<PAGE> 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve New York Tax-Exempt
Trust -- New York Tax-Exempt Fund and Reserve Tax-Exempt Trust -- California,
Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds:
We have audited the accompanying statements of net assets of the Reserve New
York Tax-Exempt Trust -- New York Tax-Exempt Fund and the California,
Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds, (five of
the series constituting Reserve Tax-Exempt Trust) and the statement of assets
and liabilities of the Florida Tax-Exempt Fund as of May 31, 1997, and the
related statements of operations for the year then ended and the statements of
changes in net assets for each of the two years in the period then ended except
for the Florida Tax-Exempt Fund for which the period was from June 24, 1996
(commencement of operations) to May 31, 1997, 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, 1997, 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 the
Reserve New York Tax-Exempt Trust -- New York Tax-Exempt Fund and the
California, Connecticut, Florida, Massachusetts and New Jersey Tax-Exempt Funds
of Reserve Tax-Exempt Trust as of May 31, 1997, 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 27, 1997
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- ------------
<S> <C> <C> <C>
Bleecker HDC Terrace Apt Project S85, 3.85%(a)................................. 7/1/2015 $2,515 $ 2,532,168
Brockport CSD GOB, 5.375%...................................................... 6/15/1997 900 922,973
Buffalo RAN, 4.25%............................................................. 7/15/1997 1,000 1,024,051
Eagle Tax-Exempt Trust COP Series 1994C-2 Class A, 4.01%(a).................... 6/15/2018 3,000 3,051,512
Erie County RAN, 4.25%......................................................... 11/19/1997 2,000 2,051,014
Guilderland IDA for North Eastern Industrial Park Series 1993 A, 4%(a)......... 12/1/2008 3,600 3,613,468
Jefferson County IDA for Watertown Carthage, 3.75%(a).......................... 12/1/2012 3,500 3,511,507
Metropolitan Transportation Authority Commuter Facilities Revenue Bonds
Series 1991, 3.95%(a)...................................................... 7/1/2021 5,800 5,821,277
Monroe-Woodbury GOB, 5.625%.................................................... 5/15/1998 640 651,376
Montgomery County IDA for Service Merchandise Co., 3.75%(a).................... 12/31/2024 1,600 1,602,959
Nassau County BAN, 4.50%....................................................... 8/15/1997 2,000 2,066,924
New York City GOB, 3.75%(a).................................................... 8/1/2014 1,500 1,503,082
New York City GOB Fiscal 96 Series J2, 3.75%(a)................................ 2/15/2016 9,000 9,017,568
New York City GOB Custodial Receipts Series A31, 4%(a)......................... 7/2/2000 4,000 4,049,375
New York City GOB Fiscal 1994 Series A, 4%(a).................................. 8/1/2022 5,380 5,380,590
New York City GOB Series A, 4%(a).............................................. 8/1/2023 2,800 2,800,307
New York City GOB Series B, 3.85%(a)........................................... 8/15/2024 3,400 3,400,358
New York City GOB Series B1, 3.85%(a).......................................... 8/15/2024 8,000 8,000,844
</TABLE>
16
<PAGE> 2
RESERVE NEW YORK TAX-EXEMPT TRUST--NEW YORK TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- ------------
<S> <C> <C> <C>
New York City GOB Series B4, 4.20%(a).......................................... 8/15/2022 $ 700 $ 700,081
New York City GOB Series C4-97, 4%(a).......................................... 8/1/1997 1,000 1,000,110
New York City GOB Series C4-98, 4%(a).......................................... 8/1/1998 1,000 1,000,110
New York City GOB Series D, 3.85%(a)........................................... 2/1/2020 300 300,032
New York City GOB Series E4, 4%(a)............................................. 8/1/2021 1,000 1,000,110
New York City GOB Series E4, 4%(a)............................................. 8/1/2022 3,800 3,800,416
New York City GOB Series E5, 4%(a)............................................. 8/1/2010 1,000 1,000,110
New York City GOB Series E5, 4%(a)............................................. 8/1/2017 1,000 1,000,110
New York City GOB Series E5, 4%(a)............................................. 8/1/2019 1,000 1,000,110
New York City GOB Series E6, 4%(a)............................................. 8/1/2019 1,900 1,900,208
New York City GOB Fiscal 1994 Series E2, 4%(a)................................. 8/1/2020 2,000 2,000,219
New York City HDC for Carnegie Park Project Series A, 4.50%(a)................. 12/1/2016 1,410 1,410,176
New York City HDC for Columbus Green Project, 4.50%(a)......................... 12/1/2009 900 900,113
New York City IDA for Goodwill Project, 3.80%(a)............................... 3/1/2000 955 957,667
New York City IDA for Stroheim & Roman, 3.85%(a)............................... 12/1/2015 1,500 1,513,759
New York State ERD for Brooklyn Union Gas, 3.80%(a)............................ 12/1/2020 2,000 2,005,606
New York State ERD/PCR for LILCO Series 85B, 3.60%(a).......................... 3/1/2016 3,000 3,027,230
New York State ERD/PCR for Niagara Mohawk Power Plant, 4.20%(a)................ 7/1/2015 2,100 2,100,242
New York State ERD/PCR for Rochester Gas & Electric Corporation, 3.55%(a)...... 10/1/2014 3,000 3,009,337
New York State ERD/PCR for Rochester Gas & Electric R&D, 3.60%(a).............. 11/15/2015 3,000 3,005,283
New York State Job Development Authority Series F, 4.05%(a).................... 3/1/1999 495 496,758
New York State Local Government Assistance 1993A, 3.80%(a)..................... 4/1/2022 10,000 10,035,370
New York State Local Government Assistance Series B, 3.80%(a).................. 4/1/2025 3,900 3,913,901
North Hempstead BAN, 4.25%..................................................... 2/26/1998 4,287 4,348,117
Onondaga County IDR for Edgecomb Metals Project, 3.85%(a)...................... 11/1/2009 1,100 1,103,636
Onondaga County IDR for McLane Co. Project, 4.15%(a)........................... 11/1/2004 2,100 2,107,747
Onondaga County IDR for McLane Co. Project, 4.35%(a)........................... 11/1/2004 460 461,707
Onondaga County IDR for Pass and Seymour, Inc. Project, 3.55%(a)............... 6/15/1997 1,900 1,903,326
Oppenheim-Ephreta GOB, 5.125%.................................................. 6/15/1997 2,500 2,624,752
Oyster Bay BAN, 4%............................................................. 2/27/1998 675 682,178
Riverhead TAN, 4.25%........................................................... 6/26/1997 3,000 3,119,685
Roslyn BAN, 4%................................................................. 10/15/1997 2,600 2,651,801
Sands Point BAN, 3.80%......................................................... 11/20/1997 1,500 1,530,971
Suffolk County IDA for Target Rock Corporation Revenue Bonds, 3.75%(a)......... 2/1/2007 1,500 1,500,154
Suffolk County IDA for Satellite Transmission Systems, Inc., 4.05%(a).......... 11/1/2007 1,630 1,636,044
Syossett BAN, 4.25%............................................................ 7/18/1997 1,700 1,763,573
Syracuse BAN, 3.90%............................................................ 12/19/1997 2,000 2,036,838
Syracuse IDA for General Accident Insurance Co. Project, 3.80%(a).............. 12/1/2003 4,550 4,550,000
Triboro Bridge and Tunnel Authority Special Obligation Series 1994, 3.85%(a)... 1/1/2024 4,800 4,817,174
Yonkers IDA Civic Revenue Bonds for Consumers Union, 3.70%(a).................. 7/1/2019 1,400 1,403,823
Yonkers IDR for Consumers Union Facility, 3.70%(a)............................. 7/1/2021 4,500 4,512,291
------------
Total New York Fund Investments (98.47%) (Cost $149,922,624)................... 150,832,228
