<PAGE> 1
General Information, Purchases and
Redemptions
---------------------------------------
24-Hour Yield and Balance Information
---------------------------------------
Nationwide 800-637-1700
AMERICAN EXPRESS MONEY-MARKET ACCOUNT
PROSPECTUS
Reserve Fund "America's First Money Fund," Reserve Tax-Exempt Trust and
Reserve New York Tax-Exempt Trust are no-load money-market funds with twelve
investment portfolios, collectively: PRIMARY, U.S. GOVERNMENT, U.S. TREASURY,
INTERSTATE TAX-EXEMPT, CALIFORNIA TAX-EXEMPT, CONNECTICUT TAX-EXEMPT, FLORIDA
TAX-EXEMPT, MASSACHUSETTS TAX-EXEMPT, NEW JERSEY TAX-EXEMPT, NEW YORK
TAX-EXEMPT, OHIO TAX-EXEMPT and PENNSYLVANIA TAX-EXEMPT FUNDS (THE "FUND(S)").
The primary objective of each Fund is to seek as high a level of short-term
interest income as is consistent with the preservation of capital and liquidity
and in the tax-exempt funds, exempt from federal income and state and local
personal income taxes in many states. However, achievement of this objective
cannot be assured.
The Funds are designed for institutions and individuals as a convenient
alternative to the direct investment of temporary cash balances in short-term
money-market accounts or instruments. The Funds seek to employ idle cash at
yields competitive with yields of other comparable short-term investments, and
are designed to reduce or eliminate for the investor the mechanical problems of
direct investment in money-market instruments such as scheduling maturities,
evaluating the credit of issuers, investing in round lots, safeguarding receipt
and delivery of securities and reinvesting.
- PRIMARY FUND of Reserve Fund invests in (i) obligations backed by the full
faith and credit of the U.S. government and its agencies or
instrumentalities; (ii) deposit-type obligations, acceptances and letters
of credit of FDIC insured institutions and foreign banks with assets in
excess of $25 billion; (iii) short-term corporate obligations rated A-1 or
the equivalent thereof; (iv) other similar high quality short-term
instruments; and (v) instruments fully collateralized by the foregoing
instruments.
- U.S. GOVERNMENT FUND of Reserve Fund invests in obligations backed by the
full faith and credit of the U.S. government or obligations collateralized
thereby.
- U.S. TREASURY FUND of Reserve Fund invests exclusively in obligations
backed by the full faith and credit of the U.S. government that provide
interest income exempt in many states from state and local personal income
taxes.
- THE INTERSTATE TAX-EXEMPT FUND of the Reserve Tax-Exempt Trust invests
principally in short-term obligations issued by the states, territories,
and possessions of the U.S. and their political subdivisions, duly
constituted authorities and corporations.
- THE NEW YORK TAX-EXEMPT FUND of Reserve New York Tax-Exempt Trust and the
CALIFORNIA, CONNECTICUT, FLORIDA, MASSACHUSETTS, NEW JERSEY, OHIO and
PENNSYLVANIA TAX-EXEMPT FUNDS of Reserve Tax-Exempt Trust seek a high
level of short-term interest income exempt from federal income and state
and local personal income and/or property taxes, if any, for resident
holders of the particular state fund as is consistent with the
preservation of capital and liquidity. Each of these Funds invests
principally in high quality tax-exempt obligations issued by the specific
state 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.
This Prospectus sets forth information about each Fund which a prospective
investor should know before investing and which was filed with the Securities
and Exchange Commission ("SEC") on the individual registration statements for
Reserve Fund, Reserve Tax-Exempt Trust and Reserve New York Tax-Exempt Trust
(the "Trusts"). A Statement of Additional Information ("SAI") for each Fund
dated July 31, 1998 providing further details about the Funds has been filed
with the SEC for each Trust, respectively, and is herein incorporated by
reference. An SAI may be obtained without charge by writing or calling the Funds
at the above telephone number. The SEC maintains a web site (http://www.sec.gov)
that contains the individual registration statements, material incorporated by
reference, and other information regarding the Funds electronically filed with
the SEC.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAVE THEY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------
Prospectus dated July 31, 1998
Investors are advised to read and retain this Prospectus for future reference.
<PAGE> 2
SHAREHOLDER EXPENSES
The following tables illustrate all expenses and fees that a shareholder of
the Funds will incur directly or indirectly. The expenses and fees set forth in
the table are for the fiscal year ended May 31, 1998.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Redemption Fees*............................................ None
Exchange Fees............................................... None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
CALIFORNIA CONNECTICUT
PRIMARY U.S. GOVERNMENT U.S. TREASURY INTERSTATE TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND(1) FUND FUND FUND
------- --------------- ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Management Fee................................ .45% .49% -- .50% .50% .50%
Comprehensive Fee............................. -- -- .60% -- -- --
12b-1 Fees.................................... .18% .18% .17% .19% .20% .16%
Other Operating Expenses
Administration and Operations Expenses...... .25% .27% None .23% .22% .20%
Equipment................................... .05% .03% None .03% .03% .02%
Other....................................... .01% .02% None .02% .01% .01%
--- --- --- --- ---- ---
Total Operating Expenses...................... .94% .99% .77% .97% .96% .89%
=== === === === ==== ===
</TABLE>
<TABLE>
<CAPTION>
FLORIDA MASSACHUSETTS NEW JERSEY NEW YORK OHIO PENNSYLVANIA
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
FUND FUND FUND FUND FUND FUND
---------- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees............................. .50% .50% .50% .50% .50% .50%
Comprehensive Fee........................... -- -- -- -- -- --
12b-1 Fees.................................. .20% .03% .19% .17% .00% .20%
Other Operating Expenses
Administration and Operations Expenses.... .20% .17% .26% .22% .47% .26%
Equipment................................. .03% .03% .03% .03% .01% .03%
Other..................................... .01% .02% .01% .02% .02% .01%
--- --- --- --- ---- ----
Total Operating Expenses.................... .94% .75% .99% .94% 1.00% 1.00%
=== === === === ==== ====
</TABLE>
*A $2 fee will be charged on redemption checks issued by the Funds of less
than $100 and a $10 fee will be charged for wire redemptions of less than
$10,000. (1) The U.S. Treasury Fund is charged a comprehensive management fee of
0.80% per annum of its average net assets for both advisory and ordinary
operating expenses during the year. The Fund's Adviser voluntarily waived a
portion of its comprehensive fee. However, the U.S. Treasury Fund may be charged
for certain non-recurring extraordinary expenses and its allocated or direct
share of certain other expenses. See "Investment Management Agreement" on page
16.
The purpose of these tables is to assist the investor in understanding the
costs and expenses that a shareholder in a Fund will bear directly or
indirectly.
