined and reported to Bank One. Any check in an amount exceeding
the participant's CHECK PLAN open-to-buy value for that business day will not
be paid but will be returned by Bank One to the payee in such manner as Bank
One may select. Checks may be used in the same manner as other bank checks and
may be written in any amount. Checks will be received by Bank One through the
Federal Reserve System or other clearing channels which Bank One may establish
from time to time. Checks will not be returned to the participant but complete
information on such checks, including the payee, will be supplied to the
participant on a monthly basis. Bank One will supply checks to each
participant which will be subject to the terms of your Reserve CPA Account
Agreement in the application for a CHECK PLAN.
A Fund will charge a non-refundable annual CPA service fee (currently
$75 which may be charged to the account 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 in processing
returned checks. The annual service fee and other charges may be changed at
any time upon 30 days notice to participants. In addition, broker/dealers or
other financial institutions in the CPA Program may charge their own service
fees in addition to the annual fee.
CUSTOM PLAN. A CUSTOM PLAN is a CHECK PLAN plus a VISA Gold card issued
to the participant. The VISA Gold card is a debit card, not a credit card.
The Custom Plan and VISA Gold card are available only to customers of
participating broker/dealers or other financial institutions. Use of the debit
card will provide automatic common carrier travel insurance, auto rental/loss
damage insurance and extended product guarantees. In addition, VISA Gold
cardholders will be provided a comprehensive package of free travel and
emergency assistance services, including: emergency cash; emergency card
replacement; medical, legal and lost baggage assistance; and emergency ticket
replacement.
Bank One will process new debits to a CUSTOM PLAN in the order of
receipt against Bank One's determination of the CUSTOM PLAN "open-to-buy value"
(the sum of the participant's account value minus previous CUSTOM PLAN net
debits which have not been applied against net asset value). These debits
include outstanding VISA Gold card charges, unpaid check charges, cash advances
authorized by Bank One against the CUSTOM PLAN open-to-buy value and
redemptions from the participant's account determined and reported to Bank One.
A Fund will redeem shares on behalf of the participant on the business day it
receives notice of these debits from Bank One and send the proceeds to Bank One
to cover such debits.
The conditions for establishing a CPA account may be altered or waived
by the Funds, either with respect to services generally or with respect to
special groups or limited categories of individuals. The checks and VISA Gold
card features of the CPA Program are intended to provide participants with easy
access to their account assets. The Funds may reject any application to open a
CPA account and may terminate a CPA account for any reason. Bank One may
reject any application for checks or cards.
TRAVEL INSURANCE. Use of cards to pay the full travel fares for you,
your spouse, and your dependent children under the age of 25 years on any air
or land or water conveyance operated by a common carrier licensed to carry
passengers for hire will insure each automatically against accidental bodily
injuries which are the sole cause of death or dismemberment while riding in,
boarding, or getting out of such aircraft or conveyance. Your name must appear
in an account registration or you must be an associate cardholder for this
travel insurance to cover you, your spouse, and your dependent children.
<PAGE> 32
VISA GOLD CARD. Upon approval of an application for participation in
the CUSTOM PLAN, Bank One will issue one or more VISA Gold Cards to the
participant. Bank One will not give authorizations for cash advances exceeding
on any business day the CUSTOM PLAN open-to-buy value.
Participants subscribing to the CUSTOM PLAN service may be liable for
the unauthorized use of their card up to the amount set by the governing
Federal regulations which is currently $500 if the Funds or Bank One 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 CUSTOM PLAN participant should report the loss
immediately by telephoning Bank One 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.
MUNICIPAL OBLIGATIONS
Municipal bonds and municipal notes are the two major classifications of
Municipal Obligations. Such obligations are generally issued to obtain funds
for various public purposes, including the construction of public facilities
such as airports, bridges, highways, houses, hospitals, mass transportation,
schools, streets, and water and sewer works. In addition, Municipal
Obligations may be issued 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 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 a 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, Pollock v. Farmers' Loan & Trust 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 Funds may purchase securities affected by these proposals. If such
proposals are enacted, the availability of Municipal Obligations by the Funds
would be adversely affected. In such event, the Funds would reevaluate their
investment objective and policies and submit possible changes in the structure
of the Funds for the consideration of shareholders. Investors should be aware
that the quantity of Municipal Obligations available for purchase by the Funds
may be limited, and that factor may affect the amount of tax-exempt income
which can be obtained from an investment in them. Substantial reductions in
the
<PAGE> 33
availability of tax-exempt securities might also cause a reevaluation of a
Fund's investment objective and policies.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments that
the Funds 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 the
required for the holder to demand payment.
The variable rate demand instruments in which the Funds may invest will
comply with Rule 2a-7 under the Investment Company Act of 1940. The Funds will
determine the variable rate demand instruments it will purchase in accordance
with procedures prescribed by its Board to minimize credit risks. The Fund's
investment adviser may determine that an unrated variable rate demand
instrument meets the Fund's investment high quality criteria if it is backed by
a suitable bank letter of credit or guarantee.
The variable rate demand instruments that the Funds 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 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.
RATINGS
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 a 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 somewhat 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-2/VMIG-2, High Quality. The designation of MIG-1/VMIG-1 indicates there is
strong protection by established cash flows, superior liquidity support of
demonstrated broad based access to the market for refinancing. The designation
of MIG-2/VMIG-2 indicates margins of protection ample although not so large as
in MIG-1/VMIG-1.
S&P's tax-exempt paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more that 365 days.
The highest quality obligations are rated "A". Issues assigned A rating for
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
<PAGE> 34
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.
RISK FACTORS OF CONCENTRATING IN ARIZONA
Arizona has been one of the fastest growing states in the nation since
World War II. Its growth has been due, in part, to its favorable climate and
affordable housing generally associated with the states in the Southwest. In the
late 1980s, the state's rapid growth was sharply curtailed by an overbuilding of
office space which led to a slower rate of new construction and financial
difficulties in the banking and savings and loan industries. This was compounded
by reduced defense spending which adversely affected many defense-related
electronics firms. The economy has also seen a noticeable shift away from
manufacturing toward services, evidenced in part by the attraction of major
credit card processing centers. These and other trends have resulted in a shift
to lower paying jobs. The state's economy is improving and Arizona has had some
success in attracting business from California, which is seen as having a less
favorable regulatory environment. Arizona has seen a rapid influx of new
residents in 1995, and the workforce has tended to expand more rapidly than
available jobs. An exception has been in construction and retail, where labor
shortages were reported in late 1995.
Many new companies have established operations in Arizona because of its
proximity to Mexico, so that they can take better advantage of the North
American Free Trade Agreement. The state also lowered its corporate income tax
rate to 9.0% in 1994, down from 9.3% in 1993. The corporate tax rate was 10.5%
in 1989.
Although the state economy is generally strong, Arizona's financial
flexibility has been eroded recently due to slow revenue growth in recent years
together with a substantial increase in expenditures for prisons and health and
welfare programs. The state is required by law to maintain a balanced budget and
has managed recurring budget shortfalls since 1985 with a combination of
internal borrowing, acceleration of tax payments, onetime adjustments and
program cuts. As projected budget shortfalls increase, the state legislature may
be required to take additional actions, including budget reductions and tax
increases, to close such deficits.
RISK FACTORS OF CONCENTRATING IN CALIFORNIA
The following discusses the risks of concentrating investments in
obligations of the State of California ("State") and its political
subdivisions, duly constituted authorities and corporations.
Since the start of State's 1990-91 fiscal year, the State has faced the
worst economic, fiscal, and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), exports and financial services, among
other, have all been severely affected. Overall, the State has lost over
800,000 jobs since May 1990. Additional job losses are expected in 1993 before
net employment starts to increase, and pre-recession job levels will not be
reached for several more years. Unemployment reached 10% in November 1992 and
is expected to remain near that level through 1993. Recovery from the
recession in California is not expected in meaningful terms until late 1993 or
1994, notwithstanding signs of recovery elsewhere in the nation.
The recession seriously affected State tax revenues, which basically
mirror economic conditions. It also caused increased expenditures for health
and welfare programs. The State has also been facing a structural imbalance in
its budget with the largest programs supported by the General Fund - K-12
schools and community colleges, health, welfare and corrections - growing at
rates significantly higher than the growth rates for the principal revenue
sources of the General Fund. As a result, the State has experienced recurring
budget deficits; the State Controller reports that expenditures exceeded
revenues for four of the last five completed fiscal years. By June 30, 1992,
according to the Department of Finance, the State's General Fund had an
accumulated deficit on a budget basis, of approximately $2.2 billion.
A further consequence of the large budget imbalance over two fiscal
years was that the State used up all of its available cash resources. In late
June, 1992 the State was required to issue $475 million of short-term revenue
anticipation warrants to cover obligations coming due on June 30. Because the
1992-93 Budget Act was not adopted until September 2, 1992, the State was
delayed in carrying out its usual cash flow borrowing for the fiscal year. The
shortfall of cash forced the State Controller, after July 1, 1992, to issue
approximately $3.8 billion of interest-bearing "registered warrants" in lieu of
regular warrants which are redeemable for cash to many State vendors, suppliers
and employees and to local government agencies to pay valid obligations from
the prior fiscal year, and to pay continuing obligations after July 1 based on
special appropriations or court orders. Certain constitutionally mandated
obligations, such as debt service on bonds and revenue anticipation warrants,
were paid with available cash. Registered warrants had not been issued by the
State in the 1930s.
The 1992-93 Budget Act closed a "gap" of about $7.9 billion, but
budgeted a reserve at June 30, 1993 of only $28 million. However, the
Governor's Budget for 1993-94, released January 8, 1993 (the "1993-94
Governor's Budget"), predicted revenues in the 1992-93 fiscal year will be $2.5
billion below 1992-93 Budget Act projections, and projected the State will have
a $2.1 billion budget deficit at June 30, 1993. This however, assumed
favorable legislative action by March 1993 on certain proposals to reduce
health and welfare payments and eliminate a renters' tax credit, which combined
would have saved $475 million by June 30, 1993. The Legislature has failed to
enact these proposals. This, combined with the impact of the State Franchise
Tax Board's February 4, 1993 order to release the renters' tax credit refunds,
will require at least another $475 million in budget reductions in addition to
those proposed in the 1993-94 Government's Budget. The 1993-94 Governor's
Budget also projects that cash resources will be depleted during May 1993,
necessitating additional cash flow borrowing. Actual performance for the
balance of the 1992-93 Fiscal year will depend on many factors, including
economic conditions in the State and the nation. As result of the
deterioration in the State's budget and cash situation in fiscal years 1991-92,
and 1992-93, rating agencies reduced the State's credit ratings. Between
November 1991 and October 1992 the rating on the State's general obligation
bonds was reduced by S&P from AAA to Aa+, by Moody's from Aaa to Aa, and by
Fitch from AAA to AA.
<PAGE> 35
The California personal income tax, which in 1990-91 contributed about
45% of General Fund revenues, is closely modeled after the federal income tax
law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1% to 11%.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
(AMT) which is much like the Federal AMT. This is designed to ensure that
excessive use of tax preferences does not reduce taxpayers' liabilities below
some minimum level. Legislation enacted in July 1991 added two new marginal
tax rates, at 10% and 11% effective for tax years 1991 through 1995. After
1995, the maximum personal income tax rate is scheduled to return to 9.3%, and
the AMT rate is scheduled to drop from 8.5% to 7%.
The personal income tax is adjusted annually by the change in the
consumer price index to prevent taxpayers from being pushed into higher tax
brackets without a real increase in income.
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas,
electricity and water. Sales tax accounted for about 39% of General Fund
revenue in 1991-92. Bank and corporation tax revenues comprised about 11% of
General Fund revenue in 1991-92. In 1989, Proposition 99 added a 25 cents per
pack excise tax on cigarettes, and a new equivalent excise tax on other tobacco
products.
The Governor's Budget proposal for 1994-95 released January 7, 1994,
projected General Fund revenues and transfers in the fiscal year of $39.7
billion (a reduction of $900 million from the original 1993-94 Budget Act) and
expenditures of $39.7 billion (an increase of $800 million over the original
1993-94 Budget Act). The Governor's Budget proposed General Fund revenues and
transfers of $41.3 billion (including $2.0 billion from the Federal government)
and expenditures of $38.8 billion in the 1994-95 fiscal year, which would leave
a balance of approximately $260 million in the budget reserve, the Special Fund
for Economic Uncertainties (the "SFEU"), at June 30, 1995 after repayment of
the accumulated 1992-93 budget deficit of $2.8 billion.
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8
on the Richter Scale struck Los Angeles causing significant damage to public
and private structures and facilities. The full impact of the earthquake on
Los Angeles and surrounding areas and on the State's finances has not been
determined.
California is experiencing its deepest recession since the 1930's. The
State's tax revenue experience clearly reflects sharp declines in employment
income and retail sales on a scale not seen in over 50 years. California's
economy has clearly not joined in the national recovery. Employment continued
to decline through the latter months of 1992, retail sales remain below year
ago levels, what growth there is in personal incomes is mainly attributable to
government transfer payments and construction activity deteriorated further in
late 1992.
The State's economy faces several formidable barriers which will likely
prolong the recession through much of 1993 and will inhibit the pace of
recovery when it does finally arrive late in 1993 or early in 1994:
Defense budget cuts will continue to reduce employment in the aerospace
industry while the major impacts of previously announced military base closings
will be felt mainly in the 1993-95 period.
The construction and real estate sectors face a variety of obstacles,
including huge oversupplies of commercial office, retail and hotel space,
constraints on traditional financial institutions relative to real estate
lending and a painful adjustment in the upper half of the housing market.
California based industries, such as high technology manufacturing are
looking increasingly to lower cost areas of the nation and the world when
considering expansion sites. The factor may already be impeding the State's
recovery.
Export markets are unlikely to provide much support to the State's
economy in 1993. Japan, Western Europe, Canada and Mexico are all affected by
the global slowdown and California has a disproportionate share of export
oriented jobs in manufacturing and other industries as well.
<PAGE> 36
Cost containment efforts are "downsizing" are continuing in a variety of
service producing industries, including finance, transportation, utilities and
wholesale and retail trade.