Other assets, less liabilities (1.53%)......................................... 2,347,856
------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 153,180,084 shares of beneficial interest of $.001 par
value outstanding............................................................ $153,180,084
============
</TABLE>
- ------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 3
RESERVE TAX-EXEMPT TRUST--CALIFORNIA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Anaheim COP, 3.70%(a).......................................................... 8/1/2019 $ 250 $ 252,888
California Community Development Authority Series A3, 3.65%(a)................. 5/15/2025 2,200 2,204,069
California HFA for Sutter Health Series 1990 B, 3.85%(a)....................... 3/1/2020 400 400,042
California Modesto Santa Clara Redding Public Power, 3.25%(a).................. 7/1/2022 300 300,855
California RAN, 3.80%.......................................................... 6/30/1997 400 401,403
California School District Cash Reserve Program Series A, 4.75%................ 7/2/1997 500 522,088
East Bay Municipal Water and Sewer Utility, 6%(a).............................. 6/1/1998 500 510,318
Foothill/Eastern Transportation Toll Road Revenue Bonds Series 95C, 3.70%(a)... 1/2/2035 1,000 1,003,467
Foothill/Eastern Transportation Toll Road Revenue Bonds, 3.75%(a).............. 1/2/2035 500 501,755
Grand Terrace HFA for Community Redevelopment Agency, 3.95%(a)................. 12/1/2011 1,300 1,303,807
Hemet MHR for Sunwest Resort Village, 4%(a).................................... 7/1/2006 1,500 1,510,570
Hermosa Beach EDA for Parking District Facility Project, 3.70%(a).............. 12/1/2023 2,000 2,005,444
Irvine Improvement Bond Assessment District 85, 3.70%(a)....................... 9/2/2011 2,000 2,000,203
Irvine Ranch PCR for Water District Election #282, 3.70%(a).................... 11/15/2013 500 500,051
Lancaster MHR for Westwood Park Apartments 1985, 3.70%(a)...................... 12/1/2007 500 501,766
Los Angeles Community Redevelopment Agency for Baldwin Hills, 3.80%(a)......... 12/1/2014 400 401,129
Los Angeles Community Redevelopment for Promenade Towers Series 1989,
3.85%(a)..................................................................... 4/1/2009 400 402,684
Los Angeles Custodial Receipts, 4%(a).......................................... 7/1/2005 1,290 1,309,657
Los Angeles Housing Authority Malibu Meadows Project Series 91-A, 3.95%(a)..... 12/1/2015 200 200,735
Los Angeles IDA for International Airport Authority, 4%(a)..................... 12/1/2025 1,000 1,000,110
Los Angeles USD TRAN, 4.50%.................................................... 6/30/1997 500 520,970
Los Angeles Waste-Water Bond, 8.125%(a)........................................ 11/1/1997 500 522,705
Orange County Apartment Development Revenue Bonds Issue A of 1991, the Lakes
Project 3.80%, Letter of Credit with Citibank(a)............................. 12/1/2006 1,000 1,003,568
Orange County Sanitation District Capital Improvement Program 1990-92, 3.75%
Letter of Credit with National Westminster(a)................................ 8/1/2015 200 200,021
Pasadena IDA for Rose Bowl Improvement Project, 3.70%(a)....................... 12/1/2011 600 602,089
Pico Rivera Community Redevelopment Agency for Rainer Fund Crossroads Plaza
Project, 3.75%(a)............................................................ 12/1/2010 700 702,016
Puerto Rico GOB, 3.60%......................................................... 6/12/1997 1,000 1,005,326
Redlands COP, 3.80%(a)......................................................... 9/1/2015 1,000 1,003,536
San Bernadino HFR for Alta Park Project, 4%(a)................................. 5/1/2006 500 501,849
San Bernadino IDA for Gate City, 4.45%(a)...................................... 3/1/2005 200 200,024
San Francisco HFR for Yerba Buena Gardens, 3.75%(a)............................ 9/1/2006 1,000 1,003,474
San Joaquin USD TRAN, 4.50%.................................................... 1/15/1998 1,000 1,033,515
San Jose HFR Redevelopment Agency, 3.80%(a).................................... 7/1/2026 1,700 1,705,878
San Mateo USD TRAN, 4.50%...................................................... 7/1/1997 500 520,922
Santa Clara Electric Revenue Bonds Series 85C, 3.80%(a)........................ 7/1/2010 400 401,414
Santa Clara El Cammino Hospital District, 3.75%(a)............................. 8/1/2015 200 200,681
Union City MHR for Skylark Apartments, 4%(a)................................... 11/1/2007 1,200 1,202,398
Upland MHR Community Redevelopment Bonds Series B for Northwood Project,
4.45%(a)..................................................................... 3/1/2014 300 303,174
Vista MHR for Shadow Ridge Apartments Project, 3.90%(a)........................ 5/1/2005 800 802,828
-----------
Total California Fund Investments (99.09%) (Cost $30,495,520).................. 30,669,429
Other assets, less liabilities (.91%).......................................... 282,967
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 30,952,396 shares of beneficial interest of $.001 par
value outstanding............................................................ $30,952,396
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 4
RESERVE TAX-EXEMPT TRUST--CONNECTICUT TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Beacon Falls BAN, 4.25%........................................................ 10/23/1997 $1,000 $ 1,027,880
Connecticut DAI for Allen Group Inc., 3.80%(a)................................. 2/1/2013 1,400 1,404,664
Connecticut DAI for Conco Medical Co. Project Series 85, 3.85%(a).............. 11/1/2005 700 702,477
Connecticut DAI for General Accident Insurance Co., 3.80%(a)................... 12/1/2013 1,700 1,700,000
Connecticut DAI for Martin Brower Corp. Series 1985, 3.65%(a).................. 5/1/2005 170 170,577
Connecticut DAI for Regional YMCA Project, 4.65%(a)............................ 6/1/2008 550 551,648
Connecticut DAI for Trudy Corporation Project, 3.75%(a)........................ 9/1/2009 600 601,973
Connecticut DAI for Zotos International Project, 4.05%(a)...................... 12/1/2004 1,655 1,660,876
Connecticut Development Authority Health Care Revenue Bonds for
Independent Living Project 1990 Series, 3.70%(a)........................... 7/1/2015 1,945 1,951,771
Connecticut Development Authority PCR for Central Vermont Public
Service, 3.55%(a).......................................................... 12/1/2015 1,400 1,404,357
Connecticut Development Authority PCR for Connecticut Light and
Power Project Series 1993, 3.80%(a)........................................ 9/1/2028 1,300 1,304,668
Connecticut Development Authority PCR for Western Massachusetts
Electric Co. Series 1993A, 3.75%(a)........................................ 9/1/2028 1,700 1,705,987
Connecticut HEF for Charlotte Hospital Series B, 3.60%(a)...................... 7/1/2010 600 602,026
Connecticut HEF for Kingswood Oxford School Issue Series A, 4.65%(a)........... 2/1/2009 490 491,998
Connecticut HEF for New Haven Hospital RAW Series E, 3.80%(a).................. 6/1/2012 500 500,000
Connecticut HEF for Pomfret School Issue Series A, 3.60%(a).................... 7/1/2024 1,385 1,388,738
Connecticut HFA BDS Project, 3.80%, (a)........................................ 5/15/2018 1,400 1,402,718
Connecticut State GOB, 4.75%................................................... 8/15/1997 500 508,004
Connecticut State GOB, 6%...................................................... 3/1/1998 1,000 1,032,975
Connecticut State GOB, 3.90%(a)................................................ 5/15/2014 1,500 1,500,321
Connecticut State Special Assessment Unemployment Compensation
RAW Series C, 3.90%(a)..................................................... 11/15/2001 1,500 1,524,564