2
<PAGE> 3
The following examples illustrate the expenses that a shareholder would pay
on a $1,000 investment over various time periods assuming: (1) a 5% annual rate
of return and (2) redemption at the end of each time period. The example
reflects the voluntary reduction of the comprehensive fee for the U.S. Treasury
Fund by the Adviser.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Primary Fund...................................... $10 $30 $52 $115
U.S. Government Fund.............................. $10 $32 $55 $121
U.S. Treasury Fund................................ $ 8 $25 $43 $ 95
Interstate Tax-Exempt Fund........................ $10 $31 $54 $119
California Tax-Exempt Fund........................ $10 $31 $53 $118
Connecticut Tax-Exempt Fund....................... $ 9 $28 $49 $110
Florida Tax-Exempt Fund........................... $10 $30 $52 $115
Massachusetts Tax-Exempt Fund..................... $ 8 $24 $42 $ 93
New Jersey Tax-Exempt Fund........................ $10 $32 $55 $121
New York Tax-Exempt Fund.......................... $10 $30 $52 $115
Ohio Tax-Exempt Fund.............................. $10 $32 $55 $122
Pennsylvania Tax-Exempt Fund...................... $10 $32 $55 $122
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE> 4
FINANCIAL HIGHLIGHTS
The following information applies to a share of the Primary, U.S.
Government, U.S. Treasury, Interstate, Tax-Exempt, California, Connecticut,
Florida, Massachusetts, New Jersey, New York, Ohio and Pennsylvania Funds,
outstanding throughout each period. It should be read in conjunction with the
financial statements and related notes incorporated by referenced in the SAI.
Such information has been audited by PricewaterhouseCoopers LLP as indicated in
their report appearing in the SAI.
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------------------------------------------------------
PRIMARY FUND 1998 1997 1996 1995 1994 1993 1992
------------ --------- --------- --------- --------- --------- --------- ---------
<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......... .0579 .0557 .0591 .0549 .0345 .0361 .0541
Expenses............. .0096 .0100 .0101 .0099 .0099 .0100 .0100
--------- --------- --------- --------- --------- --------- ---------
Net investment income
(1)................ .0483 .0457 .0490 .0450 .0246 .0261 .0441
Dividends from net
investment income
(1)................ (.0483) (.0457) (.0490) (.0450) (.0246) (.0261) (.0441)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end
of year............ $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========= ========= ========= ========= ========= ========= =========
Total Return......... 4.83% 4.57% 4.90% 4.50% 2.46% 2.61% 4.41%
RATIOS/SUPPLEMENTAL
DATA
- ---------------------
Net assets in
thousands, end of
year............... 2,707,620 2,104,109 1,664,114 1,602,464 1,415,378 1,389,136 1,553,828
Ratio of expenses to
average net
assets............. .94% .98% .98% .97% .97% .99% .99%
Ratio of net
investment income
to average net
assets............. 4.71% 4.47% 4.79% 4.42% 2.44% 2.58% 4.34%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
---------------------------------
PRIMARY FUND 1991 1990 1989
------------ --------- --------- ---------
<S> <C> <C> <C>
Net asset value,
beginning of
year............... $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- ---------
Income from
investment
operations......... .0794 .0915 .0913
Expenses............. .0100 .0096 .0098
--------- --------- ---------
Net investment income
(1)................ .0694 .0819 .0815
Dividends from net
investment income
(1)................ (.0694) (.0819) (.0815)
--------- --------- ---------
Net asset value, end
of year............ $ 1.0000 $ 1.0000 $ 1.0000
========= ========= =========
Total Return......... 6.94% 8.19% 8.15%
RATIOS/SUPPLEMENTAL
DATA
- ---------------------
Net assets in
thousands, end of
year............... 1,803,132 1,777,372 1,698,934
Ratio of expenses to
average net
assets............. .97% .92% .94%
Ratio of net
investment income
to average net
assets............. 6.72% 7.85% 7.84%
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------------------------------
U.S. GOVERNMENT FUND 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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.................. .0572 .0550 .0586 .0542 .0337 .0353 .0533 .0772 .0908 .0921
Expenses...................... .0101 .0101 .0102 .0101 .0100 .0100 .0101 .0102 .0098 .0100
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income (1)..... .0471 .0449 .0484 .0441 .0237 .0253 .0432 .0670 .0810 .0821
Dividends from net investment
income (1).................. (.0471) (.0449) (.0484) (.0441) (.0237) (.0253) (.0432) (.0670) (.0810) (.0821)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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.................. 4.71% 4.49% 4.84% 4.41% 2.37% 2.53% 4.32% 6.70% 8.10% 8.21%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 652,468 611,844 568,497 721,785 740,698 728,138 853,823 817,604 585,023 654,571
Ratio of expenses to average
net assets.................. .99% .99% 1.00% .99% .99% .99% .99% .98% .94% .98%
Ratio of net investment income
to average net assets....... 4.60% 4.40% 4.75% 4.31% 2.35% 2.50% 4.21% 6.38% 7.78% 8.01%
</TABLE>
4
<PAGE> 5
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FEBRUARY 3, 1992
(COMMENCEMENT OF
FOR FISCAL YEARS ENDED MAY 31, OPERATIONS)
------------------------------------------------------------------- THROUGH
U.S. TREASURY FUND 1998 1997 1996 1995 1994 1993 MAY 31, 1992
------------------ ------- ------- ------- ------- ------- ------- ----------------
<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..... .0535 .0521 .0547 .0523 .0313 .0330 .0121
Expenses.............................. .0079 .0078 .0081 .0067 .0073 .0092 .0031
------- ------- ------- ------- ------- ------- -------
Net investment income (1)............. .0456 .0443 .0466 .0456 .0240 .0238 .0090
Dividends from net investment income
(1)................................. (.0456) (.0443) (.0466) (.0456) (.0240) (.0238) (.0090)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of year.......... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= ======= =======
Total Return.......................... 4.56% 4.43% 4.66% 4.56% 2.40% 2.38% 2.75%(2)
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------
Net assets in thousands, end of
year................................ 239,760 169,178 142,766 95,227 7,350 32,325 512
Ratio of expenses to average net
assets.............................. .77%(3) .77%(3) .79%(3) .68%(3) .73%(3) .80% .97%(2)
Ratio of net investment income to
average net assets.................. 4.46% 4.33% 4.53% 4.64% 2.38% 2.07% 2.74%(2)
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------------------------------
INTERSTATE TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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.................. .0378 .0361 .0390 .0368 .0268 .0312 .0455 .0599 .0663 .0650
Expenses...................... .0099 .0105 .0105 .0103 .0103 .0104 .0106 .0105 .0104 .0104
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income (1)..... .0279 .0256 .0285 .0265 .0165 .0208 .0349 .0494 .0559 .0546
Dividends from net investment
income (1).................. (.0279) (.0256) (.0285) (.0265) (.0165) (.0208) (.0349) (.0494) (.0559) (.0546)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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.................. 2.79% 2.56% 2.85% 2.65% 1.65% 2.08% 3.49% 4.94% 5.59% 5.46%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 352,869 306,152 292,067 315,232 352,594 366,383 358,101 333,321 306,153 312,239
Ratio of expenses to average
net assets.................. .97% 1.04% 1.04% 1.00% 1.02% 1.03% 1.03% 1.03% 1.01% 1.01%
Ratio of net investment income
to average net assets....... 2.75% 2.52% 2.80% 2.59% 1.63% 2.06% 3.41% 4.81% 5.43% 5.29%
</TABLE>
5
<PAGE> 6
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, OCTOBER 17, 1994
-------------------------------- (COMMENCEMENT OF OPERATIONS)