The construction industry is projected to see only modest improvement in
homebuilding to perhaps 115,000 units from 1992's estimated 95,000 unit volume.
Even 1944's 144,000 figure is a far cry from the quarter million unit years of
the lats 1980s.
With continued weakness in aerospace construction and export California
recovery will depend on national economic growth and the gradual completion of
the restructuring of the state's services economy. Eventually - by late 1993
or early 1994 - underlying national growth trends should be sufficient to
offset the diminishing negative effects of defense cuts, real estate imbalances
and sluggish export markets. Specifically, the Governor's Budget projects
further, albeit modest declines in employment over the first half of 1993,
stabilization in the second half of the year with an upturn finally underway by
the end of 1993 or early 1994. On a year average basis, however, wage and
salary employment is expected to decline by about 1% in 1993 compared to 1992's
drop of slightly more than 2% and 1991's 3% fall. In 1994, the number of jobs
is expected to increase by over 1%.
The State's unemployment rate which first broke into double digits in
November 1992, is expected to remain near 10% throughout 1993, reflecting
continued labor force growth against stagnant employment. In 1994, the rate is
expected to fall slow to 9.5% on an annual average basis.
RISK FACTORS OF CONCENTRATING IN CONNECTICUT
The following concerns the risks of concentrating investments in
obligations of the State of Connecticut ("State") and its political
subdivisions, duly constituted authorities and corporations.
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total nonagricultural employment.
Manufacturing employment has been on a downward trend since 1984 while
nonmanufacturing employment has risen significantly. From 1970 to 1992,
manufacturing employment has declined 30.8% while the number of persons
employed in service-related industries, such as trade, government, health,
education, recreation, utilities, finance, insurance, transportation, and real
estate increased 60.8%. Although agriculture remains significant to
Connecticut, the amount of land devoted to farming has declined over time.
These trends are expected to continue in the future. Tourism and summer
residency are also economic factors.
Manufacturing has traditionally been of prime economic importance to
Connecticut and remains the State's single most important economic activity.
The manufacturing industry is diversified, with transportation equipment
(primarily commercial and defense related) the dominant industry, followed by
fabricated metal products, non-electrical machinery and electrical machinery.
Defense-related business plays an important role in the Connecticut economy.
Economic activity has been affected by the volume of defense contracts awarded
to Connecticut firms. In the past ten years Connecticut has generally ranked
from 6th to 11th among all states in total defense contracts awards, receiving
2.8% of all such contracts in 1992. On a per capita basis, defense awards to
Connecticut have been among the highest in the nation. In recent years, the
federal government has reduced defense-related spending and this trend is
expected to continue. Both United Technologies Corporation and General
Dynamics Corporation's Electric Boat Division have announced substantial labor
force reduction. Any further decline in the federal defense budget could have
a detrimental affect on the Connecticut economy.
The industrial activity of the State is concentrated in two regions.
The first, the Naugatuck Valley extends from Bridgeport north through Ansonia
and Waterbury to Torrington, and has a high proportion of heavy industry. The
second, a belt extending from Hartford southwest through New Britain, Middleton
and Meriden to New Haven, is typified by highly skilled precision metal
products manufacturing. In addition, certain large submarine building activity
and chemical production exist in the Groton area.
Hartford, the capital of Connecticut, is a center of the insurance
industry and a major service center for business and commerce. The
southwestern portion of the State benefits from its proximity to New York City,
with a substantial amount of suburban commutation to New York. An important
factor in Connecticut's
<PAGE> 37
overall economic and employment picture is the influx of major business
organizations that are relocating corporate headquarters or executive offices
in Connecticut. Major employers in Connecticut include United Technologies
Corporation, General Dynamics Corporation, Aetna Life and Casualty Company, The
Travelers Insurance Company and Yale University.
The budget adopted by the General Assembly for fiscal 1993-94 projects
General Fund operations of $7,690.1 million and estimated General Fund revenues
of $7,695.3 million. The State Comptroller's monthly report for November 1993,
which is required by Section 3-115 of the Connecticut General Statutes,
reflects a surplus of $62.9 million. No assurance can be given that the
financial assumptions utilized in the 1993-94 budget will be accurate and that
there will not be subsequent changes to the budget.
On November 3, 1992, Connecticut voters approved a constitutional
amendment which requires a balanced budget for each year and imposes a cap on
the growth of expenditures. The General Assembly is required by the
constitutional amendment to adopt by three-fifths vote certain spending cap
definitions, which has not yet occurred. Accordingly, the adopted budget
complies with the current statutory spending cap definitions enacted in 1991.
Expenditures for the payment of bonds, notes and other evidences of
indebtedness are excluded from the constitutional statutory definitions of
general budget expenditures.
In order to promote economic stability and provide a positive business
climate, several tax changes were adopted during the 1993 legislative session.
Among the most significant changes was a four year gradual rate reduction to
the Corporation Business Tax based on income. Additionally, the interest rate
for late payment of the Corporation Business Tax was reduced and additional tax
credits, including a research and development tax credit, were created. In
addition, several Sales Tax exemptions were added which include, among others,
amusements and recreation, certain tax preparation services and car washes.
Although the State recorded General Fund surpluses in its fiscal years
1985 through 1987, Connecticut reported deficits from its General Fund
operations for the fiscal years 1988 through 1991. Together with the deficit
carried forward from the State's 1990 fiscal year, the total General Fund
deficit for the 1991 fiscal year was $965.7 million. The total deficit was
funded by the issuance of General Obligation Economic Recovery Notes. The
Comptroller's annual reports for the fiscal years ended June 30, 1992, 1993 and
1994 reflected General Fund operating surpluses of $110 million, $113.5
million, and $19.7 million, respectively. The Comptroller's monthly report for
the period ended August 31, 1994 stated that on a GAAP basis the cumulative
deficit is $531 million for fiscal 1994-95. S&P, Moody's and Fitch currently
rate Connecticut's bonds AA-Aa and AA+, respectively.
There can be no assurance that general economic difficulties or the
financial circumstances of Connecticut or its towns and cities will not
adversely affect the ability of Connecticut issuers or obligors of State,
municipal and public authority debt obligations to meet their obligations
thereunder.
RISK FACTORS OF CONCENTRATING IN FLORIDA
The Fund invests in obligations of Florida issuers which results in the
Fund's performance being subject to the risks associated with the overall
conditions present within the state. The following information is a brief
summary of the recent prevailing economic conditions and a general summary of
the state's financial status. This information is based on official statements
relating to securities that have been offered by Florida issuers and from other
sources believed to be reliable but should not be relied upon as a complete
description of all relevant information.
Florida is the twenty-second largest state with an area of 54,136 square
miles and a water area of 4,424 square miles. The state is 447 miles long and
361 miles wide with a tidal shoreline of almost 2,300 miles. According to the
U.S. Census Bureau, Florida moved past Illinois in 1986 to become the fourth
most populous state, and as of 1990, had an estimated population of 13.2
million.
Services and trade continue to be the largest components of the Florida
economy, reflecting the importance of tourism as well as the need to serve
Florida's rapidly growing population. Agriculture is also an important part of
the economy, particularly citrus fruits. Oranges have been the principal crop,
accounting for 70% of the nation's output. Manufacturing, although of less
significance, is a rapidly growing component of the economy. The economy also
has substantial insurance, banking, and export participation. Unemployment
rates have historically been below national averages, but have recently risen
above the national rate.
Section 215.32, Florida Statutes, provides that financial operations of
the State of Florida covering all receipts and expenditures must be maintained
through the use of three funds--the General Revenue Fund, the Trust Fund, and
the Working Capital Fund. The General Revenue Fund receives the majority of
State tax revenues. The Working Capital Fund receives revenues in excess of
appropriations and its balances are freely transferred to the General Revenue
Fund as necessary. In November, 1992, Florida voters approved a constitutional
amendment requiring the state to fund a Budget Stabilization Fund to 5% of
general revenues, with funding to be phased in over five years beginning in
fiscal 1995. The Working Capital Fund will become the Budget Stabilization
Fund. Major sources of tax revenues to the General Revenue Fund are the sale
and use tax, corporate income tax and beverage tax.
The over-dependence on the sensitive sales tax creates vulnerability to
recession. Accordingly, financial operations have been strained during the
past few years, but the state has responded in a timely manner to maintain
budgetary control.
Hurricane Andrew devasted portions of southern Florida in August 1992,
costing billions of dollars in emergency relief, damage, and repair costs.
However, the overall financial condition of the major issuers of municipal bond
debt in the state were relatively unaffected by Hurricane Andrew, due to
federal disaster payments and the overall level of private insurance. However,
it is possible that single revenue-based local bond issues could be severely
impacted by storm damage in certain circumstances.
Florida's debt structure is complex. Most state debt is payable from
specified taxes and additionally secured by the full faith and credit of the
state. Under the general obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make payment on bonds
from all non-dedicated taxes.
The Fund's concentration in securities issued by the state and its
political subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. The ability of the
state or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the state; and the underlying condition of the state, and its
municipalities.
RISK FACTORS OF CONCENTRATING IN LOUISIANA
The Fund is more susceptible to factors adversely affecting issuers of
Louisiana Municipal Securities than is a comparable municipal bond fund that
does not focus its investments in Louisiana Municipal Securities. Although its
economy has improved somewhat in recent years, Louisiana experienced severe
financial difficulties in the late 1980s and continues to face the risks
associated with a non-diversified economy. In particular, the significance of
the oil and gas industry in Louisiana's economy has resulted in financial
difficulties during unfavorable markets for oil and gas products and in
financial benefits during favorable markets. Further difficulties may result
from the uncertain state of the land-based casino in New Orleans.
Louisiana is working to expand economic development activities that will
take advantage of its replenishable natural resources such as timber, water for
aquaculture, fish and seafood related products and related industrial uses of
such resources. The state is also pursuing further development of its
transportation capabilities by expanding port-related activities and improving
its highways and airports.
General obligations of Louisiana are currently rated A- and Baa1, by S&P
and Moody's, respectively. There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
bond issues may not be adversely affected by changes in economic, political or
other conditions. If either Louisiana or any of its local government entities
is unable to meet its financial obligations, the income derived by the Fund,
the Fund's net asset value, the ability to preserve or realize appreciation of
the Fund's capital or the Fund's liquidity could be adversely affected.
RISK FACTORS OF CONCENTRATING IN MASSACHUSETTS
The following concerns the risks of concentrating investments in
obligations of the Commonwealth of Massachusetts and its political
subdivisions, duly constituted authorities and corporations.
There has been a significant improvement in the Massachusetts
unemployment rate since 1975 when it was 12 percent. The state has recovered
well from the decline of the apparel, textile and leather industries. Its
employment mix is now particularly strong in high technology, military
contractors, financial services, and education. In 1992, 33% of the work force
was in the service sector.
Boston is the transportation and commercial center for New England. It
has an improving seaport and extensive railroad and trucking facilities, and
its Logan International Airport is the tenth busiest airport in the United
States. Boston is also a substantial world financial center, the home of major
banking, insurance, mutual fund and investment institutions. The concentration
of educational institutions in Boston, and Massachusetts generally, has
contributed greatly to the growing strength of the Massachusetts economy.
Between 1991 and 1992, the state has lost 22,900 manufacturing jobs,
from 485,000 to 462,100 (4.7%), and the unemployment rate in January 1994 was
7.2% while the United States unemployment rate
<PAGE> 38
was 6.7%. Increasing unemployment claims have also caused a deficit in the
unemployment compensation trust fund of $120 million as of December 31, 1993.
Between January 1993 and November 1993, 2,547 businesses failed; a slight
decrease of 273 (9.68%) from the same period in 1992. Further, it is estimated
by the Defense Budget Project that civilian defense related employment will
decline to 90,000 in 1993 from 107,000 in 1990. In addition, per capita
personal income is currently growing at a rate lower than the national average.
On January 21, 1994, the Governor submitted a fiscal 1995 budget
recommendation of approximately $16,139 billion. The recommended spending
level is approximately $423.8 million, or 2.7% over fiscal 1994's estimated
state spending level of $15.716 billion, exclusive of certain interfund
transfers. Proposed revenues for fiscal 1995 would exceed proposed
expenditures by approximately $1.5 million. The Governor's budget
recommendation is based on a tax revenue estimate of $11.226 billion, an
increase of approximately $532 million, or 5.0%, from estimated fiscal 1994 tax
revenues of $10,694 billion. The Governor's fiscal 1995 budget submission also
proposes tax reductions aggregating $105 million, which includes a reduction in
the income tax rate from 5.95% to 5.85%, an increase in certain income tax
exemptions and an increase in the no-tax threshold for low-income taxpayers.
The Governor's recommendation projects a fiscal 1995 ending balance of
approximately $383.4 million, of which approximately $325.0 million will be in
the Stabilization Fund. The Governor's budget recommendation is based on a tax
revenue estimate of $11.226 billion, an increase of approximately $532 million,
or approximately 5.0%, as compared to estimated fiscal 1994 tax revenues of
$10.694 billion. The Governor's fiscal 1995 budget submission also proposes
tax reductions aggregating $105 million in fiscal 1995, which include a
reduction in the income tax rate from 5.95% to 5.85%, an increase in certain
income tax exemptions and an increase in the no-tax status threshold for
low-income taxpayers. The fiscal 1995 revenue estimate of $11.226 billion is
net of the $105 million tax reduction proposal. The annualized impact of these
reductions is estimated to be approximately $270 million.
Under the Governor's budge recommendation, non-tax revenues and
estimated to increase to approximately $4.915 billion in fiscal 1995, an
increase of approximately $73.19 million, or 1.5%, over estimated non-tax
revenues for fiscal 1994. Such non-tax revenues would include $125 million
from a new video poker game and water-based gambling to be run by the State
Lottery Commission, which are proposed in the Governor's budget recommendation.
There can be no assurance that general economic difficulties or the
financial circumstances of Massachusetts or its political subdivisions will not
adversely affect the ability of Massachusetts issuers or obligors of State,
municipal and public authority obligations to meet those obligations.