Connecticut State Special Assessment Unemployment Compensation
RAW Series 1993B Pre-refunded, 7.20%(a).................................... 2/15/1998 460 489,183
Connecticut State Special Tax Transportation Infrastructure 2nd Lien
Revenue Bonds, 3.85%(a).................................................... 12/1/2010 1,570 1,575,605
Hartford Redevelopment Agency MHR for Underwood Towers Project,
3.65%(a)................................................................... 6/1/2020 2,100 2,107,223
New Canaan BAN, 3.75%.......................................................... 3/10/1998 1,000 1,011,025
Puerto Rico Industrial, Medical and Environmental Higher Education Facility
Authority, 4.05%(a).......................................................... 12/1/2015 400 401,454
Puerto Rico Industrial, Medical, and Environmental RAW for Reynolds Metals,
3.80%(a)..................................................................... 9/1/2013 1,200 1,211,524
Puerto Rico GOB, 3.60%......................................................... 6/12/1997 2,000 2,010,652
Puerto Rico GOB, 3.85%......................................................... 6/19/1997 590 590,871
Simsbury GOB, 4.60%............................................................ 1/15/1998 410 419,661
Tolland BAN, 3.70%............................................................. 6/12/1997 650 673,340
Windsor Locks BAN, 3.90%....................................................... 10/15/1997 1,000 1,001,490
Wollcott BAN, 4.25%............................................................ 8/13/1997 704 728,535
-----------
Total Connecticut Fund Investments (105.56%) (Cost $35,145,207)................ 35,358,785
Other liabilities, less assets, (-5.56%)....................................... (1,862,282)
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 33,496,503 shares of beneficial interest of $.001 par
value outstanding............................................................ $33,496,503
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 5
RESERVE TAX-EXEMPT TRUST--FLORIDA TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- --------------------------------------------------------------------------------- --------- -------------- ----------
<S> <C> <C> <C>
FLORIDA -- 82.47%
Boca Raton IDA for Parking Garage Project, 4.325%(a)........................... 12/1/2014 $200 $ 200,024
Broward MHR for Welleby Apartment Project Series 1984, 4%(a)................... 12/1/2006 200 200,736
Collier IDA for Retirement Rental Housing Revenue Bonds HFA, 3.95%(a).......... 12/1/2015 100 100,362
Dade IDA for Aviation Authority Facilities Series 84A, 4.30%(a)................ 10/1/2009 100 100,314
Dade IDA for Dolphin Stadium Project, 3.95%(a)................................. 1/1/2016 300 301,095
Dade HFA for Hospital Revenue Bonds for Miami Children's Hospital Project,
3.85%(a)..................................................................... 3/1/2025 200 200,570
Duval HFA for Lakes of Mayport Apartment Project, 4%(a)........................ 12/1/2009 200 200,744
Florida MHR for Oaks at Mill Creek Series 85, 3.95%(a)......................... 11/1/2007 200 200,578
Hillsborough IDA for Tampa Electric Company Project, 4.15%(a).................. 9/1/2025 300 301,050
Jacksonville IDR for Coastal Islands Project, 4.05%(a)......................... 8/1/2008 180 180,020
Lee IDA For Charter Glade, 4.10%(a)............................................ 8/1/2007 200 200,749
Manatee PCR for Florida Power and Light, 3.95%(a).............................. 9/1/2024 200 200,022
Palm Beach PCR for Water and Sewer Project, 4.05%(a)........................... 10/1/2011 200 200,022
Putnam PCR for Florida Power and Light, 3.95%(a)............................... 9/1/2024 100 100,011
Port St. Lucie PCR for Florida Power and Light, 3.75%(a)....................... 1/1/2011 200 200,658
Tampa Occupational License Tax Bonds, 3.90%(a)................................. 5/1/2027 200 200,571
University of North Florida Capital Improvement Project, 3.90%(a).............. 11/1/2024 300 301,103
CHICAGO -- 2.43%
Chicago O'Hare International Airport American Airlines Series 94, 4.05%(a)..... 12/1/2017 100 100,011
LOUISIANA -- 2.43%
LA Offshore Terminal Authority, 4.05%(a)....................................... 9/1/2008 100 100,011
MICHIGAN -- 2.46%
Michigan Strategic Fund for Detroit Edison Company Series 95C, 3.05%(a)........ 9/1/2030 100 100,996
----------
Total Florida Fund Investments (89.79%) (Cost $3,680,000)........................ 3,689,647
Other assets, less liabilities, (10.21%)......................................... 419,737
----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 4,109,384 shares of beneficial interest of $.001 par value
outstanding.................................................................... $4,109,384
=========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 6
RESERVE TAX-EXEMPT TRUST--MASSACHUSETTS TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ----------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Arlington GOB, 6.30%......................................................... 8/15/1997 $315 $ 325,919
Billerica GOB, 5.85%......................................................... 10/15/1997 345 350,187
Boston Water and Sewer Commission Revenue Bonds 1994A, 3.80%(a).............. 11/1/2024 200 200,693
Chelmsford GOB, 6.90%........................................................ 7/15/1997 100 103,018
Dennis GOB, 4.50%............................................................ 3/1/1998 470 478,244
Dighton-Rehoboth Regional School District GOB, 6.50%......................... 6/1/1998 190 194,653
Framingham IDA for Perrini Corp., 4.05%(a)................................... 9/30/2005 300 301,112
Hingham BAN, 4%.............................................................. 12/19/1997 300 306,105
Massachusetts, Municipal Wholesale Electric Series 1994 C, 3.75%(a).......... 7/1/2019 300 301,042
Massachusetts Dedicated Income Tax Bonds Series B, 4%(a)..................... 12/1/1997 800 800,087
Massachusetts Dedicated Income Tax Bonds Series E, 4%(a)..................... 12/1/1997 100 100,010
Massachusetts HEF for Endicott College Series A, 3.75%(a).................... 10/1/2011 400 401,411
Massachusetts HEF for Clark University, 3.80%(a)............................. 12/1/2004 100 100,349
Massachusetts HEF for Boston University Series H, 3.85%(a)................... 12/1/2015 400 400,802
Massachusetts HEF for Harvard University, 3.65%(a)........................... 2/1/2016 487 488,694
Massachusetts HEF for Harvard University, 3.65%(a)........................... 8/1/2017 200 200,696
Massachusetts HEF for Mount College Series A, 3.75%(a)....................... 7/1/2018 400 401,411
Massachusetts HEF Capital Assistance Program Series G-1, 3.60%(a)............ 1/1/2019 300 300,798
Massachusetts HEF Capital Asset Series D, 4%(a).............................. 1/1/2035 400 401,375
Massachusetts HEF Capital Asset Series E, 4.05%(a)........................... 1/1/2035 600 602,073
Massachusetts HEF for Williams College Series E, 3.75%(a).................... 8/1/2014 400 401,401
Massachusetts HEF for Wellesley College Series B, 3.70%(a)................... 7/1/2022 400 400,041
Massachusetts IDA for KRH Rolls Inc. Project Series 1988, 4.40%(a)........... 5/1/2006 500 503,732
Massachusetts IFA for Composite Easy Day, 3.80%(a)........................... 7/1/2006 170 170,596
Massachusetts IFA for Emerson College, 3.80%(a).............................. 11/1/2025 500 501,805
Massachusetts IFA for Governor Dummer Academy, 3.80%(a)...................... 7/1/2026 300 301,057
Massachusetts IFA for Griffin Realty Series B, 3.85%(a)...................... 7/1/2008 465 466,650
Massachusetts IFA for Groton School, 3.75%(a)................................ 6/1/2019 200 200,689