CALIFORNIA TAX-EXEMPT FUND 1998 1997 1996 THROUGH MAY 31, 1995
-------------------------- -------- -------- -------- ----------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year..................... $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment operations...................... .0358 .0341 .0379 .0243
Expenses............................................... .0098 .0102 .0106 .0062
------- ------- ------- -------
Net investment income (1).............................. .0260 .0239 .0273 .0181
Dividends from net investment income (1)............... (.0260) (.0239) (.0273) (.0181)
------- ------- ------- -------
Net asset value, end of year........................... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return........................................... 2.60% 2.39% 2.73% 1.81%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets in thousands, end of year................... 66,933 30,952 12,612 11,088
Ratio of expenses to average net assets................ .96% 1.03% 1.04% 1.02%(2)
Ratio of net investment income to average net assets... 2.55% 2.40% 2.67% 2.95%(2)
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-----------------------------------------------------------
CONNECTICUT TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993
- --------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year................. $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- -------
Income from investment
operations.............. .0358 .0341 .0368 .0352 .0250 .0269
Expenses................... .0091 .0098 .0102 .0098(3) .0086(3) .0087(3)
------- ------- ------- ------- ------- -------
Net investment income
(1)..................... .0267 .0243 .0266 .0254 .0164 .0182
Dividends from net
investment income (1)... (.0267) (.0243) (.0266) (.0254) (.0164) (.0182)
------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= =======
Total Return.............. 2.67% 2.43% 2.66% 2.54% 1.64% 1.82%
RATIOS/SUPPLEMENTAL DATA
-------------------------
Net assets in thousands,
end of year............. 36,787 33,497 34,801 26,626 128,693 157,115
Ratio of expenses to
average net assets...... .89% .97% 1.01% .89%(3) .85%(3) .86%(3)
Ratio of net investment
income to average net
assets.................. 2.64% 2.39% 2.61% 2.33% 1.62% 1.81%
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
----------------------------------------
CONNECTICUT TAX-EXEMPT FUND 1992 1991 1990 1989
- --------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning
of year................. $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment
operations.............. .0400 .0534 .0615 .0604
Expenses................... .0091(3) .0086(3) .0083(3) .0086(3)
------- ------- ------- -------
Net investment income
(1)..................... .0309 .0448 .0532 .0518
Dividends from net
investment income (1)... (.0309) (.0448) (.0532) (.0518)
------- ------- ------- -------
Net asset value, end of
year.................... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return.............. 3.09% 4.48% 5.32% 5.18%
RATIOS/SUPPLEMENTAL DATA
-------------------------
Net assets in thousands,
end of year............. 191,101 241,790 314,489 247,929
Ratio of expenses to
average net assets...... .90%(3) .85%(3) .81%(3) .84%(3)
Ratio of net investment
income to average net
assets.................. 3.05% 4.41% 5.17% 5.05%
</TABLE>
6
<PAGE> 7
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 24, 1996
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FLORIDA TAX-EXEMPT FUND MAY 31, 1998 THROUGH MAY 31, 1997
----------------------- ------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of year.......................... $1.0000 $1.0000
------- -------
Income from investment operations........................... .0366 .0321
Expenses.................................................... .0097 .0093
------- -------
Net investment income (1)................................... .0269 .0228
Dividends from net investment income (1).................... (.0269) (.0228)
------- -------
Net asset value, end of year................................ $1.0000 $1.0000
======= =======
Total Return................................................ 2.69% 2.42%(2)
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets in thousands, end of year........................ 10,817 4,109
Ratio of expenses to average net assets..................... .94% 1.04%(2)
Ratio of net investment income to average net assets........ 2.62% 2.39%(2)
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
--------------------------------------------------------------------------------
MASSACHUSETTS TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992 1991
- ----------------------------- ------- ------ ------ ------ ------ ------ ------ ------
<S> <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
------- ------ ------ ------ ------ ------ ------ ------
Income from investment
operations................. .0361 .0338 .0362 .0335 .0227 .0257 .0386 .0551
Expenses..................... .0077 .0079(3) .0086(3) .0070(3) .0052(3) .0048(3) .0045(3) .0032(3)
------- ------ ------ ------ ------ ------ ------ ------
Net investment income (1).... .0284 .0259 .0276 .0265 .0175 .0209 .0341 .0519
Dividends from net investment
income (1)................. (.0284) (.0259) (.0276) (.0265) (.0175) (.0209) (.0341) (.0519)
------- ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
year....................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ====== ====== ====== ====== ====== ====== ======
Total Return................. 2.84% 2.59% 2.76% 2.65% 1.75% 2.09% 3.41% 5.19%
RATIOS/SUPPLEMENTAL DATA
- -----------------------------
Net assets in thousands, end
of year.................... 25,383 13,035 8,955 10,169 14,824 13,305 7,186 4,652
Ratio of expenses to average
net assets................. .75% .79%(3) .84%(3) .69%(3) .51%(3) .46%(3) .44%(3) .30%(3)
Ratio of net investment
income to average net
assets..................... 2.78% 2.58% 2.71% 2.60% 1.73% 2.04% 3.28% 4.79%
<CAPTION>
JANUARY 22, 1990
(COMMENCEMENT OF
OPERATIONS) THROUGH
MASSACHUSETTS TAX-EXEMPT FUND MAY 31, 1990
- ----------------------------- -------------------
<S> <C>
Net asset value, beginning of
year....................... $1.0000
-------
Income from investment
operations................. .0209
Expenses..................... .0010
-------
Net investment income (1).... .0199
Dividends from net investment
income (1)................. (.0199)(4)
-------
Net asset value, end of
year....................... $1.0000
=======
Total Return................. 5.59%(2)
RATIOS/SUPPLEMENTAL DATA
- -----------------------------
Net assets in thousands, end
of year.................... 2,140
Ratio of expenses to average
net assets................. .29%(2)
Ratio of net investment
income to average net
assets..................... 5.53%(2)
</TABLE>
7
<PAGE> 8
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31, OCTOBER 17, 1994
-------------------------------- (COMMENCEMENT OF OPERATIONS)
NEW JERSEY TAX-EXEMPT FUND 1998 1997 1996 THROUGH MAY 31, 1995
-------------------------- -------- -------- -------- ----------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year..................... $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income from investment operations...................... .0354 .0343 .0369 .0330
Expenses............................................... .0100 .0107 .0106 .0087(3)
------- ------- ------- -------
Net investment income (1).............................. .0254 .0236 .0263 .0243
Dividends from net investment income (1)............... (.0254) (.0236) (.0263) (.0243)
------- ------- ------- -------
Net asset value, end of year........................... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return........................................... 2.54% 2.36% 2.63% 2.43%(2)
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets in thousands, end of year................... 37,600 39,452 41,026 21,607
Ratio of expenses to average net assets................ .99% 1.06% 1.04% 1.01%(2)(3)
Ratio of net investment income to average net assets... 2.50% 2.33% 2.59% 2.82%(2)