RISK FACTORS OF CONCENTRATING IN MICHIGAN
In fiscal 1991, Michigan faced an estimated $1.8 billion budgetary gap
caused, in part, by a decrease in tax revenues during the most recent
recession. This deficit was reduced to $90 million through measures enacted in
1991 and 1992 that cut public assistance by more than $500 million, imposed a
state hiring freeze, and resulted in the utilization of the general and budget
stabilization funds' reserves. At the beginning of fiscal 1993, Michigan's
operating deficit had been eliminated.
Michigan's financial position improved in fiscal 1993, and $282 million
was deposited in the state's budget stabilization fund at year end. Fiscal
1994 ended with a surplus of $463 million, which was due to strong revenue
growth resulting from a strong state economy, spending restraint, and the
imposition of a two cent sales tax increase to fund statewide school finance
reform. Under that reform, the dedicated sales tax replaced local property
taxes as the primary funding source, although a state-levied property tax and
the reinstatement of local property tax levies at lower levels will also
provide revenue. The state expects that the budget stabilization fund balance
will increase to $1.1 billion at the close of fiscal 1995 from $779 million at
1994 fiscal year end.
Michigan's debt burden is moderate, with all ratios below the national
median. However, the state's economic health will continue to be tied to the
auto industry which is often very cyclical.
While Michigan's economy is traditionally based on heavy manufacturing,
growth in the services and trade sectors over the last decade has led to a
more diversified economy. Michigan's economy is still closely linked to the
manufacturing industry. However, in 1991, about 23% of total jobs in Michigan
were in the manufacturing sector versus 17% nationally. The state's economy
continues to rely on national economic trends, especially the demand for
durable goods.
A weakened demand for capital goods, a slowdown in private investment,
and weakness in the market for automobile and transportation goods resulted in
poor economic performance and considerable job losses for Michigan during the
recession. Since the recession, however, the state economy has shown a very
strong recovery. Employment growth in the service sector has led to an
unemployment rate below the national average for the first time in almost 20
years, and more employment growth is expected in the service-related
industries. While the decline in jobs in automobile (from 10.8% of total jobs
in 1979 to 6.9% in 1989) and other durable goods manufacturing has been offset
by job growth in other areas, per capita income dropped from 108% of the U.S.
figure in 1977 to 99% in 1994.
RISK FACTOR OF CONCENTRATING IN NEW JERSEY
The following discusses the risks of concentrating investments in
obligations of the State of New Jersey ("State") and its political
subdivisions, duly constituted authorities and corporations.
New Jersey is the ninth largest state in population and fifth smallest
in land area. With an average of 1,050 persons per square mile, it is the most
densely populated of all the states. The State's economy is diversified
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
After enjoying an extraordinary boom during the mid-1980s, New Jersey as
well as the rest of the Northeast slipped into an economic slowdown well before
the onset of the national recession which officially began in 1990 (according
to the National Bureau of Economic Research). Initially, this slowdown was an
expected response to the State's tight labor market and the fewer number of
young persons from the "baby bust" generation born in the late 1960s and early
1970s, entering the labor force.
By the beginning of the national recession, construction activity had
already been declining in New Jersey for nearly two years. As the rapid
acceleration of real estate prices forced many would-be homeowners out of the
market and high non-residential vacancy rates reduced new commitments for
offices and commercial facilities, construction employment began to decline;
also growth had tapered off markedly in
<PAGE> 39
the services sectors and the long-term downtrend of factory employment had
accelerated, partly because of a leveling off of industrial demand nationally.
The onset of recession caused an acceleration of New Jersey's job losses in
construction and manufacturing, as well as an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities
and trucking. Reflecting the downturn, the rate of unemployment in the State
rose from a peace time low of 3.6% during the first quarter of 1989 to an
estimated 6.6% in 1991. In 1992 the State's unemployment rate moved ahead of
the nation's for the first time in a decade to an annual average of 8.4% versus
7.4% in the United States.
Unemployment in the State has been declining since July 1992, when it
peaked at 9.6% according to U.S. Bureau of Labor Statistics estimates based on
the federal government's monthly household survey. The same survey shows
joblessness dropping to an average of 8.4% during the fourth quarter of 1992,
to an average of 7.8% in the first quarter of 1993 before declining to 6.9% in
June 1993. Although June's drop is probably a statistical aberration, the
trend in these numbers shows that conditions in the labor market have been
slowly improving.
Prospects for New Jersey are favorable, although a return to pace of the
1980s is highly unlikely. Although growth is expected to be slower than in the
nation, the local advantages that have served the State well for many years
will remain. Structural changes that have been going on for years can be
expected to continue, with job creation primarily in the services sector.
RISK FACTORS OF CONCENTRATING IN NORTH CAROLINA
North Carolina state and municipal securities may be adversely affected
by economic and political conditions and developments within the State of North
Carolina.
The economic profile of the State consists of a combination of
agriculture, industry and tourism. The State is moving away from its traditional
agriculture base towards a service and goods producing economy. The State
labor force reflects this increased emphasis toward non-agricultural
production. According to the North Carolina Employment Security Commission,
total non-agricultural employment as of January 1996 was approximately
3,433,500 jobs, of which 843,800 were in the manufacturing sector. In January,
1996, retail trade provided approximately 613,100 jobs, services provided
approximately 752,100 jobs and the government sector provided approximately
570,000 jobs. In 1991, these figures were 703,400, 602,000 and 501,700,
respectively.
Based upon the unofficial 1990 census estimates of population growth, the
population of North Carolina increased 12.70% from 5,881,766 in 1980 to
6,628,637 in 1990. According to the Employment Security Commission, the labor
force grew 5.9% to 3,649,400 by January, 1996, from 3,445,000 in 1991. The
Employment Security Commission also estimates that the unadjusted unemployment
rate in January, 1996 to have been 5.5% of the labor force, as compared with
the nationwide unadjusted unemployment rate of 6.3%. The North Carolina annual
average unemployment rate over the past seven years has ranged from a high of
5.9% in 1992 to a low of 3.5% in 1989.
Agriculture remains a basic economic element in North Carolina. North
Carolina ranked eighth (8th) in the nation in 1994 total farm income. Total
gross agricultural income in 1994 was approximately $6.4 billion, up from 5.2
billion in 1991. Poultry and eggs remain the leading source of agricultural
non-crop income in the State. Income from the production of poultry and eggs
for 1994 was approximately $1.9 billion, accounting for approximately 30.0% of
the gross agricultural income. These figures are up from $1.5 billion in 1991.
In addition, tobacco production remains the leading source of agricultural crop
income in the State. Income from the production of tobacco for 1994 was
approximately $943 million, accounting for approximately 14.8% of the gross
agricultural income. These figures are down from $1.1 billion and 21.2% in
1992. Federal legislation and regulatory measures regarding tobacco production
and marketing, along with international competition have and are expected to
continue to affect tobacco farming in North Carolina. Changes in such factors
or any other adverse conditions in the tobacco farming sector could have
negative effects on farm income and the North Carolina economy as a whole.
In 1995 there were approximately 58,000 farms in the State, compared to
60,000 in 1992 and 72,000 in 1978. Even though the total number of farms in
North Carolina has decreased, the diversity of agriculture in North Carolina
and a continuing push in agriculture marketing efforts have protected farm
income from some of the wide variations that have been experienced in other
states where most of the agricultural economy is dependent on a small number of
agricultural commodities. According to the State Commissioner of Agriculture,
in 1994 North Carolina ranked first in the nation in the production of
flue-cured tobacco, total tobacco, turkeys raised and sweet potatoes; second in
the production of cucumbers for pickles, the number of hogs on farms, and trout
sales; third in poultry and egg products cash receipts, net farm income,
greenhouse and nursery receipts, and peanuts; fourth in commercial broilers,
blueberries and strawberries; fifth in burley tobacco; sixth in peaches; and
seventh in apples, pecans and rye. A strong agribusiness sector also supports
farmers with farm inputs (fertilizer, insecticides, pesticide and farm
machinery) and processing of commodities produced by farmers (vegetable canning
and cigarette manufacturing).
The North Carolina Department of Commerce, Travel and Tourism Division, has
reported that North Carolina's travel industry grew by more than eight percent
(8%) in 1995, the highest growth rate in five years. This growth rate is three
percent (3%) higher than the national average. In 1995 approximately $9.2
billion was spent on travel and tourism in the State, compared to approximately
8.5 billion in 1994, $8.0 billion in 1993, $7.4 billion in 1992 and $7.0
billion in 1991. In 1995 the State's travel industry generated more than $700
million in state and local taxes and provided approximately 250,000
tourism-related jobs. The greatest number of visitors to the State come from
Virginia, Florida, Pennsylvania, Maryland and South Carolina.
The folowing represents an overview of the State budgetary system and a
discussion of legislation passed by the General Assembly in recent years along
with current judicial developments effecting the State budget and fiscal
health.
In North Carolina the issuance of municipal debt is overseen by the
North Carolina Local Government Commission. This Commission is composed of
nine members including the State Treasurer, the Secretary of State, the State
Auditor, and the Secretary of Revenue. This Commission handles the approval,
sale, and delivery of all local bonds and notes issued in North Carolina and
monitors certain fiscal and accounting standards prescribed by The Local
Government Budget and Fiscal Control Act. No unit of local government can incur
bonded indebtedness without the Commission's prior approval. If approved, the
obligations are sold by the Commission on a sealed bid basis. The Commission
then monitors the local unit's debt service through a system of monthly
reports.
Over the past twenty years, North Carolina State debt obligations have
maintained ratings of Aaa in Moody's and AAA in S&P. There can be no assurance
that the State's current ratings will be maintained for any given period or
that such ratings will not be lowered, suspended or withdrawn entirely by
either rating agency.
The North Carolina State Constitution requires that the total
expenditures of the State for the fiscal period covered by the budget shall not
exceed the total receipts during that fiscal period plus the surplus remaining
in the State Treasury at the beginning of the period. The State has not
realized any revenue shortfalls in recent fiscal years. For the three most
recent fiscal periods ending June 30, 1993, 1994, and 1995 the State realized
budgetary credit balances of approximately $578.9 million, $887.5 million and
$892.2 million, respectively. However, during the 1989-90 and 1990-91 fiscal
years, the State had revenue shortfalls of approximately $346.2 million and
$727.3 million, respectively, requiring the Governor and General Assembly to
mandate significant spending constraints through reductions in spending
authorizations and hiring restrictions to fulfill the constitutional
requirement of maintaining a balanced budget. Therefore, even though the State
has not experienced any revenue shortfalls in recent years, there can be no
guarantee that a budgetary credit balance will continue to be realized in future
periods.
The State budget is based upon a correlation between estimated revenues
and expenditures for the State and various State and non-State factors. These
factors include State and national economic conditions, federal government
legislation and policies, and international activities and economic
conditions. The General Fund and the Highway Fund represent the two major
operating funds.
Revenues from the General Fund are used to finance virtually all
non-highway operations of the State Government, while revenues from the
Highway Fund, the majority of which are generated by taxes and fees related to
motor vehicles and highway use, are primarily used for the maintenance and
upkeep of the State highway system.
Legislation enacted by the 1991 General Assembly increased state sales taxes,
individual and corporate income taxes, cigarette taxes, real estate conveyance
taxes, alcoholic beverage fees and taxes, insurance taxes, and certain other
taxes and fees. The State's portion of the sales tax was increased from 3% to
4% increasing the sales tax revenue by $507.9 million in the 1992-93 fiscal
year. The General Assembly also increased the corporate income tax rate from
7% to 7.75% in addition to imposing a temporary surtax of 4% beginning in 1991
(creating an effective corporate tax rate of 8.06% in 1991), decreasing by 1%
each year thereafter and ending in 1995, which increased corporate income tax
revenue by $91.7 million in the 1992-93 fiscal year. The addition of a 7.75%
tax bracket for taxable personal income above $100,000 for married taxpayers
filing a joint tax return, and an equivalent increase for other
categories increased individual income tax revenue. An increase in the
cigarette excise tax from $0.02 to $0.05 per pack of 20 raised tax revenue by
$17.2 million in the 1992-93 fiscal period. The increase in the deed stamp tax
on real estate conveyances from $1 per $1,000 of consideration to $2 per $1,000
of the value of the property transferred generated a tax revenue increase in
the 1992-93 fiscal year of $12.5 million.
Besides adopting a biennium budget for the 1991-1993 fiscal periods, the
1991 General Assembly also adopted other legislation addressing future budget
enactments. This budget reform package placed restrictions on the growth in
the total number of state employees, placed limitations on the growth of the
second year of a biennium budget, and established funding for a budget
stabilization reserve. These restrictions are currently still in place.
The 1991 General Assembly also appropriated $3.0 million for the 1991-92
fiscal year to contract for performance audits of the Executive and Legislative
Branches of the State Government. The Government Performace Audit Committee
was formed to study ways in which the state government could be streamlined and
made more efficient. The Committee's report submitted to the 1993 General
Assembly recommended short-term initiatives and long-term strategies including
changes in education, the institution of an Economic Development Board,
improvements in the State's information technology, a downsizing in the State's
mental health facilities, expansion of the Carolina Access Program (Medicaid
Managed Care), and a reorganization of the Departments of Transportation,
Correction and Revenue. In 1993, the General Assembly passed legislation based
on the Committee's recommendations. As these recommendations are fully
implemented, future savings are anticipated by the Commission. The effect
these legislative changes have had, or may have, on the long term fiscal
condition of the State and its political subdivisions cannot be presently
determined.
The 1993 General Assembly enacted a total 1993-95 budget of $33.2
billion, representing a 19.8% increase over the 1991-93 budget of $27.9
billion. The 1994 General Assembly passed in a special legislative session, an
anti-crime package totalling $257 million. It included a 3,000-bed increase in
prison space, stricter sentencing guidelines and early intervention programs for
children and those with drug problems. This anti-crime legislation was funded
from beginning budgetary credit balances and operational revenues.
The Regular Session of the 1994 General Assembly authorized additional
General Fund expenditures of $1.02 billion in excess of the previously
authorized 1994-95 budget. A major portion of these additional expenses
consisted of a $427.1 million compensation package for public school teachers,
state employees and employees of state-funded local programs. The funding of
these additional expenditures came from the collection of additional revenues
and a reduction in existing programs.