Massachusetts IFA for Holyoke Water Power Project, 3.90%(a).................. 5/1/2022 300 301,043
Massachusetts IFA for Quamco Series B, 3.70%(a).............................. 9/1/2001 800 802,774
Massachusetts Showa Women's Institute of Boston, 3.90%(a).................... 3/15/2004 500 500,052
Massachusetts State GOB Series C, 6.90%...................................... 6/1/1997 300 300,000
Puerto Rico Industrial, Medical, Higher Education and Environmental Bonds for
PCR Facility Authority, 4.05%(a)........................................... 12/1/2015 300 301,090
Watertown BAN, 4.25%......................................................... 5/13/1998 345 346,585
Westfield BAN, 4.50%......................................................... 5/8/1998 500 503,332
-----------
Total Massachusetts Fund Investments (97.89%) (Cost $12,721,412)............. 12,759,526
Other assets, less liabilities (2.11%)....................................... 275,083
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and
redemption prices per share on 13,034,609 shares of beneficial interest of
$.001 par value outstanding................................................ $13,034,609
===========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 7
RESERVE TAX-EXEMPT TRUST--NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Burlington BAN, 3.69%.......................................................... 6/13/1997 $1,000 $ 1,035,697
Cranford GOB, 4%............................................................... 2/27/1998 1,291 1,306,982
East Rutherford BAN, 4.31%..................................................... 1/23/1998 498 500,410
Eatontown BAN, 4.25%........................................................... 12/17/1997 550 562,218
Essex County Improvement Authority GOB, 3.75%(a)............................... 12/01/2025 2,000 2,006,964
Evesham Fire District BAN, 4.50%............................................... 4/14/1998 675 678,979
Fair Lawn BAN, 4%.............................................................. 8/1/1997 1,000 1,033,577
Fairfield BAN, 4%.............................................................. 12/17/1997 600 611,006
Haddonfield Temp Notes, 4.25%.................................................. 7/3/1997 1,450 1,506,680
Millville BAN, 4.02%........................................................... 9/4/1997 1,319 1,337,117
Monmouth BAN, 3.55%(a)......................................................... 8/1/2016 100 100,311
Morristown GOB, 5.30%.......................................................... 7/15/1997 310 316,760
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.70%(a)................ 12/1/2027 2,200 2,207,088
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.75%(a)................ 12/1/2027 400 401,306
New Jersey EDA for Bayonne IMTT Docking Revenue Bonds, 3.75%(a)................ 12/1/2027 700 702,286
New Jersey EDA for Economic Growth Bond Series F, 3.75%(a)..................... 8/1/2014 770 772,709
New Jersey EDA for Lawrenceville School, 3.70%(a).............................. 7/1/2026 1,000 1,003,378
New Jersey EDA for PCR Series 95, 3.55%(a)..................................... 9/1/2012 1,000 1,003,296
New Jersey EDA for St. Peters School Series 1995, 3.80%(a)..................... 1/1/2010 1,145 1,149,122
New Jersey EDA for Trailer Marine Corps Project, 3.70%(a)...................... 2/1/2002 400 400,041
New Jersey EDA for Volvo of American Corp, 4.40%(a)............................ 12/1/2004 3,500 3,500,422
New Jersey EDA for RJB Associate Project, 3.90%(a)............................. 8/1/2008 900 903,276
New Jersey HCF Hospital Capital Asset, 3.65%(a)................................ 7/01/2035 400 401,368
New Jersey Sports Expo Authority Series 92C, 3.65%(a).......................... 9/01/2024 2,400 2,421,495
New Jersey Transportation Series 1997A, 4%..................................... 6/13/1997 2,000 2,003,945
New Jersey Turnpike Authority General Series 91D, 3.70%(a)..................... 1/01/2018 3,700 3,751,901
Ocean County BAN, 4.25%........................................................ 6/20/1997 1,000 1,040,594
Passaic BAN, 4%................................................................ 9/26/1997 900 918,625
Port Authority of New York and New Jersey Special Versatile
Structure Obligation, 4%(a)................................................ 5/1/2019 3,100 3,110,735
Puerto Rico Industrial, Medical, Environmental PCR, 3.85%(a)................... 6/19/1997 1,000 1,001,477
Rahway BAN, 4%................................................................. 12/23/1997 500 509,630
Trenton Temp Notes, 4%......................................................... 12/18/1997 1,000 1,020,296
Vernon Board of Education Temp Notes, 4%....................................... 1/16/1998 1,000 1,016,513
Washington GOB, 5.30%.......................................................... 10/1/1997 315 319,155
-----------
Total New Jersey Fund Investments (102.80%) (Cost $40,160,883)................. 40,555,359
Other liabilities, less assets (-2.80%)........................................ (1,103,259)
-----------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 39,452,100 shares of beneficial interest of $.001 par
value outstanding............................................................ $39,452,100
==========
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. Securities payable on demand are collateralized by
bank letters of credit or other bank credit agreements.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 8
RESERVE TAX-EXEMPT TRUST--NEW JERSEY TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
SECURITY TYPE ABBREVIATIONS:
<TABLE>
<S> <C> <C>
BAN -- Bond Anticipation Notes
COP -- Certificate of Participation
CSD -- Central School District
DAI -- Development Authority Industrial Development Refunding
Bonds
EDA -- Economic Development Authority Revenue Bonds
ERD -- Energy Research and Development Authority
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
IDA -- Industrial Development Authority Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
IFA -- Industrial Finance Authority
MHR -- Multifamily Housing Revenue Bonds
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>
RESERVE TAX-EXEMPT TRUST--FLORIDA TAX-EXEMPT FUND
STATEMENT OF ASSETS AND LIABILITIES--MAY 31, 1997
<TABLE>
<CAPTION>
JUNE 24, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH
MAY 31, 1997
-------------------
<S> <C>
ASSETS:
Investments, at value (identified cost--$3,680,000)................................... $ 3,689,647
Cash.................................................................................. 420,058
-------------------
Total Assets........................................................................ 4,109,705
-------------------
LIABILITIES:
Accrued expenses...................................................................... 321
-------------------
Total Liabilities................................................................... 321
-------------------
NET ASSETS.............................................................................. $ 4,109,384
===================
NET ASSETS CONSIST OF:
Shares of beneficial interest, $.001 par value, unlimited number of shares
authorized.......................................................................... $ 4,109
Paid-in capital in excess of par...................................................... 4,105,275
-------------------
NET ASSETS--Equivalent to $1.00 per share based on 4,109,384 shares of beneficial
interest outstanding.................................................................. $ 4,109,384
===================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE> 9
STATEMENTS OF OPERATIONS--YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
RESERVE
NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
---------------- --------------------------------------------------------------------
NEW YORK CALIFORNIA CONNECTICUT FLORIDA MASSACHUSETTS NEW JERSEY
FUND FUND FUND FUND * FUND FUND
---------------- ---------- ----------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME (Note 1).............. $5,477,002 $711,345 $1,121,367 $130,782 $ 372,093 $1,321,959
---------------- ---------- ----------- -------- ------------- ----------
EXPENSES (Note 2)
Management fee...................... 786,904 103,607 166,430 19,304 55,173 194,595
Shareholder servicing,
administration and general office
expenses.......................... 383,457 43,265 67,635 8,681 19,844 94,664
Distribution assistance (Note 3).... 278,860 40,979 51,730 5,627 3,232 75,554
Equipment expense................... 56,426 7,437 11,105 1,450 3,516 13,976
Professional fees................... 44,566 6,806 9,706 1,116 2,987 12,332
Occupancy costs..................... 22,032 2,841 4,359 550 1,344 5,470
Stationery, printing and supplies... 41,554 4,200 7,116 671 2,018 9,335
Trustee fees........................ 6,048 701 1,328 98 372 1,589
Other expenses...................... 18,237 3,410 3,991 512 2,588 5,026
---------------- ---------- ----------- -------- ------------- ----------
Total Expenses.................... 1,638,084 213,246 323,400 38,009 91,074 412,541
Less: Management fees and other
expenses voluntarily waived by
Investment Manager................ (4,167)
---------------- ---------- ----------- -------- ------------- ----------
Net Expenses........................ 1,638,084 213,246 323,400 38,009 86,907 412,541
---------------- ---------- ----------- -------- ------------- ----------
NET INVESTMENT INCOME................. $3,838,918 $498,099 $ 797,967 $ 92,773 $ 285,186 $ 909,418
=============== ======== ========== ======== ============ ==========
</TABLE>
- ---------------
* The Florida Tax-Exempt Fund commenced operations on June 24, 1996.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE NEW YORK
TAX-EXEMPT TRUST RESERVE TAX-EXEMPT TRUST
------------------------------ -------------------------------------------------------------
NEW YORK FUND CALIFORNIA FUND CONNECTICUT FUND
------------------------------ ----------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996
------------- ------------- ------------ ------------- ------------ ------------
<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)................... $ (3,838,918) $ (4,189,736) $ (498,099) $ (269,905) $ (797,967) $ (804,738)
------------- ------------- ------------ ------------- ------------ ------------
FROM CAPITAL SHARE
TRANSACTIONS (at net
asset value of $1 per
share):
Net proceeds from sale of
shares..................... 676,647,327 636,980,296 153,856,260 51,508,091 104,926,291 98,890,288
Net asset value of shares
issued on reinvestment of
dividends.................. 3,838,918 4,189,736 498,099 269,905 797,967 804,738
------------- ------------- ------------ ------------- ------------ ------------
Subtotal................... 680,486,245 641,170,032 154,354,359 51,777,996 105,724,258 99,695,026
Cost of shares redeemed.... (652,760,567) (668,621,594) (136,013,932) (50,253,639) (107,029,059) (91,519,680)
------------- ------------- ------------ ------------- ------------ ------------
Net increase (decrease) in
net assets derived from
capital share transactions
and from investment
operations................. 27,725,678 (27,451,562) 18,340,427 1,524,357 (1,304,801) 8,175,346
NET ASSETS:
Beginning of year............ 125,454,406 152,905,968 12,611,969 11,087,612 34,801,304 26,625,958
------------- ------------- ------------ ------------- ------------ ------------
End of year.................. $ 153,180,084 $ 125,454,406 $30,952,396 $ 12,611,969 $33,496,503 $34,801,304
============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE> 10
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
RESERVE TAX-EXEMPT TRUST
-----------------------------------------------------------------------------------
FLORIDA FUND
-------------------
JUNE 24, 1996 MASSACHUSETTS FUND NEW JERSEY FUND
(COMMENCEMENT OF ---------------------------- ----------------------------
OPERATIONS) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
INVESTMENT OPERATIONS:
Net investment income paid to
shareholders as dividends (Note 1)..... $ (92,773) $ (285,186) $ (288,434) $ (909,418) $ (797,253)
------------------- ------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
(at net asset value of $1 per share):
Net proceeds from sale of shares....... 38,626,682 52,472,123 44,175,742 223,428,579 189,336,696
Net asset value of shares issued on
reinvestment of dividends............ 92,773 285,186 288,434 909,418 797,253
------------------- ------------ ------------ ------------ ------------
Subtotal............................. 38,719,455 52,757,309 44,464,176 224,337,997 190,133,949
Cost of shares redeemed.............. (34,610,071) (48,678,063) (45,677,798) (225,911,698) (170,715,398)
------------------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
derived from capital share transactions
and from investment operations......... 4,109,384 4,079,246 (1,213,622) (1,573,701) 19,418,551
NET ASSETS:
Beginning of year........................ 0 8,955,363 10,168,985 41,025,801 21,607,250
------------------- ------------ ------------ ------------ ------------
End of year.............................. $ 4,109,384 $13,034,609 $ 8,955,363 $39,452,100 $41,025,801
================= ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE> 11
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS 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 six series, California Fund,
Connecticut Fund, Florida Fund, Interstate Fund, Massachusetts Fund, and New
Jersey Fund. These financial statements and notes apply only to the
California, Connecticut, Florida, Massachusetts 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.
G. The New York and Massachusetts Funds had purchases of $4,550,000 and
$194,653, respectively, not delivered at May 31, 1997.
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 $572,320 (New
York Fund), $68,660 (California Fund), $105,240 (Connecticut Fund), $13,078
(Florida Fund), $32,669 (Massachusetts Fund) and $142,392 (New Jersey Fund)
during the year ended May 31, 1997 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 $4,167 on the Massachusetts Fund. At
May 31, 1997, the New York, California, Connecticut, Florida, Massachusetts
and New Jersey Funds, had accrued expenses of $12,713, $2,543, $2,532, $321,
$803 and $3,436, 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.
26
<PAGE> 12
RESERVE NEW YORK TAX-EXEMPT TRUST ("NY TRUST")
RESERVE TAX-EXEMPT TRUST (CALIFORNIA, CONNECTICUT, FLORIDA,
MASSACHUSETTS 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, California, Connecticut, Florida, Massachusetts 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, 83.89%, 84.15%, 71.04%, 100%, 80.51% and
67.83% of the New York, California, Connecticut, Florida, Massachusetts 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 5/31/97, the following funds had these components of net assets:
<TABLE>
<CAPTION>
NEW YORK CONNECTICUT CALIFORNIA MASSACHUSETTS NEW JERSEY
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Par Value.................................. $ 153,180 $ 33,497 $ 30,952 $ 13,035 $ 39,452
Paid-in-Capital............................ 153,026,904 33,463,006 30,921,444 13,021,574 39,412,648
----------- ---------- ----------
Net Assets................................. $153,180,084 $33,496,503 $30,952,396 $13,034,609 $39,452,100
=========== ========== ==========
</TABLE>
---------------------
FEDERAL TAX INFORMATION
The dividends distributed by each Fund are exempt interest dividends for Federal
tax purposes.