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MAY 31,
-------------------------------------------------------------------------------------------------
NEW YORK TAX-EXEMPT FUND 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------------------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<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.................. .0363 .0352 .0381 .0352 .0249 .0281 .0421 .0563 .0616 .0600
Expenses...................... .0095 .0105 .0105 .0099 .0099 .0103 .0104 .0105 .0100 .0103
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income (1)..... .0268 .0247 .0276 .0253 .0150 .0178 .0317 .0458 .0516 .0497
Dividends from net investment
income (1).................. (.0268) (.0247) (.0276) (.0253) (.0150) (.0178) (.0317) (.0458) (.0516) (.0497)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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.................. 2.68% 2.47% 2.76% 2.53% 1.50% 1.78% 3.17% 4.58% 5.16% 4.97%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------
Net assets in thousands, end
of year..................... 171,212 153,180 125,454 152,906 148,387 149,785 156,567 148,079 120,142 90,378
Ratio of expenses to average
net assets.................. .94% 1.04% 1.04% .98% .98% 1.02% 1.03% 1.01% .98% 1.00%
Ratio of net investment income
to average net assets....... 2.63% 2.43% 2.72% 2.48% 1.48% 1.76% 3.09% 4.43% 5.02% 4.86%
</TABLE>
8
<PAGE> 9
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
APRIL 1, 1998
(COMMENCEMENT OF OPERATIONS)
OHIO TAX-EXEMPT FUND THROUGH MAY 31, 1998
-------------------- ----------------------------
<S> <C>
Net asset value, beginning of period........................ $1.0000
-------
Income from investment operations........................... .0065
Expenses.................................................... .0017
Net investment income (1)................................... .0048
-------
Dividends from net investment income (1).................... (.0048)
-------
Net asset value, end of year................................ $1.0000
=======
Total Return (2)............................................ 2.87%(2)
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets in thousands, end of year........................ 2,507
Ratio of expenses to average net assets (2)................. 1.00%(2)
Ratio of net investment income to average net assets (2).... 2.86%(2)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 12, 1997
(COMMENCEMENT OF OPERATIONS)
PENNSYLVANIA TAX-EXEMPT FUND THROUGH MAY 31, 1998
---------------------------- ----------------------------
<S> <C>
Net asset value, beginning of year.......................... $1.0000
-------
Income from investment operations........................... .0261
Expenses.................................................... .0072
-------
Net investment income (1)................................... .0189
Dividends from net investment income........................ (.0189)
-------
Net asset value, end of year................................ $1.0000
=======
Total Return................................................ 2.64%(2)
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets in thousands, end of year........................ 13,187
Ratio of expenses to average net assets..................... 1.00%(2)
Ratio of net investment income to average net assets)....... 2.62%(2)
</TABLE>
- ---------------
(1) Based on compounding of daily dividends. Not indicative of future results.
(2) Annualized.
(3) During these periods the manager waived a portion of fees and expenses. If
there were no reductions in expenses, the actual expenses would have been
approximately 0.20%, 0.20%, 0.20%, 0.25% and 0.12% higher, respectively for
the U.S. Treasury Fund, 0.10% higher for the Connecticut Fund, 0.04%, 0.05%,
0.11%, 0.43%, 0.50%, 0.50%, 0.50%, 0.50% and 0.50% higher for the
Massachusetts Fund and 0.01% higher for the New Jersey Fund.
(4) 0.01c per share represents distributions of taxable income.
9
<PAGE> 10
YIELD
For the seven calendar days ended May 31, 1998, the current and effective
yields of each Fund were as follows:
<TABLE>
<CAPTION>
CURRENT YIELD EFFECTIVE YIELD
------------- ---------------
<S> <C> <C>
Primary Fund............................................. 4.65% 4.76%
U.S. Government Fund..................................... 4.60% 4.71%
U.S. Treasury Fund....................................... 4.40% 4.50%
Interstate Tax-Exempt Fund............................... 2.90% 2.94%
California Tax-Exempt Fund............................... 2.67% 2.71%
Connecticut Tax-Exempt Fund.............................. 2.66% 2.70%
Florida Tax-Exempt Fund.................................. 2.85% 2.89%
Massachusetts Tax-Exempt Fund............................ 2.72% 2.76%
New Jersey Tax-Exempt Fund............................... 2.66% 2.69%
New York Tax-Exempt Fund................................. 2.74% 2.78%
Ohio Tax-Exempt Fund..................................... 2.86% 2.90%
Pennsylvania Tax-Exempt Fund............................. 2.75% 2.79%
</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. The 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 OBJECTIVES AND POLICIES
The investment objective of each Fund is to seek as high a level of current
income as is consistent with preservation of capital and liquidity. 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 that
Fund as defined in the Investment Company Act of 1940 ("1940 Act").
INVESTMENT OBJECTIVES AND POLICIES OF THE PRIMARY, U.S. GOVERNMENT
AND U.S. TREASURY FUNDS
The Primary Fund seeks to attain its objective by investing in U.S.
government securities; deposit-type obligations, such as negotiable certificates
of deposit and time deposits, bankers' acceptances and letters of credit of
domestic and foreign banks; savings and loan associations and savings banks;
high-quality domestic and foreign commercial paper as determined by any
nationally recognized statistical rating organization or, in the case of any
instrument that is not rated, of comparable quality as determined by the Board
of Trustees; other short-term instruments of similar quality; and instruments
fully collateralized by such obligations.
The U.S. Government Fund seeks to attain its objective by investing only in
securities backed by the full faith and credit of the U.S. government or
obligations collateralized thereby.
The U.S. Treasury Fund seeks to attain its objective by investing in
securities of the U.S. government that provide interest income exempt in many
states from state and local personal income taxes.
U.S. government securities include a variety of securities which are issued
or guaranteed by the U.S. Treasury, various agencies of the federal government
and various instrumentalities which have been established or sponsored by the
U.S. government, and certain interests in the foregoing types of securities such
as U.S. Treasury STRIPS. U.S. government securities include direct obligations
of the U.S. Treasury (such as Treasury bills, Treasury notes, and Treasury
bonds). Obligations such as securities issued by the Government National
Mortgage Association ("GNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA"), the Student Loan
Marketing Association ("SLMA") and the Federal Home Loan Bank ("FHLB") are also
considered U.S. government securities. Some obligations of agencies and
instrumentalities of the U.S. government, such as the GNMA, are supported by the
full faith and credit of the U.S. Other securities, such as obligations issued
by the FNMA and SLMA, are supported
10
<PAGE> 11
by the right of the issuer to borrow from the U.S. Treasury; and others, such as
obligations issued by the FHLB and FHLMC, are supported only by the credit of
the agency or instrumentality issuing the obligation. In the case of securities
not backed by the full faith and credit of the U.S. the investor must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
U.S. Treasury STRIPS permit the separate ownership and trading of the
interest and principal components of direct obligations of the U.S. Treasury.