The 1995 General Assembly enacted a total 1995-97 state budget of $36.4
billion, representing a 9.6% increase over the 1993-95 budget of $33.2 billion,
and enacted a tax relief package which included legislation (1) increasing the
personal exemption for each member of a household from $2,000 to $2,500; (2)
creating a $60 per child tax credit; and (3) eliminating the state intangible
tax on stocks and bonds. The 1995 General Assembly focused much of its
attention on the continuing effort of reducing the cost of government
through downsizing organizations, efficiencies in operations, and maximizing
certain resources available to the State. Through this effort, the General
Assembly adopted budget reductions totaling $170.8 million for 1995-96 and
$162.3 million for 1996-97. These reductions assisted in the enactment of tax
reduction package which will provide tax relief of $364.6 million in 1995-96
and $401.7 million in 1996-97.
The Governor had requested an analysis of the State's tax structure. The
study found that North Carolina had a broad-based tax structure with a low
overall tax burden which was slightly below average. However, North
Carolina's individual income tax burden was higher than most states, the
corporate income tax rate was above average, and North Carolina was one of the
few states with a broad-based intangibles tax. As a result, at the beginning of
the Regular Session of the 1995 General Assembly, the Governor proposed a new
tax relief plan which, if enacted by the General Assembly, would have been the
biggest tax cut in North Carolina history. The Governor proposed (1) a
reduction in the corporate income tax rate from 7.75% to 7%; (2) the repeal of
the intangibles tax on stocks and bonds; (3) the creation of a new tax credit in
the amount of $50 per child; (4) the increase in the personal exemption for
each member of a household from $2,000 to $2,500; and (5) the increase in the
homestead exemption for low-income elderly people such that the income
eligibility would rise from $11,000 to $15,000 and the property exemption would
be increased from $15,000 to $18,000.
Most of the Governor's tax package was enacted by the 1995 General
Assembly, which passed legislation increasing personal exemptions from $2,000
to $2,250 in 1995, and to $2,500 in 1996. A $60 per child tax credit was
enacted, and the General Assembly eliminated the intangibles tax effective
January 1, 1995. However, the General Assembly did not increase the homestead
exemption or reduce the corporate income tax rate.
Additionally, the North Carolina Supreme Court recently decided FULTON
CORN. V. JUSTUS. In this case, the plaintiff challenged the constitutionality
of North Carolina intangibles tax levied on ownership of corporate stock. The
plantiff alleged that this intangibles tax violated the Commerce Clause of the
United States Constitution because it taxed more heavily the stock of
corporations not doing business in North Carolina. However, the Court found
that this taxing scheme treated all corporations with substantial equality
because the intangibles tax imposed on a corporation's stock was directly and
inversely proportional to the issuing corporation's taxable income in North
Carolina. The effect was to reduce the intangibles tax liability on a
corporation's stock to the extent the corporation's income was taxed in North
Carolina; and to increase the intangibles tax liability on a corporation's
stock to the extent the corporation's income was not taxed in North Carolina.
The plaintiff's petition for certiorari to the United States Supreme Court was
granted, and in February, 1996, the United States Supreme Court held that the
State's intangibles tax on shares of corporate stock was unconstitutional. In
accordance therewith, the State Secretary of Revenue has announced plans to
issue refunds, pending approval by the State Supreme Court, during the last
quarter of 1996, to those taxpayers who paid their intangibles tax under
protest from 1991 (the date the case was originally filed) until January, 1995
(the effective date of the General Assembly's repeal of the tax; See above
discussion). The Department of Revenue estimates that 233,000 taxpayers paid
their intangibles tax under protest during the tax years 1991-94 totaling
approximately $123 million. The Governor plans to recommend that the refunds
be financed by the State's "Rainy Day Fund," which will require action by the
General Assembly.
Also, the North Carolina Supreme Court recently decided SWANSON V.
STATE OF NORTH CAROLINA. This case involved class action plaintiffs (former
federal employees and active duty federal military personnel and reservists)
who were seeking full refunds for North Carolina income taxes paid on federal
pension benefits during tax years 1985-1988. The plaintiffs claimed they were
due a refund because state employee pension benefits were exempted from income
taxation, while federal employee benefits were exempt only up to $3,000. The
State Supreme Court held that because the plaintiffs had not complied with
procedural requirements, they were not entitled to tax refunds for the years
1985-1988. The plaintiffs petitioned for certiorari and while the case was
being litigated, the State Department of Revenue stopped further collection
efforts against federal retirees, pending outcome of the case. Now, the
Department has to proceed with collection efforts for the assessments and any
applicable interest.
RISK FACTORS OF CONCENTRATING IN OHIO
Financial operations continued to show improvement in fiscal year 1994.
The state achieved an operating surplus and the budget stabilization fund
balance was increased to $280 million. Fiscal 1995 ended up with tax receipts
2.9% ahead of estimates and total spending below estimates. The state ended
the biennium with a general revenue fund balance of $928 million. The
1995-1997 budget is based on reasonable revenue assumptions and no drawdown of
available reserves. General revenue spending will increase, with 28.5% going
to education and 9.5% to human services. Revenues and expenditures met target
levels for the first six months of fiscal 1996.
The state's current direct debt levels are relatively moderate,
representing, on a per capita basis, $489 or 2.3% of personal income. Debt
service payments to cover general obligations and lease obligations constitute
approximately 5% of the state's budget.
Over the past ten years, employment and earnings in Ohio have grown
steadily and become more diversified. Although manufacturing still provides
21% of the employment in the state, employment growth in the services and trade
sectors has created a more stable economy. Statewide employment was up 3% from
1990-1995, and employment gains in 1994 and 1995 were enough to offset
recession years' losses. Although manufacturing is expected to slow in 1996,
growth in the services, trade and construction industries should continue to
produce strong economic growth.
The rate of personal income growth, however, has declined as
lower-paying service jobs have replaced those lost in manufacturing, with
income levels currently slightly below the national average. Personal income
has grown 3.9% and 3.1% in 1994 and 1995, respectively.
RISK FACTORS OF CONCENTRATING IN TENNESSEE
The Fund's performance can be expected to be closely tied to the
prevailing economic conditions of the state of Tennessee as a whole, its
particular geographic regions, and the industries located within the state.
Traditionally divided into three geographic regions, the State's economy has
historically been dominated by agriculture in the west, manufacturing in the
east, and government in the middle region. Though trade and services have
replaced agriculture in terms of total output, manufacturing continues to be
the largest single sector of the economy. While the Gross State Product of
Tennessee was in excess of $100 billion in 1991 and the state placed 20th in
national rank, manufacturing comprised 24% of the total economy during the prior
recessionary period. Also, overbuilding of commercial and residential
properties in prior years caused the state to experience some difficulties with
declining real estate values.
Along with the national economy, Tennessee has recently experienced a
significant recovery in economic activity. Although moderate rates of economic
growth in past recoveries along with a steady influx of transplant corporations
have helped the state avoid the dramatic "boom and bust" cycle experienced by
many sunbelt states, the recent recession did put pressure on governmental
receipts and outlays.
The constitution of the state requires a balanced budget. This
constraint along with relatively low debt and expenditure per capita ratios has
helped the state maintain its current long term bond rating of AAA by Standard
& Poor's Rating Group and Aaa by Moody's Investors Services Inc. While
Tennessee is one of only nine states which have such ratings, the ability of
the state to maintain this rating given the current economic and political
environment is by no means certain.
RISK FACTORS CONCENTRATING IN VIRGINIA
As described above, except to the extent the Fund invests in temporary
investments, the Fund will invest substantially all of its net assets in
Virginia Municipal Obligations. The Fund is therefore susceptible to these
Obligations. Without intending to be complete, the following briefly
summarizes some of these difficulties and the current financial situation, as
well as some of the complex factors affecting the financial situation, in the
Commonwealth of Virginia (the "Commonwealth" or "Virginia"). It is derived
from sources that are generally available to investors and is based in part on
information obtained from various agencies in Virginia. No independent
verification has been made of the accuracy or completeness of the following
information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State of local governmental
finances generally, will not adversely affect the market value of Virginia
Municipal Obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
The Commonwealth's financial condition is supported by a broad-based
economy, including manufacturing, tourism, agriculture, ports, mining and
fisheries. Manufacturing continues to be a major source of employment, ranking
behind only services, wholesale and retail trade, and government (federal,
state and local). Defense activity is an important component of Virginia's
economy. The Commonwealth accounted for 9.6 percent of all military and
civilian U.S. Department of Defense (DOD) employees and ranked first in per
capita defense spending in federal fiscal year 1994, while ranking second in
total defense spending. Northern Virginia and the Hampton Roads area accounted
for 91.5 percent of DOD employments in Virginia in 1994. However, for federal
fiscal year 1994, total DOD employment in Virginia decreased 2.2 percent from
the previous year and can be expected to continue to decline as previously
annnounced base closures are implemented and the military downsizes.
Economic growth continued in fiscal year 1995, mimicking neither the
boom of the late 1980's nor the 1990-1991 recession. Personal income continued
to rise in real terms during the first three quarters of the fiscal year but at
only 1.1 percent in the first quarter of calendar year 1995. Employment
continued to give brighter news and unemployment dropped to 4.7 percent
compared to the national rate of 5.7 percent. While recent decisions by large
private firms to locate or expand in Virginia provide encouragement, additional
company downsizings and defense cutbacks have now been joined by the prospect
of major cuts in federal employment as threats to the Commonwealth's economic
health.
Personal income figures for Virginia have generally followed national
trends. Changes in the Commonwealth personal income were generally higher than
the U.S. figures in the 1980's. Since then, the Commonwealth and the nation
have grown at similiar rates. Virginia's per capita income of $22,501 for 1994
was 104 percent of the national figure, as in the previous two years. At 106
percent of the South Atlantic region's per capita income for both 1993 and
1994, the ratio remains lower than at any other time since 1980.
Virginia's nonagricultural employment has also reflected that of the
national economy. For fiscal year 1994 Virginia's nonagricultural employment
rose 2.3 percent, as did U.S. employment; however, the rate of growth was less
than the Commonwealth's 2.9 percent rate for the previous year. Total
nonagricultural employment for Virginia in June 1995 was a record high. During
the 1980's, the Commonwealth growth rate outpaced the nation, but since then it
has been close to the national average. The South Atlantic region continued to
outpace Virginia in growth of nonagricultural employment were found in
southwest Virginia where mining jobs have been lost and the lowest
unemployment rates were seen in the Northern Virginia, Charlottesville and
Richmond areas at under 4 percent.
Employment trends in Virginia have varied from sector to sector. The
growth patterns were similar to those in fiscal year 1994. Employment grew in
seven of ten sectors. This past fiscal year's growth was led by a 6.3 percent
employment jump in the construction sector and 5.4 percent in services.
Federal civilian employment slipped 2.3 percent, the result of continued
defense cutbacks and an effort to downsize. The drop in mining employment
accelerated to 9.8 percent from 7.7 percent in the previous year.
Manufacturing has lost 25,100 jobs during the five-year period beginning in
1991, emphasizing dramatic evidence of the shift to a service to a service
economy from a goods-producing one. Employment trends also varied among
regions. All of the Commonwealth's metropolitan statistical areas showed
increased employment from fiscal year 1994 to fiscal year 1995, ranging from .7
percent to 4.3 percent, with most employment increases being experienced in
metropolitan areas.
While Virginia has nearly completed an economic recovery from the
1990-91 recession, its period of eclipsing national and South Atlantic regional
economic outcomes may be over. In both measures of income and particularly of
employment the South Atlantic region seems to be gaining. Virginia continues
to lead the U.S. as a whole in per capita income but no longer exceeds the
nation in year-to-year changes in income and level of employment. The
implementation of announced defense cutbacks, the duration of the period of
economic growth, and the impact of potential cuts in federal spending are
continuing sources of concern. Dependence of Virginia's international trade
upon tobacco exports is worrisome for the long term. Growing interest in
Virginia by major corporations as a site for new facilities is the brightest
hope to the future of the state.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1995 fiscal year, the General Fund
had an ending fund balance, computed on a budgetary cash basis, of $350.7
million, of which $151.6 million was in required reserves. $199.1 million of
the general fund balance was designated for expenditure during the next fiscal
year, leaving no undesignated, unreserved fund balance. This is the first year
since fiscal year 1991 that there has not been an undesignated fund balance at
year end. Computed on a modified accrual basis in accordance with generally
accepted accounting pricipals, the General Fund balance at the end of the
fiscal year ended June 10, 1995, was negative $86.4 million, compared with a
General Fund balance of $185.3 million at the end of fiscal year ended June 30,
1994. The fiscal year 1995 deficit in the General Fund is the result of a
settlement and subsequent ruling by the Virginia Supreme Court in the case of
Harper v. Department of Taxation relating to the tax treatment of federal
retirees' benefits.
As of June 30, 1995, total debt of the Commonwealth aggregated $9.3
billion. Of that amount, $2.7 million was tax-supported. Outstanding general
obligation debt backed by the full faith and credit of the Commonwealth was
$963 million at June 30, 1995. Of that amount, $524 million was also secured
by revenue producing capital projects.
The Virginia Constitution contains limits on the amount of general
obligation bonds which the Commonwealth issues and they must be approved in a
state-wide election.
The Commonwealth of Virginia maintains a AAA bond rating from Standard &
Poor's Corporation, Moody's Investors Service and Fitch Investors Service on
its general obligation indebtedness, reflecting in part its sound fiscal
management, diversified economic base and low debt ratios. There can be no
assurances that these conditions will continue. Nor are these same conditions
necessarily applicable to securities which are not general obligations of the
Commonwealth. Securities issued by specific municipalities, governmental
authorities or similiar issuers may be subject to economic risks or
uncertainties peculiar to the issuers of such securities or the sources from
which they are to be paid, and the credit quality of the securities issued by
them may vary considerably from the credit quality of obligations backed by the
full faith and credit of the Commonwealth.
RISK FACTORS OF CONCENTRATING IN NEW YORK
The following concerns the risks of concentrating investments in
obligations of New York and its political subdivisions, duly constituted
authorities and corporations.