27
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Trustees of Reserve Tax-Exempt
Trust--Interstate Tax-Exempt Fund:
We have audited the accompanying statement of net assets of the Interstate
Tax-Exempt Fund (one of the series constituting Reserve Tax-Exempt Trust) as of
May 31, 1997, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the 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, 1997, 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 the
Interstate Tax-Exempt Fund of Reserve Tax-Exempt Trust as of May 31, 1997, the
results of its operations, the changes in its net assets and its 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 27, 1997
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------ ---------- -------------- ------------
<S> <C> <C> <C>
ALABAMA -- .66%
Decatur IDA for Scientific Manufacturing, 4.15%(a).......................... 2/1/2014 $ 1,000 $ 1,000,114
Pell City IDA for General Signal Corporation, 4.05%(a)...................... 10/1/2000 1,000 1,007,059
ARIZONA -- 6.45%
Apache IDA for Tucson Electric Power Company, 3.90%(a)...................... 12/15/2018 6,000 6,011,992
Apache IDA for Tucson Electric Power Company, 3.95%(a)...................... 12/15/2018 2,000 2,004,030
Coconino PCR for Tucson Electric Power Company Series B, 3.80%(a)........... 5/1/2031 1,000 1,002,841
Gila IDA PCR for Cobre Valley Hospital, 3.90%(a)............................ 11/1/2025 4,000 4,014,597
Pima IDA PCR for Tucson Electric Project, 3.90%(a).......................... 10/1/2022 5,600 5,600,598
Pima IDA for Tucson Retirement Center, 3.85%(a)............................. 1/1/2009 800 805,451
Yauapai IDA for Kachina Pointe Project, 3.85%(a)............................ 1/1/2009 300 302,044
CALIFORNIA -- 8.23%
California School District Cash Reserves Program Series A, 4.75%............ 7/2/1997 3,000 3,132,529
California Community Development Authority, 3.65%(a)........................ 5/15/2025 100 100,185
Grand Terrace Community Redevelopment Agency, 3.95%(a)...................... 12/1/2011 5,700 5,716,694
Irvine Beach Assessment, 3.70%(a)........................................... 9/2/2011 300 300,030
Los Angeles MHR for Malibu Meadows Project Series 91-A, 3.95%(a)............ 12/1/2015 800 802,941
Los Angeles USD TRAN, 4.50%................................................. 6/30/1997 500 520,970
Los Angeles Transportation Commission Custodial Receipts, 4%(a)............. 7/1/2005 600 609,143
San Bernadino HFR Alta Park Project, 4%(a).................................. 5/1/2006 3,500 3,512,940
San Francisco Bayside Village Series 85D, 3.95%(a).......................... 12/1/2005 4,000 4,027,944
San Joaquin USD TRAN, 4.50%................................................. 1/15/1998 1,000 1,033,515
San Jose Community Redevelopment Agency, 3.80%(a)........................... 7/1/2026 1,300 1,304,495
San Mateo USD TRAN, 4.50%................................................... 7/1/1997 3,000 3,125,535
Union City MHR for Skylark Apartments, 4%(a)................................ 11/1/2007 1,000 1,001,999
</TABLE>
11
<PAGE> 14
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------ ---------- -------------- ------------
<S> <C> <C> <C>
COLORADO -- 2.22%
Englewood HCF for SW Medical Professional Ltd. Series 85 Series 85,
4.05%(a).................................................................. 12/1/2010 $ 2,000 $ 2,007,523
Jefferson County IDR for Kinder-Care Learning Centers Series C, 4.15%(a).... 2/1/2001 1,700 1,700,193
Jefferson Country IDR for S.W. Medical Project Series 85, 4.05%(a).......... 11/1/2010 2,450 2,459,216
Wheat Ridge IDA for Pearse Electronics Inc. Project, 4.25%(a)............... 6/1/1999 625 626,178
CONNECTICUT -- .56%
Connecticut Development Authority Health Care Revenue Bonds for Independent
Living Project 1990 Series, 3.70%(a)...................................... 7/1/2015 300 301,052
Hartford Redevelopment Agency MHR for Underwood Towers, 3.65%(a)............ 6/1/2020 1,400 1,404,816
DELAWARE -- .66%
Wilmington GOB, 5%.......................................................... 10/1/1997 2,000 2,025,644
DISTRICT OF COLUMBIA -- .73%
Washington, D.C. Housing Finance Agency MHR for Chastleton Development
Project, 4%(a)............................................................ 7/1/1997 2,200 2,236,950
FLORIDA -- 4.51%
Boca Raton IDA for Parking Garage Project, 4.325%(a)........................ 12/1/2014 2,800 2,800,336
Broward Country MHR for Welleby Apartment Project, 4%(a).................... 12/1/2006 600 602,209
Collier IDA for Retirement Housing Revenue Bonds, 3.95%(a).................. 12/1/2015 200 200,724
Dade County Hospital Revenue Bonds, 3.85%(a)................................ 9/1/2025 200 200,570
Dade County IDA for Dolphin Stadium Project, 3.95%(a)....................... 1/1/2016 2,800 2,810,218
Dade County Hospital Revenue Bonds Project, 3.85%(a)........................ 3/1/2025 100 100,285
Duval County HFA for Lakes of Mayport Apartment Project, 4%(a).............. 12/1/2009 700 702,602
Florida HFR/Oaks at Mill Creek Project Series 85, 3.95%(a).................. 11/1/2007 200 200,578
Gulf Breeze Series 85 A Revenue Bonds, 4%(a)................................ 12/1/2015 400 401,476
Hillsborough IDA for Tampa Electric Co., 4.15%(a)........................... 9/1/2025 700 702,451
Hillsborough PCR for Cannon Conversion, 4%(a)............................... 5/15/2018 200 200,690
Jacksonville IDA for Coastal Islands Project, 4.05%(a)...................... 8/1/2008 195 195,022
Lee County IDA for Charter Glade Hospital Project, 4.10%(a)................. 8/1/2007 4,375 4,391,379
Palm Beach PCR for Water and Sewer Project, 4.05%(a)........................ 10/1/2011 200 200,022
University of North Florida HEF Capital Improvement Project, 3.90%(a)....... 11/1/2024 100 100,368
GEORGIA -- 5.80%
Clayton County DAI for Rivers Edge Development, 3.95%(a).................... 8/1/2006 2,880 2,890,664
Elbert County Industrial Building Authority Revenue Bonds for Seaboard Farms
of Elberton, 3.95%(a)..................................................... 7/1/2005 1,800 1,812,452
Gwinnett County IDA for United Stationers Supply Company, 3.95%(a).......... 10/31/2002 3,800 3,813,998
Municipal Electric Authority, 4.05%(a)...................................... 1/1/2026 9,200 9,226,982
IOWA -- 2.09%
Buffalo IDA for Linwood Mining & Materials, 4.20%(a)........................ 1/1/2000 1,165 1,165,134
Iowa School Corp. Warrant Certificates Series A, 4.75%...................... 6/27/1997 5,000 5,223,866
ILLINOIS -- 0.55%
Streamwood IDA for Olde Church Centre Project, 4.05%(a)..................... 12/1/2014 1,685 1,691,258
INDIANA -- 4.53%
Indianapolis Airport Custodial Receipts, 4.05%(a)........................... 7/1/2015 5,000 5,077,784
Tippecanoe County PCR for Caterpillar Inc., 3.95%(a)........................ 11/1/2006 8,750 8,782,315
KANSAS -- 1.33%
Ottawa IDA for Our Own Hardware Co., 3.95%(a)............................... 10/1/2004 4,080 4,080,442
KENTUCKY -- 3.76%
Danville EDA Multi-Lease Revenue Bonds, 4.20%(a)............................ 4/1/2007 900 903,443
Ohio County PCR for Big River Electric Corporation, 4.40%(a)................ 6/1/2013 4,500 4,593,605
Ohio County PCR for Big River Electric Corporation Project Series 1985,
4.85%(a).................................................................. 10/1/2015 6,000 6,024,279
LOUISIANA -- 0.33%
Louisiana Public Facilities Authority W. Knighton Project, 3.90%(a)......... 9/1/2025 1,000 1,002,893
</TABLE>
12
<PAGE> 15
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------ ---------- -------------- ------------
<S> <C> <C> <C>
MARYLAND -- 6.03%
Anne Arundel County Industrial Refunding Revenue Bonds for Kinder-Care
Learning Centers, 4.15%(a)................................................ 2/1/2001 $ 2,260 $ 2,260,257
Baltimore IDA for Mayor and City Counsel Project, 4.05%(a).................. 8/1/2016 2,500 2,507,548
Maryland Health and Higher Education Pooled Project Series 85A, 3.90%(a).... 4/1/2035 13,000 13,001,389
Montgomery County IDA for Info Systems and Network Corporation, 4.15%(a).... 4/1/2014 700 702,547
MASSACHUSETTS -- 2.82%
Boston Water and Sewer Commission Revenue Bonds 1994 A, 3.80%(a)............ 11/1/2024 300 301,040
Massachusetts HEF for Harvard University, 3.65%(a).......................... 2/1/2016 400 401,391
Massachusetts IFA for Governor Dummer Academy, 3.80%(a)..................... 7/1/2026 1,200 1,204,228