These obligations may take the form of (i) obligations from which interest
coupons have been stripped; (ii) the interest coupons that are stripped; or
(iii) book-entries at a Federal Reserve member bank representing ownership of
obligation components.
Under federal law, the income derived from obligations issued by the U.S.
Treasury and certain of its agencies and instrumentalities is exempt from state
personal income taxes. A substantial majority of the states that tax personal
income permit mutual funds to pass-through this tax exemption to shareholders.
It is anticipated that a substantial portion of the dividends paid to
shareholders of the U.S. Treasury Fund residing in these states will qualify for
this exemption from state taxation. However, a state or local taxing authority
may seek, in the future, to tax a shareholder on all or a portion of the
interest income of a security held by the U.S. Treasury Fund.
The Primary Fund may invest in obligations of U.S. banking institutions that
are insured by the FDIC; commercial paper which is rated, at the time of
investment, P-1 by Moody's Investors Service, Inc. ("Moody's"), A-1 by Standard
& Poor's Corporation ("S&P") or the equivalent thereof; and obligations of
foreign banks which, at the time of investment, have more than $25 billion (or
the equivalent in other currencies) in total assets and which, in the opinion of
the Fund's Adviser, are of comparable quality to obligations of U.S. banks which
may be purchased by the Fund. Instruments which are not rated may also be
purchased by the Primary Fund provided such instruments are determined to be of
comparable quality by the Board of Trustees of the Fund to those rated
instruments in which the Primary Fund may invest.
The Primary Fund may invest in obligations of U.S. banks, foreign branches
of U.S. banks (Eurodollars), U.S. branches of foreign banks (Yankee dollars) and
foreign branches of foreign banks. Euro and Yankee dollar investments involve
certain risks that are different from investments in obligations of U.S. banks.
These risks may include unfavorable political and economic developments,
possible withholding taxes, seizure of foreign deposits, currency controls or
other governmental restrictions which might affect payment of principal or
interest. In addition, foreign branches of foreign banks are not regulated by
U.S. banking authorities and are generally not bound by financial reporting
standards comparable to U.S. banks. The Primary Fund will limit its investment
in foreign banks to those banks located in Australia, Canada, Western Europe and
Japan. The Primary Fund may also invest in Municipal Obligations secured by bank
letters of credit, the interest on which is not exempt from federal income
taxation.
OTHER POLICIES. Each Fund may engage in repurchase agreement transactions. A
repurchase agreement is a transaction by which a Fund purchases a security (U.S.
government or other) and simultaneously commits to resell that security to the
seller at an agreed upon price at a later date. The Fund will limit repurchase
agreements to those banks and securities dealers who are deemed creditworthy
pursuant to guidelines adopted by the Fund's Board of Trustees. The Adviser will
follow procedures to assure that all repurchase agreements are always fully
collateralized as to principal and interest. The instruments held as collateral
are valued daily, and if the value of the instruments declines, the Fund will
require additional collateral. If the other party to the repurchase agreement
defaults on its obligation to repurchase the underlying securities, a portfolio
may incur a loss upon disposition of them if the value of those securities has
declined. In the event of insolvency or bankruptcy of the other party to a
repurchase agreement, a Fund may encounter difficulties and might incur costs
upon the exercise of its rights under the repurchase agreement. The U.S.
Treasury Fund will limit its investment in repurchase agreements with respect to
securities backed only by the full faith and credit of the U.S. government to
not more than 5% of its total assets. Such investment will be for temporary
purposes pending the investment of uninvested cash in U.S. Treasury obligations.
The Primary Fund may engage in limited repurchase agreement transactions
collateralized by first mortgages conforming to the lending standards of the
GNMA, FHLMA or FNMA.
The Primary and U.S. Government Funds may from time to time lend securities
on a short-term basis to banks, brokers and dealers (but not individuals) and
receive as collateral cash or securities issued by the U.S. government or its
agencies or instrumentalities (or any combination thereof), which collateral
will be required to be maintained at all times in an amount equal to at least
100% of the current value of the loaned securities plus accrued interest. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any interest paid on such securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed upon amount of interest from the borrower who has delivered equivalent
collateral or secured a letter of credit. The value of the securities loaned
cannot exceed 25% of the Fund's total assets. Loans of securities involve risks
of delay in receiving additional collateral or in recovering the securities lent
or even loss of rights to the collateral in the event of insolvency of the
borrower of the securities. The SAI further explains the Funds' securities
lending policies.
Each Fund may invest, without limitation, in U.S. government securities and
in instruments secured or collateralized by U.S. government securities. A Fund
will not invest more than 10% of its net assets in illiquid securities,
including repurchase agreements
11
<PAGE> 12
providing for settlement in more than seven (7) days after notice and will not
concentrate more than 25% of its total assets in the securities of issuers in a
single industry, except that the Primary Fund will invest more than 25% of its
assets in the banking industry. In addition, a Fund will not invest more than 5%
of its assets in the securities of any single issuer (except U.S. government
securities). Each Fund has the authority to borrow money (including reverse
purchase agreements) for extraordinary or emergency purposes but not in an
amount exceeding 5% of its total assets. Reverse repurchase agreements involve
sales by a Fund of portfolio securities concurrently with an agreement by the
Fund to repurchase the same securities at a later date at a fixed price.
INVESTMENT OBJECTIVES AND POLICIES OF THE INTERSTATE, CALIFORNIA, CONNECTICUT,
FLORIDA,
MASSACHUSETTS, NEW JERSEY, NEW YORK, OHIO AND PENNSYLVANIA TAX-EXEMPT FUNDS
The investment objective of each of the tax-exempt Funds is to seek as high
a level of short-term interest income exempt from federal income and state and
local personal 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 1940 Act.
Each of the Funds 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.
These securities are generally known as "municipal bonds" or "municipal
notes" ("Municipal Obligations") 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. 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 the value of each
Fund's assets will be invested in Municipal Obligations which are exempt from
federal income and state and, with respect to the New York Tax-Exempt Fund,
local personal income taxes and, with respect to the Florida Tax-Exempt Fund,
the Florida intangibles tax, and with respect to the Pennsylvania Tax-Exempt
Fund, the Pennsylvania county personal property 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 the
value of its assets, or a greater percentage on a temporary basis, in Municipal
Obligations exempt only from federal income taxes.
Each 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 (7) 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 or
other 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 (7) 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 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 of borrowers 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. 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.
12
<PAGE> 13
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 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 participation interests in Municipal Obligations from
financial institutions. 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.
Interest received on certain otherwise tax-exempt securities ("private
activity bonds") is subject to a federal Alternative Minimum Tax ("AMT"). It is
the position of the SEC that in order for a fund to call itself "tax-free", not
more than 20% of its net assets may be invested in municipal securities subject
to the AMT 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 shareholders of each Fund to the AMT. 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 Fund to achieve its
investment objective is also dependent on the continuing ability of issuers of
municipal securities to meet their obligations for the payment of interest and
principal when due.
From time to time a Fund may invest in taxable short-term investments
("Taxable Investments") consisting of obligations backed by the full faith and
credit of the U.S. government, its agencies or instrumentalities ("U.S.