The financial condition of New York State ("State") may be affected by
various financial, social economic and political factors. Those factors can be
complex, may vary from fiscal year, and are frequently the result of actions
taken not only by the State and its agencies and instrumentalities but also by
entities that are not under the control of the State. The information set
forth below concerns the financing activities of the State, the activities of
the State's authorities and public benefit corporations (the "Authorities"),
the financial condition and projections of the Metropolitan Transit Authority
("MTA"), the financial condition of The City of New York (the "City"), and
certain information relating to the State's other localities. Adverse
developments affecting the State's financing activities, the Authorities, the
MTA, the City or other localities could adversely affect the State's financial
condition.
STATE FINANCING ACTIVITIES
There are a number of methods by which the State may incur debt. In
addition to tax and revenue anticipation notes, the State may issue general
obligation bonds and notes in anticipation of such bonds. Except for certain
general obligation bonds that may be issued for specifically enumerated
emergency purposes, all general obligation bonds must be authorized by the
voters. The State may also, pursuant to specific constitutional authorization,
directly guarantee certain Authority obligations. Payments of debt service on
State general obligation and State-guaranteed bonds and notes are legally
enforceable obligations of the State.
The State also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State: moral
obligation and lease-purchase or contractual-obligation financing. Moral
obligation financing generally involves the issuance of debt by an Authority to
finance a revenue-producing project or other activity. The Authority's debt is
secured by project revenues and statutory provisions for the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation financial arrangements, Authorities and certain
municipalities have issued obligations to finance the construction and
rehabilitation of facilities or the acquisition and rehabilitation of equipment
and expect to cover debt service and amortization of the obligations through
the receipt of rental or other contract payments made by the State. State
lease-purchase or contractual-obligation financing arrangements involve a
contractual undertaking to make payments to an authority, municipality, or
other entity, but the State's obligation to make
<PAGE> 40
such payments is generally expressly made subject to appropriation by the
Legislature and the actual availability of money to the State for making the
payments.
The State also participates in the issuance of certificates of
participation in a pool of leases entered into by the State's Office of General
Service on behalf of several State departments and agencies and in the issuance
of certificates of participation which represent proportionate interests in
lease payments to be paid by the State, acting by and through the Commissioner
of the Commissioner of the Office of Mental Health of the State of New York.
Payments for principal and interest due on general obligation bonds,
interest due on tax and revenue anticipation notes, and contractual-obligation
and lease-purchase payments are estimated to be $2.167 billion in the aggregate
for the State's 1993-94 fiscal year and are projected to be $2.459 billion in
the aggregate for the 1994-95 fiscal year. These figures do not include
interest payable on State General Obligation Refunding Bonds issued in July
1992, to the extent that such interest is to be paid from an escrow fund
established with proceeds of such Refunding Bonds, or the State's installment
payments relating to the issuance of certificates of participation.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees. There has never been a default on any
moral obligation debt of any Authority.
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation For
The City of New York, ("MAC"), created to provide financing assistance to New
York City, is the only municipal assistance corporation created to date. To
enable MAC to pay debt service on its obligations, MAC receives, subject to
annual appropriation by the Legislature, receipts from the 4% New York Sales
Tax for the Benefits of New York City, the State-imposed Stock Transfer Tax
and, subject to certain prior liens, local assistance payments otherwise
payable to the City.
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for 1994-95 fiscal year was formulated on June 16, 1994 and is
based on the State's budget as enacted by the Legislature and signed into law
by the Governor.
The State Financial Plan is based upon forecasts for national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and the State
economies. many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, Federal
financial and monetary policies, the availability of credit and the condition
of the world economy, which could have an adverse effect on the State. There
can be no assurance that the State economy will not experience
worse-than-predicted results in the 1994-95 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
AUTHORITIES
The fiscal stability of the State is related to the fiscal stability of
its Authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
Authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself, and issue bonds and notes
within the amounts of, and as otherwise restricted by, their legislative
authorization. As of September 30, 1993, the latest data available, there were
18 Authorities that had outstanding debt of $100 million or more. The
aggregate outstanding debt, including refunding bonds, of these 18 Authorities
was $63.5 billion as of September 30, 1993, of which approximately $7.7 billion
was moral obligation debt and approximately $19.3 billion was financed under
lease-purchased or contractual-obligation financing arrangements.
<PAGE> 41
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory room and housing. In recent years, however the
State has provided financial assistance through appropriations, in some cases
of a recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. The operating assistance is
expected to continue to be required in future years.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The Housing
Finance Agency ("HFA") and the Urban Development Corporation ("UDC") have in
the past required substantial amounts of assistance from the State of meet debt
service costs or to pay operating expenses. Further assistance, possibly in
increasing amounts, may be required for these, or other, Authorities in the
future. In addition, certain statutory arrangements provide for State local
assistance payments otherwise payable to localities to be made under certain
circumstance to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could seek
additional State funds.
METROPOLITAN TRANSPORTATION AUTHORITY ("MTA")
The MTA oversees the operation of New York City's subway and bus lines
by the New York City Transit Authority and the Manhattan and Bronx Surface
Transit Operating Authority (collectively, the "Transit Authority" or the
"TA"). Through its subsidiaries, the Long Island Rail Road Company, the
Metro-North Commuter Railroad Company and the Metropolitan Suburban Bus
Authority, the MTA operates certain commuter rail and bus lines in the New York
metropolitan area. In addition, the Staten Island Rapid Transit Operating
Authority, an MTA subsidiary, operates a rapid transit line on Staten Island.
Through its affiliated agency, the Triborough Bridge and Tunnel Authority (the
"TBTA"), the MTA operates certain intrastate toll bridges and tunnels. Because
fare revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended, and will continue to depend, for operating
support upon a system of State, local government and TBTA support, and, to the
extent available, federal operating assistance, including loans, grants and
subsidies.
OTHER LOCALITIES
Certain localities in addition to New York City could also have
financial problems leading to requests for additional State assistance during
the State's 1993-94 and 1994-95 fiscal years and thereafter. The potential
impact on the State of such request by localities is not included in the
projections of the State receipts and disbursements in the State's 1994-95
fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
CERTAIN MUNICIPAL INDEBTEDNESS
Municipalities and school districts have engaged in substantial
short-term and long-term borrowing. In 1992 the total indebtedness of all
localities in the State was approximately $35.2 billion, of which $19.5 billion
was debt of New York City (excluding $5.9 billion in MAC debt); a small portion
(approximately $71.6 million) of the $35.2 billion of indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling
State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1992.
<PAGE> 42
In 1992, an unusually large number of local government units requested
authorization for deficit financing. According to the Comptroller, nine local
government units were authorized to issue deficit financing in the aggregate
amount of $131.1 million, including Nassau County for $65 million in six-year
deficit bonds and Suffolk County for $36 million in six-year deficit bonds.
The current session of the Legislature may receive as many or more requests for
deficit-financing authorizations as a result of deficits previously incurred by
local governments. The Comptroller has indicated that the level of deficit
financing requests in 1992 was unprecedented, since in 1993 only five
localities were authorized to issue only $5.5 million in deficit financing
indebtedness.
Certain proposed federal expenditure reductions would reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected local
programs and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City or any of the
Authorities were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of notes and
bonds issued by localities within the State should be adversely affected.
Localities also face anticipated and potential problems resulting from certain
pending litigation, judicial decisions, and long-range economic trends. The
longer-range problems of declining urban population, increasing expenditures,
and other economic trends could adversely affect localities and require
increasing State assistance in the future.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health
of its localities, particularly the City, which has required and continues to
require significant financial assistance form the State. The City's
independently audited operating results for each of its 1981 through 1993
fiscal years, which end on June 30, show a General Fund surplus reported in
accordance with GAAP. In addition, the City's financial statements for the
1993 fiscal year received an unqualified opinion from the City's independent
auditors, the eleventh consecutive year the City has received such an opinion.
However, there can be no assurance that the City will not have a sizable
deficit in the future.
In response to the City's fiscal crisis in 1975, the State took a number
of steps to assist the City in returning to fiscal stability. Among these
actions, the State created MAC to provide financing assistance to the City.
The State also enacted the New York State Financial Emergency Act for The City
of New York (the "Financial Emergency Act") which, among other things,
established the New York State Financial Control Board (the "Control Board") to
oversee the City's financial affairs. The State also established the Office of
the State Deputy Comptroller of the City of New York ("OSDC") to assist the
Control Board in exercising its powers and responsibilities.
The City operates under a four-year financial plan which is prepared
annually and is periodically updated. On June 30, 1986, the Control Board's
powers of approval over the City's financial plan were suspended pursuant to
the Financial Emergency Act. However, the Control Board, MAC and OSDC continue
to exercise various monitoring functions relating to the City's financial
position. The City submits its financial plans as well as the periodic updates
to the Control Board for its review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for the City's financial plan or if other uncertainties materialized that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State.
On December 1, 1993, a three-member panel appointed by the Mayor to
address City structural budget imbalance released a report setting forth its
findings and recommendations. In its report, they noted that budget imbalance
is likely to be greater than the City projected on November 23, 1993 by $255
million in fiscal year 1995, rising to nearly $1.5 billion in fiscal year 1997.
The report provided a number of options that the City should consider in
addressing the structural balance issues such as severe cuts in City-funded
personnel levels, increases in residential property taxes and the sales tax,
and the imposition of bridge tolls
<PAGE> 43
and solid waste collection fees. The report also noted that additional State
actions will be required in many instances to allow the City to cut its budget
without grave damage to basic services.
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve New York Tax-Exempt
Trust -- New York Fund and Reserve Tax-Exempt Trust -- Connecticut,
Massachusetts, California and New Jersey Funds:
We have audited the accompanying statements of net assets of the Reserve New
York Tax-Exempt Trust -- New York Fund and the Connecticut, Massachusetts,
California and New Jersey Funds (four of the series constituting Reserve
Tax-Exempt Trust) and the statements of assets and liabilities of the
Massachusetts and New Jersey Funds, as of May 31, 1996, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the respective
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Reserve New York Tax-Exempt Trust -- New York Fund and the Connecticut,
Massachusetts, California and New Jersey Funds of Reserve Tax-Exempt Trust as of
May 31, 1996, the results of their operations, the changes in their net assets
and their financial highlights for the periods referred to above, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 28, 1996
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- ------------
<S> <C> <C> <C>
Beacon BAN, 4%................................................................. 8/16/1996 $2,000 $ 2,063,720
Babylon USD TAN, 4.25%......................................................... 6/14/1996 2,000 2,081,133
Babylon IDA for Nabisco Security System, 3.60%(a).............................. 4/1/2000 1,200 1,204,159
Bleecker HDC Terrace Apt Project S85, 3.525%(a)................................ 7/1/2015 2,555 2,570,761
Cattaragus County IDR for Park Centre Development Project, 4.10%(a)............ 1/1/2000 405 407,906
Cattaragus County IDR for Park Centre Development Project, 4.65%(a)............ 1/1/2000 550 554,363
Chautauqua County IDR for Greater Buffalo Press Project, 4.15%(a).............. 1/1/2000 1,700 1,712,346
Dutchess County IDA for M&R Associates Series 1984, 3.50%(a)................... 12/1/2002 420 423,732
Eagle Tax-Exempt Trust CP Series 1994C-Z Class A, 3.70%(a)..................... 6/15/2018 3,000 3,051,919
East Islip Union Free School District TAN, 4.50%............................... 6/28/1996 1,315 1,369,442
Erie County RAN, 4.50%(a)...................................................... 9/20/1996 1,100 1,136,671
Guilderland IDA for North Eastern Industrial Park Series 1993 A,
3.65%(a)................................................................... 12/1/2008 3,700 3,712,884
Jefferson County IDA for Watertown Carthage, 3.75%(a).......................... 12/1/2012 3,500 3,511,834
Merrick Union Free School District TAN, 4.50%.................................. 6/27/1996 1,300 1,353,819
Metropolitan Transportation Authority Commuter Facilities Revenue Bonds
Series 1991, 3.50%(a)...................................................... 7/1/2021 2,200 2,207,427
Montgomery County IDR for Service Merchandise Co., 3.70%(a).................... 12/31/2024 1,600 1,603,073
Nassau County BAN, 4.25%....................................................... 11/15/1996 3,000 3,015,492
Nassau County RAN, 4%.......................................................... 3/5/1997 3,000 3,043,784
New York City GOB, 3.50%(a).................................................... 9/17/1996 2,000 2,014,153
New York City Cultural Resources for Solomon R. Guggenheim, 3.60%(a)........... 12/1/2015 900 900,177
New York City GOB Custodial Receipts Series A31, 3.60%(a)...................... 8/1/2001 4,000 4,032,224