Massachusetts IFA for Griffin Realty, 3.85%(a).............................. 7/1/2008 200 200,710
Massachusetts IFA for Quamco Series B, 3.70%(a)............................. 9/1/2001 200 200,693
Watertown BAN, 4.25%........................................................ 5/13/1998 5,000 5,022,986
Westfield BAN, 4.50%........................................................ 5/8/1998 1,300 1,308,657
MICHIGAN -- 1.44%
Dearborn Heights EDC for Oakbrook Common Project Series 1993, 3.85%(a)...... 3/1/2025 3,900 3,900,411
Jackson EDC for Thrifty Leoni Inc. Project, 4.075%(a)....................... 12/1/2014 500 500,057
MINNESOTA -- 2.21%
Eagan MHR for Aspen Woods, 4.15%(a)......................................... 1/1/2026 5,580 5,601,594
New Brighton Industrial Development Refunding Revenue Bonds for Taylor
Corporation Series 1988, 5.44%(a)......................................... 11/1/1999 385 384,694
New Hope Commercial Development Revenue Bonds for National Beauty Project
Series 1994, 4.15%(a)..................................................... 5/1/2010 775 775,088
MISSOURI -- 2.26%
Cole IDA for Modine Manufacturing Series 85, 4.15%(a)....................... 12/1/2015 2,940 2,961,552
Missouri State Environmental Improvement and Energy Resources Authority
Pollution Control RAW Series A, 3.95%(a).................................. 6/1/2014 3,000 3,000,000
St. Louis Industrial Development Refunding Revenue Bonds for Kinder-Care
Learning Centers, 4.15%(a)................................................ 2/1/2001 965 965,110
MONTANA -- .20%
Great Falls Commercial Development Revenue Bonds for Liberty Development
Partners Project, 4.15%(a)................................................ 12/1/2007 625 625,071
NEBRASKA -- 1.67%
Nuckolls IDA for Agrex Inc Project, 4.40%,(a)............................... 2/1/2015 5,100 5,120,665
NEVADA -- 1.31%
Clark Unlimited Tax GOB Series A, 4.05%(a).................................. 10/1/2030 4,000 4,014,395
NEW JERSEY -- 5.98%
East Rutherford BAN, 4.31%.................................................. 1/23/1998 2,000 2,010,892
Fair Lawn BAN, 4%........................................................... 8/1/1997 1,866 1,929,017
Fairfield BAN, 4%........................................................... 12/17/1997 2,000 2,036,685
New Jersey EDA for Volvo of America Corp., 4.40%(a)......................... 12/1/2004 1,800 1,800,217
New Jersey Sports Expo Authority Series 92C, 3.65%(a)....................... 9/1/2024 600 605,374
Rahway BAN, 4%.............................................................. 12/23/1997 2,740 2,792,260
Trenton Temp Notes, 4%...................................................... 12/18/1997 3,000 3,060,889
Vernon Board of Education Temp Notes, 4%.................................... 1/16/1998 4,000 4,066,052
NEW MEXICO -- 3.97%
Dona Ana IDR for Foamex Products, 3.90%(a).................................. 11/1/2013 2,100 2,107,623
Farmington PCR for Public Service Four Corners, 4.05%(a).................... 4/1/2022 10,000 10,035,986
NEW YORK -- 8.68%
Nassau BAN, 4.50%........................................................... 8/15/1997 4,000 4,133,848
New York City GOB Series A7, 4%(a).......................................... 8/1/2020 1,300 1,300,142
New York City GOB Series B4, 4.05%(a)....................................... 8/15/2023 1,800 1,800,200
New York City GOB Series B8, 3.85%(a)....................................... 8/15/2023 500 500,053
New York City GOB Series C4-97, 4%(a)....................................... 8/1/1997 3,100 3,100,345
</TABLE>
13
<PAGE> 16
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------ ---------- -------------- ------------
<S> <C> <C> <C>
NEW YORK -- (CONTINUED)
New York City GOB Series E5, 4%(a).......................................... 8/1/2009 $ 1,500 $ 1,500,164
New York State R&D PCR for Niagara Mohawk, 4.20%(a)......................... 7/1/2015 1,000 1,000,115
North Hempstead G.O. BAN, 4.25%............................................. 2/26/1998 4,000 4,057,026
Roslyn BAN, 4%.............................................................. 10/15/1997 5,000 5,099,618
Syracuse BAN Series 96A, 3.90%.............................................. 12/19/1997 4,000 4,073,677
NORTH CAROLINA -- .03%
North Carolina HEF for Guilford College Project, 4.10%(a)................... 9/1/2023 100 100,351
NORTH DAKOTA -- .36%
Minot IDR for Nash Finch Co. Project, 4.15%(a).............................. 12/1/2002 1,100 1,100,125
OHIO -- 3.11%
Brunswick IDA for Kinder-Care Learning Centers Project Series A, 4.15%(a)... 6/1/2002 425 425,048
Columbus ERD Electric Systems Revenue Bonds, 3.60%(a)....................... 9/1/2009 1,000 1,003,156
Cuyahoga IDA for Allen Group Project, 3.80%(a).............................. 12/1/2015 1,000 1,002,841
Cuyahoga IDA for Edgecomb Metals Co., 3.95%(a).............................. 9/1/2009 1,000 1,000,110
Franklin County Industrial Development Refunding Revenue Bonds for
Kinder-Care Learning Centers Project Series A, 4.15%(a)................... 6/1/2002 1,080 1,080,123
Montgomery IDA for Sister Chart Health Care, 3.85%(a)....................... 5/15/2025 1,900 1,906,832
Sharonville IDA for Edgecomb Metals Inc., 3.85%(a).......................... 11/1/2009 1,610 1,615,901
Toledo Special Obligation Assessment Notes, 3.90%(a)........................ 12/1/1998 1,500 1,500,321
OKLAHOMA -- 1.64%
Tulsa IDA for University of Tulsa Project Series B, 4%(a)................... 10/1/2026 5,000 5,017,774
OREGON -- 0.69%
Medford HFA for Rogue Valley, 4.10%(a)...................................... 10/1/2016 100 100,011
Port of Portland IDR for Tyerson & Sons, 4.05%(a)........................... 11/01/2007 2,000 2,007,400
PENNSYLVANIA -- 5.84%
Allegheny University Project Series 85, 3.75%(a)............................ 7/1/2015 1,400 1,409,298
Berks TRAN, 4.375%.......................................................... 12/31/1997 2,500 2,555,421
Butler IDA for Lutheran Welfare Series A, 4.25%(a).......................... 11/1/2026 1,700 1,710,461
Chartier Valley Industrial and Commercial Development Authority Revenue
Bonds for 1133 Penn Associates Project Series A, 3.95%(a)................. 8/1/2007 1,664 1,670,129
Clarion County Industrial Development Authority Special Development Revenue
Bonds for Meritcare Project Series A, 3.95%(a)............................ 12/1/2012 2,100 2,107,756
Delaware Valley Regional Finance Authority Series 85A, Revenue Bonds
3.90%(a).................................................................. 12/1/2020 2,000 2,007,279
Emmans GOB Local Government Revenue Bonds, 3.95%(a)......................... 3/1/2024 1,900 1,907,004
Northeastern HEF Wyoming Valley HCS Revenue Bonds, 3.85%(a)................. 1/1/2024 1,000 1,003,618
Penn GOB, 3.70%............................................................. 7/17/1997 2,000 2,006,488
Philadelphia Hospital Authority for Children's Hospital, 4.05%(a)........... 3/1/2027 1,000 1,003,479
University of Pittsburgh Capital Project Bonds, 3.75%(a).................... 1/1/2019 500 503,321
PUERTO RICO -- 1.25%
Puerto Rico Electric Power Authority Series 11, 4.10%(a).................... 7/1/2022 3,810 3,814,708
TENNESSEE -- 1.90%
Coster County IDB Seville Properties Series 1991, 4.30%(a).................. 6/15/2013 100 100,402
Chattanooga IDA for Baylor School Project, 3.95%(a)......................... 11/1/2016 1,000 1,000,108
Knox IDB for Loews Investment Corp., 3.90%(a)............................... 10/1/2005 500 501,710
Metropolitan Nashville/Davidson Lake Shore Estates, 4.30%(a)................ 9/1/2009 200 200,819
Tennessee School Bond Authority, 3.95%...................................... 3/1/1998 4,000 4,014,482
TEXAS -- 1.11%
North Central HEF for YMCA for Metro Dallas, 3.95%(a)....................... 6/1/2021 3,400 3,412,533
UTAH -- .28%
Bountiful DAI for Bountiful Gateway Park Project, 4.05%(a).................. 12/1/1997 865 868,071
WEST VIRGINIA -- 0.16%
Virginia Hospital Finance Authority Revenue Bonds for Mid-Atlantic Capital
Project 3.90%(a).......................................................... 12/1/2025 500 501,847
</TABLE>
14
<PAGE> 17
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF NET ASSETS--MAY 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL
MATURITY AMOUNT VALUE
DESCRIPTION OF SECURITY DATE (IN THOUSANDS) (NOTE 1)