Governments"), deposit-type obligations, acceptances, 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 Fund will be
invested in Taxable Investments at any time. A Fund may enter into repurchase
agreements with regard to the 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
13
<PAGE> 14
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 U.S. 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.
Each Fund's concentration in securities issued by the respective state and
its political subdivisions involves greater risks than a fund broadly invested
across many states and municipalities.
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. From mid-1990 to late 1993, the State
suffered a recession with the worst economic, fiscal and budget conditions since
the 1930s. As a result, the State was plagued by recurring budget deficits. As
of June 30, 1994, according to California's Department of Finance, the State's
special Fund for Economic Uncertainties had an accumulated deficit, on a budget
basis, of approximately $1.8 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. As a result
of the deterioration in the State's budget and cash situation, between October
1991 and July 1994, the ratings on the State's general obligation bonds were
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 obligations. However, since 1993 the State's financial and
economic condition suggests that California, following a period of stability, is
in the midst of a recovery. The General Fund GAAP-basis deficit has been reduced
from a peak of $4.6 billion in 1992-93 to $2.1 billion at fiscal 1996. In
addition, the gap between the national and California unemployment rate narrowed
from 3.4% in 1994 to 1.9% at the close of 1996. By June of 1998, the State's
general obligation bonds were rated A1, A+ and AA- by Moody's, S&P and Fitch,
respectively.
RISK FACTORS IN CONCENTRATING IN CONNECTICUT. 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.
Connecticut's economy relies in part on activities that may be adversely
affected by cyclical change, and recent declines in defense spending have had a
significant impact on unemployment levels. 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 Obligations Economic Recovery
Notes. Moreover, as of June 30, 1995 and 1996, the General Fund had cumulative
deficits under GAAP of $576.9 million and $639.9 million, respectively. As a
result of the recurring budgetary problems, S&P downgraded the State's general
obligation bonds from AA+ to AA in April 1990 and to AA- in September 1991. In
April 1990, Moody's downgraded Connecticut's bonds from Aa1 to Aa (since revised
to Aa3 in March 1997). In March 1995, Fitch downgraded Connecticut's bonds from
AA+ to AA.
RISK FACTORS IN CONCENTRATING IN FLORIDA. You should consider carefully the
special risks inherent in the Fund's investment in Florida Municipal
Obligations. The Florida Constitution and Statutes mandate that the State budget
as a whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each fiscal year. Florida's Constitution
permits issuance of Florida Municipal Obligations pledging the full faith and
credit of the State, with a vote of the electors, to finance or refinance fixed
capital outlay projects authorized by the legislature provided that the
outstanding principal does not exceed 50% of the total tax revenues of the State
for the two preceding years. Florida's Constitution also provides that the
legislature shall appropriate monies sufficient to pay debt service on State
bonds pledging the full faith and credit of the State as the same becomes due.
All State tax revenues, other than trust funds dedicated by Florida's
Constitution for other purposes, would be available for such an appropriation,
if required. Revenue bonds may be issued by the State or its agencies without a
vote of Florida's electors only to finance or refinance the cost of State fixed
capital outlay projects which may be payable solely from funds derived directly
from sources other than State tax revenues. Fiscal year 1995-96 estimated
General Revenue and Working Capital and Budget Stabilization funds available
totaled $15.311 billion, a 3.3% increase over 1994-95, resulting in unencumbered
reserves of approximately $502.7 million at the end of fiscal 1995-96. General
Revenue and Working Capital and Budget Stabilization funds available for fiscal
1996-97 are estimated to total $16.095 billion, a 5.1% increase over 1995-96,
resulting in unencumbered reserves of approximately $518.2 million at the end of
fiscal 1996-97.
RISK FACTORS IN CONCENTRATING IN MASSACHUSETTS. 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. Since 1989, Massachusetts has experienced growth rates
significantly below the national average and an economic recession in 1990 and
1991 caused negative growth rates. Massachusetts' economic and fiscal problems
in the late 1980s and early 1990s caused several rating agencies to lower their
ratings of Massachusetts Municipal Obligations. A return of persistent serious
financial difficulties could adversely affect the market values and
marketability of, or result in default in payment on, outstanding Massachusetts
Municipal Obligations. The State's operating losses in fiscal 1989 and 1990,
which totaled $672 million and $1.25 billion, respectively, were covered
primarily through deficit
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<PAGE> 15
borrowings and a fiscal 1991 operating loss of $21 million was covered by
drawing on the adjusted 1990 fund balance of $258 million. However,
Massachusetts ended fiscal years 1992 through 1996 with a positive fiscal
balance in its general operating funds. At present, Massachusetts' general
obligation bonds are rated by S&P, Fitch and Moody's AA-, AA- and Aa3,
respectively.
RISK FACTORS IN CONCENTRATING IN NEW JERSEY. 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 trailed the rest of the nation. Reflecting the
economic downturn, the State's unemployment rate rose from a low of 3.6% in the
first quarter of 1989 to a peak of 8.5% during 1992. Since then, the State's
unemployment rate fell to an average of 6.4% during 1995 and 6.1% for the
four-month period from May 1996 through August 1996. In July 1991, S&P lowered
its rating for the State's general obligation debt from AAA to AA+. The State's
general obligation debt is rated AA+ and Aa1 by Fitch and Moody's, respectively.
RISK FACTORS IN CONCENTRATING IN NEW YORK. You should consider carefully the
special risks inherent in investing in New York Municipal Obligations. These
risks result from the financial condition of New York State, certain of its
public bodies and municipalities, and New York City. Beginning in early 1975,
New York State, New York City and other State entities faced serious financial
difficulties which jeopardized the credit standing and impaired the borrowing
abilities of such entities and contributed to high-interest rates on, and lower
market prices for, debt obligations issued by them. A recurrence of such
financial difficulties or a failure of certain financial recovery programs could
result in defaults or declines in the market values of various New York
Municipal Obligations in which the Fund may invest. If there should be a default
or other financial crisis relating to New York State, New York City, a State or
City agency, or a State municipality, the market value and marketability of
outstanding New York Municipal Obligations in the Fund's portfolio and the
interest income to the Fund could be adversely affected. Moreover, the national
recession and the significant slowdown in the New York and regional economies in
the early 1990s added substantial uncertainty to estimates of the State's tax
revenues, which, in part, caused the State to incur cash-basis operating
deficits in the General Fund and issue deficit notes during the fiscal years
1989 through 1992. The State's financial operations have improved, however,
during recent fiscal years. For its fiscal years 1993 through 1996, the State
recorded balanced budgets on a cash-basis, with substantial fund balances in the
General Fund in fiscal 1992-93 and 1993-94 and smaller fund balances in fiscal
1994-95 and 1995-96. There can be no assurance that New York will not face
substantial potential budget gaps in future years. In January 1992, Moody's
lowered from A to Baa1 the ratings on certain appropriation-backed debt of New
York State and its agencies. The State's general obligation, State-guaranteed
and New York State Local Government Assistance Corporation bonds continued to be
rated A by Moody's. (Since refined to A2 in 1997). The State's general
obligation debt is rated A by S&P. At present, the general obligation debt of
New York City is rated A3 by Moody's. The City's debt is rated BBB+ by S&P with
a positive credit watch.