</TABLE>
16
<PAGE> 45
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK FUND
STATEMENT OF NET ASSETS--MAY 31, 1996--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- ------------
<S> <C> <C> <C>
New York City GOB Fiscal 1994 Series A, 3.75%(a)............................... 8/1/2022 $2,000 $ 2,000,410
New York City GOB Pre-refunded, 7%............................................. 8/15/1996 720 754,651
New York City GOB Series A, 3.75%(a)........................................... 8/1/2023 1,850 1,850,379
New York City GOB Series A10, 3.95%(a)......................................... 8/1/2016 1,565 1,565,338
New York City GOB Series B, 3.50%(a)........................................... 8/15/2024 3,400 3,400,650
New York City GOB Series C4-96, 3.90%(a)....................................... 8/1/1996 3,800 3,800,810
New York City GOB Series C4-97, 3.90%(a)....................................... 8/1/1997 1,200 1,200,256
New York City GOB Series C4-98, 3.90%(a)....................................... 8/1/1998 2,500 2,500,533
New York City GOB Fiscal 1992 Series D, 3.55%(a)............................... 2/1/2020 300 300,058
New York City GOB Series E5, 3.85%(a).......................................... 8/1/2017 200 200,042
New York City HDC for Carnegie Park Project, 4.50%(a).......................... 12/1/2016 1,410 1,410,353
New York City HDC for Columbus Green Project, 4.50%(a)......................... 12/1/2009 900 900,225
New York City Municipal Water Finance Authority Pre-refunded, 7.875%(a)........ 6/15/2016 1,090 1,153,413
New York City Municipal Water Finance Authority, 3.20%(a)...................... 8/13/1996 3,000 3,023,869
New York City Municipal Water Finance Authority, 3.80%(a)...................... 6/15/2025 1,300 1,302,483
New York City GOB Series E5, 3.85%(a).......................................... 8/1/2019 300 300,063
New York City GOB Series E5, 3.85%(a).......................................... 8/1/2010 500 500,105
New York City GOB Series E5, 3.85%(a).......................................... 8/1/2015 300 300,063
New York City ERD, 3.60%(a).................................................... 2/1/2029 300 300,950
New York State Series R, 3.75%................................................. 8/6/1996 2,000 2,005,328
New York State ERD/PCR for LILCO Series 85B, 3.25%(a).......................... 3/1/2016 3,000 3,024,905
New York State ERD/PCR for Rochester Gas and Electric Corporation, 3.45%(a).... 10/1/2014 3,000 3,009,332
New York State Job Development Authority Series F, 4.42%(a).................... 3/1/1999 590 592,351
New York State ERD/PCR Rochester Gas & Electric R&D, 3.75%(a).................. 11/15/2015 1,000 1,002,578
Newburgh School District GOB, 4.50%(a)......................................... 6/15/1996 1,250 1,304,685
North Hempstead BAN, 4%........................................................ 2/27/1997 3,000 3,042,109
Oneida County BAN, 4.25%....................................................... 5/9/1997 2,000 2,013,859
Onondaga County IDR for Edgecomb Metals Project, 3.70%(a)...................... 11/1/2009 1,100 1,103,731
Onondaga County IDR for McLane Co. Project, 4.15%(a)........................... 11/1/2004 2,860 2,870,880
Onondaga County IDR for Pass and Seymour, Inc. Project, 3.55%(a)............... 6/15/1997 1,900 1,903,502
Pearl River Union Free School District TAN, 4.25%.............................. 6/27/1996 3,350 3,483,264
Puerto Rico GDB Refunding Bonds Series 1985, 3.60%............................. 8/21/1996 3,000 3,007,672
Roslyn Union Free School District TAN, 4.25%................................... 6/28/1996 2,000 2,079,984
Sayville Union Free School District TAN, 4.25%................................. 6/27/1996 2,000 2,077,999
Schenectady BAN, 4.25%......................................................... 6/27/1996 2,000 2,080,056
Suffolk County IDA, 3.80%(a)................................................... 11/1/2007 1,830 1,836,673
Suffolk County TAN, 4.50%...................................................... 9/12/1996 3,000 3,099,971
Syracuse IDA for General Accident Insurance Co. Project, 3.60%(a).............. 12/1/2003 4,550 4,550,895
Ulster County TAN, 4.25%(a).................................................... 3/26/1997 2,000 2,023,658
West Seneca Central School District BAN, 4.125%................................ 6/26/1996 3,400 3,525,488
Westchester County IDR for M and F Associates Project, 4%(a)................... 7/1/2000 1,670 1,681,690
Yonkers IDR for Consumers Union Facility, 3.75%(a)............................. 7/1/2021 4,600 4,616,565
------------
Total New York Fund Investments (99.38%) (Cost $123,426,475)................... 124,672,845
Other assets, less liabilities (.62%).......................................... 781,561
------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 125,454,406 shares of beneficial interest of $.001 par
value outstanding............................................................ $125,454,406
============
</TABLE>
- ------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1996. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 46
RESERVE TAX-EXEMPT TRUST--CONNECTICUT FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Connecticut DAI for Allen Group Inc., 3.65%(a)................................. 2/1/2013 $1,400 $ 1,404,607
Connecticut DAI for Conco Medical Co. Project Series 85, 3.60%(a).............. 11/1/2005 700 702,324
Connecticut DAI for General Accident Insurance Co., 3.75%(a)................... 12/1/2013 1,700 1,700,348
Connecticut DAI for Martin Brower Corp. Series 1985, 3.30%(a).................. 5/1/2005 270 270,878
Connecticut DAI for Regional YMCA Project, 3.60%(a)............................ 6/1/2008 612 613,413
Connecticut DAI for Trudy Corporation Project, 3.65%(a)........................ 9/1/2009 600 601,975
Connecticut DAI for Zotos International Project, 4%(a)......................... 12/1/2004 1,860 1,866,708
Connecticut Development Authority Health Care Revenue Bonds for Independent
Living Project 1990 Series, 3.55%(a)......................................... 7/1/2015 2,345 2,353,022
Connecticut Development Authority PCR for Central Vermont Public Service,
3.40%(a)..................................................................... 12/1/2015 1,400 1,404,292
Connecticut Development Authority PCR for Connecticut Light and Power Project
Series 1993a, 3.65%(a)....................................................... 9/1/2028 1,300 1,304,577
Connecticut Development Authority PCR for Western Massachusetts Electric Co.,
3.50%(a)..................................................................... 9/1/2028 1,700 1,705,641
Connecticut ERN, 3.80%(a)...................................................... 6/1/1996 2,700 2,709,336
Connecticut ERN Series A, 5.50%................................................ 6/15/1996 550 564,520
Connecticut HEF for Charlotte Hospital Series B, 3.40%(a)...................... 7/1/2010 600 601,970
Connecticut HEF for Kingswood Oxford School Issue Series A, 3.60% (a).......... 2/1/2009 560 561,818
Connecticut HEF for New Haven Hospital Series E, 3.60%(a)...................... 6/1/2012 570 570,000
Connecticut HEF for Pomfret School Issue Series A, 3.35%(a).................... 7/1/2024 1,385 1,389,501
Connecticut HFA BDS Project, 3.55%,(a)......................................... 5/15/2018 1,500 1,502,955
Connecticut State Special Assessment Unemployment Compensation RAW Series C,
3.90%(a)..................................................................... 11/15/2001 1,500 1,524,750
Connecticut State Special Assessment Unemployment Compensation Revenue Bonds
Series 1993B Pre-refunded, 7%(a)............................................. 8/15/1996 315 330,008
Connecticut State Special Tax Transportation Infrastructure 2nd Lien Revenue
Bonds, 3.60%(a).............................................................. 12/1/2010 1,570 1,575,321
Hartford Redevelopment Agency MHR for Underwood Towers Project, 3.75%(a)....... 6/1/2020 2,800 2,810,171
Madison BAN, 3.49%............................................................. 3/19/1997 350 352,380
Metropolitan District of Hartford GOB, 5.90%................................... 12/1/1996 250 252,847
Naugatuck BAN, 3.33%........................................................... 3/27/1997 569 572,533
Puerto Rico Industrial, Medical, and Environmental RAW for Reynolds Metals,
3.75%(a)..................................................................... 9/1/2013 1,200 1,211,774
Puerto Rico GOB, 3.60%......................................................... 8/21/1996 1,000 1,002,557
Puerto Rico Industrial, Medical, Higher Education and Environmental Bonds for
PCR, 3.55%(a)................................................................ 12/1/2015 400 401,399
Sprague BAN, 4.25%............................................................. 6/27/1996 525 545,863
Thomaston GOB, 3.43%........................................................... 2/20/1997 416 420,239
Westport BAN, 3.45%............................................................ 6/14/1996 1,000 1,031,948
Windsor Locks GOB, 5.625%...................................................... 5/15/1997 575 587,412
-----------
Total Connecticut Fund Investments (98.98%) (Cost $34,259,000)................. 34,447,087
Other assets, less liabilities, (1.02%)........................................ 354,217
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 34,801,304 shares of beneficial interest of $.001 par
value outstanding............................................................ $34,801,304
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1996. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 47
RESERVE TAX-EXEMPT TRUST--MASSACHUSETTS FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- ----------
<S> <C> <C> <C>
Duxbury GOB, 5.05%............................................................. 12/1/1996 $ 405 $ 418,066
East Longmeadow GOB, 5.125%(a)................................................. 2/1/1997 260 267,235
Framingham IDA for Perrini Corp., 3.70%(a)..................................... 9/30/2005 300 301,067
Massachusets, Municipal Wholesale Electric Series 1994 C, 3.40%(a)............. 7/1/2019 300 300,977
Massachusetts Pre-refunded GOB Series A, 7.125%(a)............................. 10/1/2005 500 522,158
Massachusetts Dedicated Income Tax Bonds Series B, 3.60%(a).................... 12/1/1997 400 400,079
Massachusetts Dedicated Income Tax Bonds Series E, 3.60%(a).................... 12/1/1997 500 500,098
Massachusetts HEF for Endicott College, 3.65%(a)............................... 10/1/2011 400 401,710
Massachusetts HEF for Clark University, 3.50%(a)............................... 12/1/2004 100 100,341
Massachusetts HEF for Boston University Series H, 3.65%(a)..................... 12/1/2015 400 400,718
Massachusetts HEF for Harvard University, 3.25%(a)............................. 2/1/2016 487 488,585
Massachusetts HEF for Mount IDA College Series A, 3.35%(a)..................... 7/1/2018 400 401,279
Massachusetts HEF Capital Assistance Program Series G-1, 3.20%(a).............. 1/1/2019 100 100,315
Massachusetts HEF Series D, 3.60%(a)........................................... 1/1/2035 100 100,336
Massachusetts HEF Capital Asset Series E, 3.70%(a)............................. 1/1/2035 400 401,362
Massachusetts HEF for Williams College Series E, 3.20%(a)...................... 8/1/2014 400 401,242
Massachusetts HEF for Wellesley College Series B, 3.50%(a)..................... 7/1/2022 400 400,077
Massachusetts IDA for KRH Rolls Inc. Project Series 1988, 3.70%(a)............. 5/1/2006 300 301,948
Massachusetts IDA for Cambridge Issue Series 1985, 3.50%(a).................... 10/1/2010 500 501,707
Massachusetts Showa Womens Institute of Boston, 3.75%(a)....................... 3/15/2004 400 400,082
Rockland GOB, 5.50%(a)......................................................... 7/15/1996 475 498,904
Taunton GOB, 5.375%(a)......................................................... 3/1/1997 200 204,267
Worcester GOB, 3.70%(a)........................................................ 7/1/1996 220 224,802
Worcester BAN, 4.25%(a)........................................................ 8/29/1996 400 412,411
-----------
Total Massachusetts Fund Investments (94.35%) (Cost $8,387,784)................ 8,449,766
Other assets, less liabilities (5.65%)......................................... 505,597
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
price per share on 8,955,363 shares of beneficial interest of $.001 par value
outstanding.................................................................. $8,955,363
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1996. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
RESERVE TAX-EXEMPT TRUST--CALIFORNIA FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Anaheim Certificate of Participation, 3.30%(a)................................. 8/1/2019 $250 $ 252,773
California HFA for Sutter Health Series 1990 B, 3.30%(a)....................... 3/1/2020 500 500,090
California Modesto Santa Clara Redding Public Power, 3.25%(a).................. 7/1/2022 300 300,879
California PCR for Pacific G&E, 3.55%(a)....................................... 11/1/2026 500 500,533
California Statewide Catholic Health GOB, 3.80%(a)............................. 7/1/1996 500 508,179
Foothill/Eastern Transportation Toll Road Revenue Bonds Series 95C, 3.30%(a)... 1/2/2035 600 601,900
Foothill/Eastern Transportation Toll Road Revenue Bonds, 3.40%(a).............. 1/2/2035 500 501,628
Irvine Ranch Water District Election #198, 3.95%(a)............................ 11/15/2013 200 200,043
Lancaster MHR for Westwood Park Apartments 1985, 3.50%(a)...................... 12/1/2007 600 602,036
Los Angeles Community Redevelopment Agency for Baldwin Hills, 3.45%(a)......... 12/1/2014 400 401,325
Los Angeles Community Redevelopment for Promenade Towers Series 1989,
3.25%(a)..................................................................... 4/1/2009 400 402,549
Los Angeles USD TRAN, 4.50%(a)................................................. 7/3/1996 500 520,847
Los Angeles Housing Authority Malibu Meadows Project Series 91-A, 3.55%(a)..... 12/1/2015 500 501,739
Los Angeles MTA General Revenue Union Station Gateway Project Series 1995,
3.60%(a)..................................................................... 7/1/2025 600 602,067
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 48
RESERVE TAX-EXEMPT TRUST--CALIFORNIA FUND
STATEMENT OF NET ASSETS--MAY 31, 1996--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Orange County Apartment Development Revenue Bonds Issue A of 1991, the Lakes
Project 3.45%, Letter of Credit with Citibank(a)............................. 12/1/2006 $400 $ 401,334
Orange County Sanitation District Capital Improvement Program 1990-92, 3.50%
Letter of Credit with National Westminster(a)................................ 8/1/2015 200 200,038
Pasadena IDA for Rose Bowl Improvement Project, 3.65%(a)....................... 12/1/2011 600 602,095
Pico Rivera Community Redevelopment Agency for Rainer Fund Crossroads Plaza
Project, 3.35%(a)............................................................ 12/1/2010 600 601,580
San Bernadino IDA for Gate City, 3.85%(a)...................................... 3/1/2005 300 300,063
San Diego TAN, 4.75%........................................................... 7/3/1996 400 417,605
San Dimas Station I Project, 5.60%(a).......................................... 12/1/2005 400 401,664
San Francisco Yerba Buena Gardens, 3.50%(a).................................... 9/1/2006 200 200,687
San Francisco USD Trans, 4.50%................................................. 7/25/1996 500 519,651
San Jose CP Pre-refunded RAW, 7.90%(a)......................................... 5/1/2010 250 266,130
San Mateo Redevelopment Agency Bridge & Water Pump Station Pre-refunded Bonds,
7.70%(a)..................................................................... 8/1/2001 250 263,090
Santa Ana HDC for Mercury S&L, 3.875%(a)....................................... 11/1/2005 400 402,834
Santa Clara Electric Revenue Bonds Series 85C, 3.40%(a)........................ 7/1/2010 400 401,303
Southern California Public Power Transmission Pre-refunded Project,
7.875%(a).................................................................... 7/1/2018 500 533,220
Union City MHR for Skylark Apartments, 3.50%(a)................................ 11/1/2007 100 100,196
Upland MHR Community Redevelopment Bonds Series B for Northwood Project,
4%(a)........................................................................ 3/1/2014 100 101,011