- ------------------------------------------------------------------------------ ---------- -------------- ------------
<S> <C> <C> <C>
VIRGINIA -- 2.83%
Fairfax IDR for Kinder-Care Learning Centers Series E, 4.15%(a)............. 10/1/1999 $ 4,875 $ 4,875,554
Virginia HFR for AHC Service, 3.95%(a)...................................... 9/1/2017 3,800 3,800,411
WASHINGTON -- 1.05%
Port of Seattle DAI for Douglas Management Corporation, 4.05%(a)............ 12/1/2005 3,200 3,212,003
WISCONSIN -- 1.31%
Green Bay IDA for St. Mary Cement Company Ltd., 4.05%(a).................... 11/1/2000 4,000 4,011,848
WYOMING -- 0.33%
Sweetwater IDA for Pacific Corp Project Series A, 3.90%(a).................. 7/1/2015 1,000 1,003,596
------------
Total Interstate Fund Investments (100.87%) (Cost $306,924,758)............... 308,829,868
Other liabilities, less assets (-.87%)........................................ (2,678,002)
------------
NET ASSETS (100%) equivalent to $1.00 net asset value, offering and redemption
prices per share on 306,151,866 shares of beneficial interest of $.001 par
value outstanding. $306,151,866
============
</TABLE>
- ---------------
(a) The interest rate is subject to change periodically. The rates shown were in
effect at May 31, 1997. 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
DAI -- Development Authority Industrial Development
Refunding Bonds
EDA -- Economic Development Authority Revenue Bonds
EDC -- Economic Development Corporation
ERD -- Energy Research and Development Authority
GOB -- General Obligation Bonds
HCF -- Health Care Facility
HCS -- Health Care Systems, Inc.
HEF -- Health and Educational Facilities Revenue Bonds
HFA -- Health Facilities Authority Revenue Bonds
HFR -- Health Facilities Revenue Bonds
IDA -- Industrial Development Authority Revenue Bonds
IDB -- Industrial Development Board Revenue Bonds
IDR -- Industrial Development Agency Revenue Bonds
IFA -- Industrial Finance Agency Revenue Bonds
MHR -- Multifamily Housing Revenue Bonds
PCR -- Pollution Control Revenue Bonds
TRAN -- Tax & Revenue Anticipation Notes
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
USD -- Unified School District Bonds
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 18
RESERVE TAX-EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
<TABLE>
<S> <C>
INTEREST INCOME (Note 1)...................................................................... $10,956,203
-----------
EXPENSES (Note 2)
Management fee.............................................................................. 1,532,970
Shareholder servicing, administration and general office expenses........................... 673,797
Distribution assistance (Note 3)............................................................ 577,267
Equipment expense........................................................................... 106,255
Professional fees........................................................................... 84,398
Occupancy costs............................................................................. 41,693
Stationery, printing and supplies........................................................... 84,093
Trustee fees................................................................................ 12,315
Other expenses.............................................................................. 80,920
-----------
Total Expenses............................................................................ 3,193,708
-----------
NET INVESTMENT INCOME......................................................................... $ 7,762,495
============
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1996
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS:
Net investment income paid to shareholders as dividends (Note 1)....... $ (7,762,495) $ (8,935,332)
--------------- ---------------
FROM CAPITAL SHARE TRANSACTIONS (at net asset value of $1 per share):
Net proceeds from sale of shares....................................... 1,254,673,650 1,383,537,294
Net asset value of shares issued on reinvestment of dividends.......... 7,762,495 8,935,332
--------------- ---------------
Subtotal............................................................. 1,262,436,145 1,392,472,626
Cost of shares redeemed................................................ (1,248,351,729) (1,415,637,331)
--------------- ---------------
Net increase (decrease) in net assets derived from capital share
transactions and from investment operations........................... 14,084,416 (23,164,705)
NET ASSETS:
Beginning of year........................................................ 292,067,450 315,232,155
--------------- ---------------
End of year.............................................................. $ 306,151,866 $ 292,067,450
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 19
RESERVE TAX EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Trust is registered under the Investment Company Act of 1940 as a
nondiversified, open-end investment company. The policies summarized below
are consistently followed in the preparation of its financial statements in
conformity with generally accepted accounting principles.
A. The Trust's shares of beneficial interest authorized are unlimited and
divided into six series, Interstate, Connecticut, Massachusetts, California,
New Jersey and Florida Funds. These financial statements and notes apply only
to the Interstate Fund ("Fund").
B. Securities are stated at value which represents amortized cost plus
interest accrued to date. Under Securities and Exchange Commission Rule 2a-7,
the Trust uses amortized cost to value the 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
days to maturity, irrespective of intervening changes in interest rates or
market value of investments. The maturity of floating or variable rate
instruments in which the Trust may invest will be deemed to be, for floating
rate instruments (1) following, and for variable rate instruments the longer
of (1) or (2) following: (1) the notice period required before the Fund is
entitled to receive payment of the principal amount of the instrument; (2)
the period remaining until the instrument's next rate adjustment, for
purposes of Rule 2a-7 and for computing the portfolio's average weighted life
to maturity.
C. It is the Trust's 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. The Fund is charged only for its direct or allocated (in proportion to net
assets or number of shareholder accounts) share of expenses.
G. The Fund had payables of $4,500,320 for securities purchased but not
received at May 31, 1997.
2. MANAGEMENT FEE, SHAREHOLDER SERVICING COSTS AND TRANSACTIONS WITH AFFILIATES:
Reserve Management Company, Inc. ("RMCI") manages the Interstate portfolio's
investments, as well as the investments of the Connecticut, Massachusetts,
California, New Jersey and Florida Funds of the Reserve Tax-Exempt Trust,
effects purchases and sales thereof, and absorbs certain promotional
expenses. For such services RMCI receives management fees 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 of each Fund. Also,
under the current Service Agreement, RMCI was reimbursed $1,083,471 during
the year ended May 31, 1997 for expenditures made on behalf of the Fund for
personnel, office space and equipment and shareholder accounting and
administrative services, to conduct the Fund's business. At May 31, 1997, the
Fund had accrued expenses of $26,415 due to RMCI.
3. DISTRIBUTION ASSISTANCE:
Pursuant to a Distribution Plan, the 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.
4. INVESTMENT CONCENTRATION
The Interstate Fund invests substantially all of its assets in a portfolio of
tax-exempt debt obligations primarily consisting of issuers of various
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, 84.23% of the Interstate Funds investments
were backed by letters of credit, bond insurance of financial institutions
and financial guaranty assurance agencies.
17
<PAGE> 20
RESERVE TAX EXEMPT TRUST--INTERSTATE TAX-EXEMPT FUND ("TRUST")
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. 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.
6. COMPONENTS OF NET ASSETS
At 5/31/97, the Interstate Fund's net assets consisted of $306,152 par-value
and $305,845,714 paid-in-capital.
------------------------
FEDERAL TAX INFORMATION
The dividends distributed by the Interstate Fund are exempt interest
dividends for Federal tax purposes.
------------------------
18