RISK FACTORS OF CONCENTRATING IN OHIO. Specifically, the credit quality of the
Ohio Tax-Exempt Fund will depend on the continued financial strength of the
State of Ohio and its political subdivisions. Ohio is an industrialized state
with a diverse economy. While manufacturing jobs in the state have been
declining steadily, Ohio remains a leading exporter of manufactured goods. In an
effort to minimize the state's exposure to cyclical downturns in the
manufacturing sector, Ohio has diversified. The 1997 operating surplus of the
General Fund was $155 million, down from $548 million in 1996. However, Ohio has
made productivity improvements and has expanded into the high-tech and business
service industries. The estimated cash balance for the biennium ending 1996-97
is $596.7 million. The state's reserves have been restored to levels which now
exceed those seen before the last recession. At present, Ohio's general
obligation bonds are rated Aa1, AA+ and AA+ by Moody's, S&P, and Fitch,
respectively.
RISK FACTORS IN CONCENTRATING IN PENNSYLVANIA. Many different social,
environmental and economic factors may affect the financial condition of
Pennsylvania and its political subdivisions. From time to time, Pennsylvania and
certain of its political subdivisions have encountered financial difficulties
which have adversely affected their respective credit standings. For example,
the financial condition of the City of Philadelphia had impaired its ability to
borrow and resulted in its obligations generally being downgraded below
investment grade by the major rating services. Other factors which may
negatively affect economic conditions in Pennsylvania include adverse changes in
employment rates, Federal revenue sharing or laws governing tax-exempt
financing. Currently, Pennsylvania's general obligation bonds are rated AA-, AA
and Aa3 by S&P, Fitch and Moody's, respectively. The Adviser does not believe
that the current economic conditions in Pennsylvania will have a significant
adverse effect on the Fund's ability to invest in high-quality Pennsylvania
Municipal Obligations.
In order to provide liquidity, each Fund limits its average maturity to 90
days or less; buys securities which mature in 397 days or less; and buys only
high quality securities.
The SAI further discusses risk factors in concentrating in securities issued
by the respective states and their political subdivisions for each Fund.
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<PAGE> 16
MANAGEMENT
INVESTMENT MANAGEMENT AGREEMENT. Reserve Management Company, Inc. ("Adviser"),
14 Locust Place, Manhasset, NY 11030, a New Jersey corporation, provides the
Funds with investment advice pursuant to an Investment Management Agreement.
Since November 15, 1971, the Adviser and its affiliates have been advising The
Reserve Funds, which currently has assets in excess of $4.7 billion. Under the
Investment Management Agreement, the Adviser manages each Fund's investments,
including effecting purchases and sales, in furtherance of its investment
objective and policies, subject to overall control and direction of the Funds'
Board of Trustees.
The Primary, U.S. Government, Interstate, California, Connecticut, Florida,
Massachusetts, New Jersey, New York, Ohio and Pennsylvania Funds each pay the
Adviser a management fee, which is a percentage of the average daily net assets
of each of the Funds, calculated as follows: (i) 0.50% per annum of the first
$500 million of average daily net assets; (ii) 0.475% per annum of the next $500
million of such assets; (iii) 0.45% per annum of the next $500 million of such
assets; (iv) 0.425% per annum of the next $500 million of such assets; and (v)
0.40% per annum of such assets in excess of $2 billion. For the fiscal year
ended May 31, 1998, the Adviser received a management fee of 0.45% of the
average daily net assets of the Primary Fund, 0.49% of the average daily net
assets of the U.S. Government Fund and 0.50% of the average daily net assets of
the Interstate, California, Connecticut, Florida, Massachusetts, New Jersey, New
York, Ohio and Pennsylvania Funds. The U.S. Treasury Fund pays the Adviser a
comprehensive management fee calculated at 0.80% per annum of the average daily
net assets. Under the terms of the Investment Management Agreement with the U.S.
Treasury Fund, the Adviser pays all employee and ordinary operating costs of the
Fund. Excluded from the definition of ordinary operating costs are interest,
taxes, brokerage fees, extraordinary legal and accounting fees and expenses, and
the fees of the disinterested Trustees, for which it pays its direct or
allocated share. For the fiscal year ended May 31, 1998, the U.S. Treasury Fund
paid the Adviser a comprehensive management fee of 0.60% of its average daily
net assets. During the year, the Adviser voluntarily agreed to a reduction of
its comprehensive fee.
The Investment Management Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds 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.
SERVICE AGREEMENT. The Adviser furnishes to the Primary, U.S. Government,
Interstate, California, Connecticut, Florida, Massachusetts, New Jersey, New
York, Ohio and Pennsylvania Funds pursuant to a Service Agreement, at cost, all
personnel required for the operations of the Funds such as executive,
administrative, clerical, recordkeeping, bookkeeping, 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 includes salaries and other personnel expense,
rent, depreciation of equipment and facilities, interest and amortization of
loans which finance equipment used by the Funds, and all other expenses incurred
in the conduct of the Funds' 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 Funds' shares and of printing and mailing all
prospectuses, proxy statements and shareholder reports furnished to current
shareholders and the fees and expenses of the Funds' custodians, auditors,
lawyers and disinterested Trustees.
The Adviser has agreed to repay the Primary, U.S. Government, Interstate,
California, Connecticut, Florida, Massachusetts, New Jersey, New York, Ohio and
Pennsylvania Funds promptly any amount which a majority of disinterested
Trustees reasonably determines is not properly attributable to the Funds. The
Service Agreement is nonassignable and continues until terminated by either
party on 120 days' notice.
YEAR 2000. The Trust could be adversely affected if the computer systems and
other service providers that interface with it are unable to process data from
January 1, 2000 and after. However, steps are being taken to reasonably address
this issue and to obtain assurance that comparable effort is being made by
service providers. There can be no assurance that these steps will be sufficient
to avoid any adverse impact to the Trust.
TRUSTEES. The Trustees serve indefinite terms (subject to certain removal
procedures) and they appoint their own successors, provided that at least a
majority of the Trustees have been elected by shareholders. A Trustee may be
removed at any meeting of shareholders by a vote of a majority of the Fund's
shareholders.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. The funds each act as their own
transfer agent and dividend paying agent.
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<PAGE> 17
HOW TO BUY SHARES
METHOD OF PAYMENT. The minimum initial investment is $1,000 with no minimum
subsequent investments (denominated in U.S. dollars). An initial purchase must
be accompanied by an 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 determined after receipt by the Funds of a properly
completed order and payment in Federal funds (member bank deposits with the
Federal Reserve Bank System). Payments must be made:
- By check (drawn on a U.S. bank) payable to The Reserve Funds, 810
Seventh Avenue, New York, NY 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 account to be credited
may be returned or delay the purchase of shares. If you have an account in more
than one Fund and do not specify the account number and portfolio, all money
sent will be invested in the U.S. Government Fund. 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, the Funds must be notified before 11:00 AM (New York time) (2:00 PM for
the Primary and U.S. Government Funds) 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 (2) business days, but may take longer. Checks delivered to
the Fund's offices after 11:00 AM (2:00 PM for the Primary and U.S. Government
Funds) 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 Funds or payable to the
shareholder/payee of the check and endorsed to The Reserve Funds. 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 veterans' benefits,
or other payment from the federal government. Call the Funds at 800-637-1700 for
an application.