Vista MHR for Shadow Ridge Apartments Project, 3.15%(a)........................ 5/1/2005 $500 $ 501,420
-----------
Total California Fund Investments (99.99%) (Cost $12,506,805).................. 12,610,509
Other assets, less liabilities (.01%).......................................... 1,460
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 12,611,969 shares of beneficial interest of $.001 par
value outstanding............................................................ $12,611,969
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1996. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
RESERVE TAX-EXEMPT TRUST--NEW JERSEY FUND
STATEMENT OF NET ASSETS--MAY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Cranbury BAN, 3.39%............................................................ 8/30/1996 $ 600 $ 604,763
East Orange BAN, 4.625%........................................................ 12/12/1996 1,191 1,220,380
East Orange Unlimited Tax GOB, 4.90%(a)........................................ 8/1/1996 500 509,259
East Rutherford TAN, 4.25%..................................................... 4/25/1997 1,000 1,008,832
Emerson County BAN, 3.57%...................................................... 2/06/1997 300 303,755
Essex County Improvement Authority GOB, 3.40%(a)............................... 12/01/2025 2,000 2,006,574
Essex County TAN, 4%(a)........................................................ 8/19/1996 1,000 1,015,793
Jersey City GOB, 4.90%(a)...................................................... 12/15/1996 250 257,739
Jersey City BAN, 4.25%......................................................... 9/27/1996 1,000 1,024,376
Jersey City BAN, 4.75%......................................................... 9/27/1996 500 517,278
Livingston BAN, 3.78%.......................................................... 6/7/1996 461 478,144
Millburn Township BAN, 3.79%................................................... 12/27/1996 646 657,895
Mount Olive BAN, 4%............................................................ 10/15/1996 470 482,159
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.50%(a)................ 12/1/2027 1,200 1,203,759
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.55%(a)................ 12/1/2027 1,100 1,103,495
New Jersey Economic Recovery Notes, 3.75%(a)................................... 8/1/2008 900 903,207
New Jersey EDA for Economic Growth Bond Series F, 3.40%(a)..................... 8/1/2014 800 802,685
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.50%(a)................ 12/1/2027 1,200 1,203,759
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 49
RESERVE TAX-EXEMPT TRUST--NEW JERSEY FUND
STATEMENT OF NET ASSETS--MAY 31, 1996--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
New Jersey EDA for St. Peters School Series 1995, 3.55%(a)..................... 1/1/2010 $1,260 $ 1,264,362
New Jersey EDA for Volvo of American Corp, 4.279%(a)........................... 12/1/2004 3,500 3,512,647
New Jersey GOB Series 86, 6.50%................................................ 8/15/1996 750 769,136
New Jersey HCF Hospital Capital Asset, 3.45%(a)................................ 7/01/2035 400 401,321
New Jersey HEF Higher Trust Fund Revenue Bonds Series 1995A, 5.125%(a)......... 9/1/1996 545 554,094
New Jersey Sports Expo Authority Series 92C, 3.50%(a).......................... 9/01/2024 3,000 3,025,537
New Jersey Transportation Series 1996A CP, 3.50%(a)............................ 6/12/1996 1,000 1,004,016
New Jersey Transportation Series 1996C CP, 3.75%(a)............................ 6/14/1996 2,700 2,704,980
New Jersey Turnpike Authority General Series 91D, 3.25%(a)..................... 1/01/2018 3,300 3,343,341
North Caldwell BAN, 3.79%...................................................... 6/14/1996 607 629,390
Pennington Borough BAN 4.15%................................................... 6/27/1996 817 825,237
Port Authority of New York and New Jersey Special Obligation Revenue,
3.60%(a)..................................................................... 5/1/2019 3,200 3,210,195
Princeton BAN, 3.58%........................................................... 6/14/1996 400 413,853
Puerto Rico Industrial, Medical, Environmental PCR, 3.55%(a)................... 12/1/12015 300 301,049
Raritan Township BAN, 3.875%................................................... 6/20/1996 625 636,091
Wayne Township GOB, 6.60%...................................................... 8/01/1996 200 205,416
-----------
Total New Jersey Fund Investments (92.88%) (Cost $37,778,795).................. 38,104,517
Other assets, less liabilities, (7.12%)........................................ 2,921,284
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 41,025,801 shares of beneficial interest of $.001 par
value outstanding............................................................ $41,025,801
==========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1996. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SECURITY TYPE ABBREVIATIONS:
<TABLE>
<S> <C> <C>
BAN -- Bond Anticipation Notes
CP -- Certificate of Participation
DAI -- Development Authority Industrial Development
Refunding Bonds
EDA -- Economic Development Authority Revenue Bonds
ERN -- Economic Recovery Notes
ERD -- Energy Research and Development Authority
GDB -- Government Development Bonds
GOB -- General Obligation Bonds
HCF -- Health Care Facilities Revenue Bonds
HDC -- Housing Development Corporation Bonds
HEF -- Health and Educational Facilities Revenue Bonds
HFA -- Health Facilities Authority Revenue Bonds
HFR -- Housing Finance Agency Revenue Bonds
IDA -- Industrial Development Authority Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
MHR -- Multifamily Housing Revenue Bonds
MTA -- Metropolitan Transportation Authority
PCR -- Pollution Control Revenue Bonds
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
TAN -- Tax Anticipation Notes
TRAN -- Tax & Revenue Anticipation Notes
USD -- Unified School District
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 50
RESERVE TAX-EXEMPT TRUST ("TRUST")
STATEMENT OF ASSETS AND LIABILITIES--MAY 31, 1996
<TABLE>
<CAPTION>
MASSACHUSETTS
FUND
-------------
<S> <C>
ASSETS:
Investments, at value (identified cost -- $8,387,784)..................................... $ 8,449,766
Cash...................................................................................... 506,184
-------------
Total Assets............................................................................ 8,955,950
-------------
LIABILITIES:
Accrued expenses.......................................................................... 587
-------------
Total Liabilities....................................................................... 587
-------------
NET ASSETS.................................................................................. $ 8,955,363
==============
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.001 par value, unlimited number of shares authorized..... $ 8,955
Paid-in capital in excess of par.......................................................... 8,946,408
-------------
NET ASSETS -- Equivalent to $1.00 per share based on 8,955,363 shares of beneficial interest
outstanding............................................................................... $ 8,955,363
==============
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES--MAY 31, 1996
<TABLE>
<CAPTION>
NEW JERSEY
FUND
-------------
<S> <C>
ASSETS:
Investments, at value (identified cost -- $37,778,795).................................... $38,104,517
Cash...................................................................................... 2,924,848
-------------
Total Assets............................................................................ 41,029,365
-------------
LIABILITIES:
Accrued expenses.......................................................................... 3,564
-------------
Total Liabilities....................................................................... 3,564
-------------
NET ASSETS.................................................................................. $41,025,801
==============
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.001 par value, unlimited number of shares authorized..... $ 41,026
Paid-in capital in excess of par.......................................................... 40,984,775
-------------
NET ASSETS -- Equivalent to $1.00 per share based on 41,025,801 shares of beneficial
interest outstanding...................................................................... $41,025,801
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 51
STATEMENTS OF OPERATIONS--YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
----------------------------------------------------------------------
NEW YORK CONNECTICUT MASSACHUSETTS CALIFORNIA NEW JERSEY
FUND FUND FUND FUND FUND
---------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME (Note 1)......................... $5,792,951 $ 1,114,793 $ 378,290 $ 374,650 $1,118,099
---------- ----------- ------------- ---------- ----------
EXPENSES (Note 2)
Management fee................................. 775,398 155,027 53,512 50,807 154,727
Shareholder servicing, administration and
general office expenses...................... 342,572 67,381 21,737 19,346 66,449
Distribution assistance (Note 3)............... 299,169 45,547 2,822 20,231 61,458
Equipment expense.............................. 55,582 12,123 4,280 3,799 10,796
Professional fees.............................. 47,201 12,337 5,666 5,123 10,800
Occupancy costs................................ 33,052 7,085 2,526 2,210 6,356
Stationery, printing and supplies.............. 37,863 6,698 1,934 1,682 7,293
Trustee fees................................... 4,409 918 343 305 813
Other expenses................................. 7,970 2,939 2,435 1,242 2,154
---------- ----------- ------------- ---------- ----------
Total Expenses............................... 1,603,215 310,055 95,255 104,745 320,846
---------- ----------- ------------- ---------- ----------
Less: Management fees and other expenses
voluntarily waived by Investment Manager..... (5,399)
---------- ----------- ------------- ---------- ----------
Net Expenses................................... 1,603,215 310,055 89,856 104,745 320,846
---------- ----------- ------------- ---------- ----------
NET INVESTMENT INCOME............................ $4,189,736 $ 804,738 $ 288,434 $ 269,905 $ 797,253
========== ========== ============ ========= ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 52
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
------------------------------ -------------------------------------------------------------
NEW YORK FUND CONNECTICUT FUND MASSACHUSETTS FUND
------------------------------ ----------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1996 MAY 31, 1995 MAY 31, 1996 MAY 31, 1995
------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends
(Note 1)................... $ (4,189,736) $ (3,792,798) $ (804,738 ) $ (971,157) $ (288,434 ) $ (352,318 )
------------- ------------- ------------ ------------- ------------ ------------
FROM CAPITAL SHARE
TRANSACTIONS
(at net asset value of $1
per share):
Net proceeds from sale of
shares................... 636,980,296 592,052,007 98,890,288 114,340,212 44,175,742 58,983,470
Net asset value of shares
issued on reinvestment of
dividends................ 4,189,736 3,792,798 804,738 971,157 288,434 352,318
------------- ------------- ------------ ------------- ------------ ------------
Subtotal................. 641,170,032 595,844,805 99,695,026 115,311,369 44,464,176 59,335,788
Cost of shares
redeemed............... (668,621,594) (591,325,629) (91,519,680 ) (217,378,001) (45,677,798 ) (63,991,145 )
------------- ------------- ------------ ------------- ------------ ------------
Increase (decrease) in net
assets derived from
capital share
transactions............. (27,451,562) 4,519,176 8,175,346 (102,066,632) (1,213,622 ) (4,655,357 )
NET ASSETS:
Beginning of year............ 152,905,968 148,386,792 26,625,958 128,692,590 10,168,985 14,824,342
------------- ------------- ------------ ------------- ------------ ------------
End of year.................. $ 125,454,406 $ 152,905,968 $34,801,304 $ 26,625,958 $ 8,955,363 $10,168,985
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
---------------------------------------------------------------------
CALIFORNIA FUND NEW JERSEY FUND
-------------------------------- ---------------------------------
OCTOBER 17, 1994 JUNE 21, 1994
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) OPERATIONS)
YEAR ENDED THROUGH YEAR ENDED THROUGH
MAY 31, 1996 MAY 31, 1995 MAY 31, 1996 MAY 31, 1995
------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM INVESTMENT
OPERATIONS:
Net investment income paid to shareholders as
dividends (Note 1).............................. $ (269,905 ) $ (142,286) $ (797,253) $ (296,207)
------------ ---------------- ------------- ----------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares................ 51,508,091 29,447,705 189,336,696 74,669,862
Net asset value of shares issued on reinvestment
of dividends.................................. 269,905 142,286 797,253 296,207
------------ ---------------- ------------- ----------------
Subtotal...................................... 51,777,996 29,589,991 190,133,949 74,966,069
Cost of shares redeemed....................... (50,253,639 ) (18,502,379) (170,715,398) (53,358,819)
------------ ---------------- ------------- ----------------
Increase in net assets derived from capital share
transactions and from investment operations..... 1,524,357 11,087,612 19,418,551 21,607,250
NET ASSETS:
Beginning of period............................... 11,087,612 0 21,607,250 0
------------ ---------------- ------------- ----------------
End of period..................................... $12,611,969 $ 11,087,612 $ 41,025,801 $ 21,607,250
============ ================= ============ =================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE> 53
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trusts are registered under the Investment Company Act of 1940 as
nondiversified, open-end management investment companies. The policies
summarized below are consistently followed in the preparation of their
financial statements in conformity with generally accepted accounting
principles.
A. The Trust and NY Trust shares of beneficial interest authorized are
unlimited. The Trust's shares are divided into five series, Connecticut Fund,
Interstate Fund, Massachusetts Fund, California Fund and New Jersey Fund.
These financial statements and notes apply only to the Connecticut,
Massachusetts, California and New Jersey Funds of Reserve Tax-Exempt Trust
and to the New York Fund of Reserve New York Tax-Exempt Trust.
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Trusts use amortized cost to value each Fund, by which investments are
valued at cost and the difference between the cost of each instrument and its
value at maturity is accrued into income on a straight line basis over the
number of days to maturity, irrespective of intervening changes in interest
rates or market values of investments. The maturity of floating or variable
rate instruments in which the Trusts may invest will be deemed to be, for
floating rate instruments (1) following, and for variable rate instruments
the longer of (1) or (2) following: (1) the notice period required before the
Fund is entitled to receive payment of the principal amount of the
instrument; (2) the period remaining until the instrument's next rate
adjustment, for purposes of Rule 2a-7 and for computing each portfolio's
average weighted life to maturity.
C. It is the Trusts' policy to comply with the requirements of Subchapter M
of the Internal Revenue Code and to distribute all income to its
shareholders. Accordingly, no Federal income tax provision is required.
D. Investments are recorded as of the date of their purchase and sale.
Interest income is determined on the basis of interest accrued, premium
amortized, and discount accreted.
E. Net investment income on investments is distributed to shareholders daily
and automatically reinvested in additional shares.
F. Each Fund is charged only for its direct or allocated (in proportion to
net assets or number of shareholder accounts) share of expenses.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Trusts' investments,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees from each Fund at
an annual rate of .50% of the first $500 million, .475% of the next $500
million, .45% of the next $500 million, .425% of the next $500 million and
.40% of any excess over $2 billion of the average daily closing net assets.
Also, under the current Service Agreement, RMCI was reimbursed $528,648 (New
York Fund), $109,481 (Connecticut Fund), $38,921 (Massachusetts Fund),
$33,708 (California Fund) and $104,660 (New Jersey Fund) during the year
ended May 31, 1996 for expenditures made on behalf of the Trusts' for
personnel, office space and equipment and shareholder accounting and
administrative services, to conduct the Trusts' business. The manager waived
management fees and expenses of $5,399 on the Massachusetts Fund. At May 31,
1996 the New York, Connecticut, Massachusetts, California and New Jersey
Funds, had accrued expenses of $10,795, $2,852, $587, $1,065 and $3,564,
respectively, due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, each Trust will make payments of up to .20%
per annum of the average net asset value of the Trust qualified shareholder
accounts as to which the payee or RMCI has rendered assistance in
distributing its shares.
25
<PAGE> 54
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CONNECTICUT, MASSACHUSETTS,
CALIFORNIA AND NEW JERSEY FUNDS) ("TRUST")
(THE NY TRUST AND TRUST ARE COLLECTIVELY REFERRED TO AS "TRUSTS")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those
estimates.
5. INVESTMENT CONCENTRATION
The New York, Connecticut, Massachusetts, California and New Jersey Funds
invest substantially all of their assets in portfolios of tax-exempt debt
obligations primarily consisting of issuers of each of the respective states.
The issuers' abilities to meet their obligations may be affected by economic,
regional or political developments. In order to reduce the credit risk
associated with such factors, 63.26%, 83.57%, 90.30%, 80.01% and 74.34% of
the New York, Connecticut, Massachusetts, California and New Jersey Funds'
investments, respectively, were backed by letters of credit, bond insurance
of financial institutions and financial guaranty assurance agencies.
6. COMPONENTS OF NET ASSETS
At 5/31/96, the following funds had these components of net assets:
<TABLE>
<CAPTION>
NEW YORK CONNECTICUT CALIFORNIA
------------ ----------- -----------
<S> <C> <C> <C>
Par Value................................................... $ 125,454 $ 34,801 $ 12,612
Paid-in-Capital............................................. 125,328,952 34,766,503 12,599,357
----------- ---------- ----------
Net Assets.................................................. $125,454,406 $34,801,304 $12,611,969
----------- ---------- ----------
</TABLE>
---------------------
FEDERAL TAX INFORMATION
The dividends distributed by each Fund are exempt interest dividends for Federal
tax purposes.
26
<PAGE> 55
RESERVE TAX-EXEMPT TRUST
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements Included in Part A
(1) Financial Highlights
Financial Statements Included in Part A and Part B
(1) Statements of Net Assets at May 31, 1996
(2) Statements of Operations for the year ended May 31, 1996
(3) Statements of Changes in Net Assets for the years ended
May 31, 1995 and 1996
(4) Notes to Financial Statements
(5) Report of Independent Accountants.
(b) Exhibits
(1) Declaration of Trust was filed as an exhibit to Registrant's
Initial Registration Statement dated March 23, 1983*
(2) Bylaws were filed as an exhibit to Registrant's Initial
Registration Statement dated March 23, 1983.
Amendment No. 2 filed as an exhibit to Post-Effective
Amendment No. 15 dated July 31, 1990*
(3) Not Applicable
(4) Not Applicable
(5) Form of Investment Management Agreement filed as an Exhibit
to Post-Effective Amendment No. 14 dated November 1, 1989*
(6) Form of Distribution Agreement and Plan of Distribution
filed as an exhibit to Registrant's Pre-Effective
Amendment No. 1 dated July 22, 1983. Amendment to
Plan of Distribution filed as exhibit to
Post-Effective Amendment No. 11 dated August 1, 1988*
(7) Pension Plan of Reserve Management Corporation was filed as
an exhibit to Post-Effective Amendment No. 9 dated
September 30, 1986; Amendments to Pension Plan filed
as an exhibit to Post-Effective Amendment No. 45 of
The Reserve Fund (File No. 811-2033) dated July 31,
1989*
(8) Custodian Agreement with Chemical Bank filed as an exhibit
to Registrant's Initial Registration Statement dated
March 23, 1983*
(9) (a) Form of Service Agreement filed as an exhibit to
Post-Effective Amendment No. 14 dated November 1,
1989; Transfer Agent Agreement with First Wisconsin
Trust Company filed as an exhibit to Post-Effective
Amendment No. 15 dated July 31, 1990*
(10) Opinion of counsel**
(11) Consent of auditors**
(12) Not Applicable
(14) Not Applicable
(15) See item No. 6*
(16) Schedule of computation of each performance quotation
provided in Registration Statement
(17) Powers of Attorney**
(18) Not Applicable
- -----------------------
* Incorporated by reference
**Filed herewith
<PAGE> 56
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class at June 30, 1996
-------------- ------------------------
<S> <C>
Interstate Fund 50,923
Connecticut Tax-Exempt Fund 4,202
California Tax-Exempt Fund 778
Massachusetts Tax-Exempt Fund 674
New Jersey Tax-Exempt Fund 4,186
</TABLE>
Item 27. Indemnification
Each Trustee, officer, employee or agent of the Registrant, and any
person who has served at its request as a Director, Trustee, officer or
employee of another business entity, shall be entitled to be indemnified
by the Registrant to the fullest extent permitted by the laws of the
Commonwealth of Massachusetts, subject to the provisions of the
Investment Company Act of 1940 and the rules and regulations thereunder.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of any expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such Trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
<TABLE>
<CAPTION>
Name Position with the Adviser Other Businesses
- ---- ------------------------- ----------------
<S> <C> <C>
Henry B.R. Brown President, Treasurer and President, Treasurer and Director of
Director Director of Reserve Management
Corporation of the same address as the
Trust; Director and Treasurer of Transfer
Agent Inc. 5 Cornwall St., N.W., Leesburg,
Virginia 22075.
Bruce R. Bent Vice President, Secretary Vice President, Secretary and Director of
and Director Reserve Management Corporation and
Director of Resrv Partners, Inc. both of the
same address as the Trust.
</TABLE>
Item 29. Principal Underwriters
(a) Resrv Partners, Inc., a principal underwriter of the Registrant,
also acts as principal underwriter to The Reserve Fund, Reserve
Institutional Trust, Reserve New York Tax-Exempt Trust and Reserve
Private Equity Series.
<PAGE> 57
(b) Pacific Global Fund Distributors, Inc. ("Pacific Global") also acts as a
principal underwriter of Reserve Tax-Exempt Trust and Pacific Advisors
Fund Inc.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Pacific Global with Registrant
- ------------------- ------------------------ -------------------------
<S> <C> <C>
George A. Henning Chairman None
215 North Marengo Ave.
Suite 115
Pasadena, CA 91101
Kathleen Scott President None
215 North Marengo Ave.
Suite 115
Pasadena, CA 91101
Thomas H. Hanson Executive Vice President None
1900 State Street
Suite H
Santa Barbara, CA 93101
Eileen P. Hannemann Financial Principal None
600 Hampshire Road
Westlake Village, CA 91361
</TABLE>
Item 30. Location of Accounts and Records
All records required to be maintained by Section 31(a) of the 1940
Act and the Rules promulgated thereunder are maintained at 810 Seventh Avenue,
New York, NY 10019 except those relating to receipts and deliveries of
securities, which are maintained by the Registrant's Custodian.
Item 31. Management Services
See "Investment Management, Distribution, Service and Custodian
Agreements" in Part B.
Item 32. Undertakings
Not Applicable
<PAGE> 58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment to its Registration Statement meets all of the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933 and Registrant has duly caused this Post-Effective Amendment No. 29 to
its Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of New York and State of New York, on
the 31st day of October, 1996.
/s/ Bruce R. Bent
----------------------------------------
Bruce R. Bent, President
Attest:
/s/ Marc C. Cozzolino
- -----------------------------------------
Marc C. Cozzolino, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 29 to its Registration Statement has been below
signed by the following persons in the capacities and on the dates indicated.
/s/ Bruce R. Bent Date October 31, 1996
- ----------------------------------------------- -------------------
Bruce R. Bent, President, Treasurer
and Board Member (principal executive,
operating and financial officer)
* Date
---------------------------------------------- --------------------
Edwin Ehlert Jr., Board Member
* Date
---------------------------------------------- --------------------
Henri W. Emmet, Board Member
* Date
---------------------------------------------- --------------------
Donald J. Harrington, Board Member
* Date
---------------------------------------------- --------------------
Niels W. Johnsen, Board Member
/s/ Marc C. Cozzolino Date October 31, 1996
- ---------------------------------------------------- --------------------
Marc C. Cozzolino, *Attorney-in-Fact
General Counsel
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description
- ----------- -----------
<S> <C>
1. Declaration of Trust of Registrant**
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. Form of Investment Management Agreement filed as an Exhibit
to Post-Effective Amendment No. 14 dated November 1, 1989*
6. (a) Form of Distribution Agreement between the
Registrant and Resrv Partners, Inc.**
(b) Form of Selected Dealer Agreement.**
7. Pension Plan of Reserve Management Corp. filed
as an exhibit to Post-Effective Amendment No., 32
of The Reserve Fund (File No. 2-36429);
amendments thereto filed as an exhibit to
Post-Effective Amendment No. 45 and all are
incorporated by reference
8. Form of Custodian Agreements between Registrant and
Custodial Trust Company**
9. Not Applicable
10. Opinion of Counsel
11. Consent of Auditors
12. Not Applicable
13. Form of Subscription Agreement between the Registrant
and Reserve Management Company, Inc. **
14. Not Applicable
15. Form of Service Plan **
16. Schedule of computation of each performance quotation provided in Registration Statement
17. Powers of Attorney
18. Not Applicable
</TABLE>
* To be filed by amendment
**Previously filed
<PAGE> 1
(THE RESERVE FUNDS LETTERHEAD)
Exhibit 10
October 31, 1996
Board of Trustees
Reserve Tax-Exempt Trust
810 Seventh Avenue
New York, New York 10019
Gentlemen:
I have acted as counsel to Reserve Tax-Exempt Trust a Massachusetts
business trust (the "Fund"), in connection with the registration of shares of
the Arizona Tax-Exempt, California Tax-Exempt, Connecticut Tax-Exempt, Florida
Tax-Exempt, Louisiana Tax-Exempt, Massachusetts Tax-Exempt, Michigan
Tax-Exempt, New Jersey Tax-Exempt, North Carolina Tax-Exempt, Ohio Tax-Exempt,
Tennessee Tax-Exempt, Virginia Tax-Exempt and Interstate Funds ("Portfolios")
with the Securities and Exchange Commission.
As counsel to the Fund, I have made such investigations and have examined
and relied upon the originals or copies, certified or otherwise identified to
my satisfaction, of such records, instruments, certificates, memoranda and
other documents as I have deemed necessary or advisable for the purposes of
this opinion.
1. The Fund has been duly incorporated and is validly existing under the
laws of Massachusetts.
2. To the best of my knowledge, no further approval, consent or other
order of the Board of Trustees is legally required in connection with
the organization of the Portfolios and the registration of their
shares.
3. To the best of my knowledge, the shares of the Portfolios, when
issued, will be legally issued, non-assessable and, when subscribed
to, fully paid.
I consent to the filing of this opinion as an exhibit to the Fund's
registration statement under the Securities Act of 1933.
Very truly yours,
/s/ Marc C. Cozzolino
------------------------
Marc C. Cozzolino
Counsel
<PAGE> 1
(COOPERS & LYBRAND LETTERHEAD)
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
-----------------------------------------------
We consent to the inclusion in this Post-Effective Amendment to the
Registration Statement on Form N-1A (File No. 2-82592) and in the Statement of
Additional Information of our report dated June 28, 1996, on our audits of the
financial statements and financial highlights of Reserve Tax-Exempt Trust.
We also consent to the reference to our firm under the caption "Financial
Highlights" in the prospectus.
COOPERS & LYBRAND L.L.P.
New York, New York
July 30, 1996
<PAGE> 1
Exhibit 17
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of
RESERVE TAX-EXEMPT TRUST, a Massachusetts business trust, does hereby
constitute and appoint Marc C. Cozzolino and William Goodwin, and each of them,
his true and lawful attorney and agent to do any and all acts and things and to
execute any and all instruments which said attorney and agent may deem
necessary or advisable; (i) to enable the said Trust to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission in respect thereof, in connection
with the registration under said Securities Act of the shares of beneficial
interest of said Trust (the "Securities"), including specifically, but without
limiting the generality of the foregoing, the power and authority to sign for
and on behalf of the undersigned the name of the undersigned as trustee of said
Trust to a Registration Statement or to any amendment thereto filed with the
Securities and Exchange Commission in respect of said Securities and to any
instrument or document filed as part of, as an exhibit to or in connection with
said Registration Statement or amendment; (ii) to enable said Trust to comply
with the Investment Company act of 1940, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission in respect thereof,
in connection with the registration under said Investment Company Act of the
Trust, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign for and on behalf of the undersigned
the name of the undersigned as trustee of said Trust to a Registration
Statement or to any amendment thereto filed with the Securities and Exchange
Commission in respect of said Trust and to any instrument or document filed as
part of, as an exhibit to or in connection with said Registration Statement or
amendment; and (iii) to register or qualify said Securities for sale and to
register or license said Trust as a broker or dealer in said Securities under
the securities or Blue Sky laws of all such states as may be necessary or
appropriate to permit therein the offering and sale of said Securities as
contemplated by said Registration Statement, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for and on behalf of the undersigned the name of the undersigned as
trustee of said Trust to any application, statement, petition, prospectus,
notice or other instrument or document, or to any amendment thereto, or to any
exhibit filed as a part thereof or in connection therewith, which is required
to be signed by the undersigned and to be filed with the public authority or
authorities administering said securities or Blue Sky laws for the purpose of
so registering or qualifying said Securities or registering or licensing said
Trust, and the undersigned does hereby ratify and confirm as his own act and
deed all that said attorney and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
21st day of September , 1994.
/s/ Edwin Ehlert Jr.
-----------------------------------------
Edwin Ehlert Jr., Board Member
/s/ Henri W. Emmet
-----------------------------------------
Henri W. Emmet, Board Member
/s/ Donald J. Harrington
-----------------------------------------
Donald J. Harrington, Board Member
/s/ Niels W. Johnsen
-----------------------------------------
Niels W. Johnsen, Board Member