NET ASSET VALUE. Shares are sold to the public at net asset value ("NAV") which
is calculated at the close of each Business Day (normally 4:00 PM New York time)
by taking the sum of the value of each Fund's investments (amortized cost value
is used for this purpose) and any cash or other assets, subtracting liabilities
and dividing by the total number of shares outstanding. A "Business Day" is
Monday through Friday exclusive of days the New York Stock Exchange ("NYSE") is
closed for trading and bank holidays in New York State. It is the policy of each
Fund to seek to maintain a stable NAV of $1.00 per share, although this share
price is not guaranteed.
DISTRIBUTORS. The Funds' Distributors are Resrv Partners, Inc., 810 Seventh
Avenue, New York, NY 10019-5868, which is a wholly-owned subsidiary of the
Advisor; NWNL/Northstar Distributors, Inc., Two Pickwick Plaza, Greenwich, CT
06830; and Pacific Global Fund Distributors, Incorporated, 206 North Jackson
Street, Suite 201, Glendale, CA 91206.
EXCHANGE PRIVILEGE. The shares offered by this Prospectus may be exchanged for
shares in other Reserve investment alternatives at NAV. These exchange
privileges may be modified or terminated at any time, or from time to time, upon
60 days' notice to shareholders. Shares to be acquired in an exchange must be
registered for sale in the investor's state. Exchanges of shares of one fund for
another is a taxable event and may result in a gain or loss for federal income
tax purposes. The exchange privileges described under this heading may not be
available to clients of certain broker-dealers or Firms and some Firms may
impose conditions on their clients which are different from those described in
this Prospectus.
INDIVIDUAL RETIREMENT ACCOUNTS. Investors may use the Taxable Funds as an
investment for Individual Retirement Accounts ("IRAs"). A master IRA plan, with
information regarding administration fees and other details is available from
the Funds.
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<PAGE> 18
DISTRIBUTION AND SERVICE PLAN. Accounts may be opened through brokers,
financial intermediaries and institutions ("Firms"), some of which participate
in each Fund's Plan of Distribution ("Plan"). Under Rule 12b-1 of the 1940 Act,
each Fund makes assistance payments at an annual rate of 0.20% of net assets,
substantially all of which are paid to those Firms for distribution assistance
and administrative services provided to the Funds. The Adviser is required by
the Plan to pay an equivalent amount and may, at its discretion, pay additional
amounts based upon assets committed to the Funds by such Firms. The Plan does
not permit the carrying over of payments from year to year. The Adviser also
reimburses Firms for a portion of their costs of advertising and marketing
shares of a Fund. All such arrangements are designed to facilitate the sale of a
Fund's shares.
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. Some Firms which
utilize a centralized purchase method for Fund shares, may have an earlier cut
off for purchase orders than stated above in order to facilitate the
transmission of purchase orders by bulk wire. Firms are responsible for the
prompt transmission of purchase and redemption orders. Some Firms may establish
higher minimum investment requirements than set forth above. Some Firms may
independently establish and charge additional fees for their services, which
would reduce their clients' yield or return. Firms may also hold Fund shares in
nominee or street name on behalf of their clients. In such instances, the Funds'
transfer agents will have no information with respect to or control over the
accounts of specific shareholders. Such shareholders may obtain access to their
accounts and information about their accounts only from their Firm. Some Firms
may receive compensation for recordkeeping and other services relating to these
nominee accounts. In addition, certain privileges with respect to the purchase
and redemption of shares (such as check writing redemptions) or the reinvestment
of dividends may not be available through such Firms or may only be available
subject to certain conditions or limitations. Some Firms may participate in a
program allowing them access to their clients' accounts for servicing including,
without limitation, changes of registration and dividend-payees and may perform
functions such as generation of confirmations and periodic statements and
disbursement of cash dividends. The Prospectus should be read in connection with
such Firm's material regarding its fees and services.
SHARES OF BENEFICIAL INTEREST
The Reserve Fund was originally incorporated on February 1, 1970 as a
Maryland corporation and was reorganized as a Massachusetts business trust on
October 28, 1986; Reserve New York Tax-Exempt Trust and Reserve Tax-Exempt Trust
were organized as Massachusetts business trusts on July 12, 1983 and January 25,
1983, respectively, and are open-end management investment companies commonly
known as mutual funds. At the date of this Prospectus, there were four (4)
separate series of The Reserve Funds, eight (8) separate series of Reserve
Tax-Exempt Trust and one (1) separate series of Reserve New York Tax-Exempt
Trust authorized and outstanding. Additional series may be added in the future
by the Board of Trustees. The Reserve Fund, Reserve Tax-Exempt Trust and Reserve
New York Tax-Exempt Trust are 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 rights.
The shareholders of each series are entitled to a full vote for each full share
held (and fractional votes for fractional shares) and have equal rights with
respect to earnings, dividends, redemptions and in the net assets of their
series upon liquidation. The Trustees do not intend to hold annual meetings but
will call such special meetings of shareholders as may be required under the
1940 Act (e.g. to approve a new investment advisory agreement or changing the
fundamental investment policies) or by the Declaration of Trust.
Under Massachusetts law, the shareholders and trustees of a business trust
may, in certain circumstances, be personally liable for the trust's obligations
to third parties. However, the Declaration of Trust provides, in substance, that
no shareholder or Trustee shall be personally liable for The Reserve Fund,
Reserve Tax-Exempt Trust and Reserve New York Tax-Exempt Trust and each
investment portfolio's obligations to third parties, and requires that every
written contract made by the Fund and the Trusts contain a provision to that
effect. The Declaration of Trust also requires The Reserve Fund, Reserve
Tax-Exempt Trust and Reserve New York Tax-Exempt Trust to indemnify its
shareholders and Trustees against such liabilities and any related claims or
expenses.
DAILY DIVIDENDS
Each Fund declares dividends each Business Day. Dividends are distributed
daily as additional shares to shareholder accounts except for shareholders who
elect in writing to receive cash dividends, in which case monthly dividend
checks are sent to the shareholder.
TAXES FOR THE PRIMARY, U.S. GOVERNMENT AND U.S. TREASURY FUNDS
To maintain its regulated investment company status for federal income tax
purposes, each Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability.
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For federal income tax purposes, distributions out of interest and net
realized short-term capital gains earned by a Fund are taxable as ordinary
income. Because no portion of a Fund's income is expected to consist of
dividends paid by U.S. corporations, no portion of the dividends paid by the
Funds is expected to be eligible for the corporate dividends-received deduction.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses), if any, designated as capital gain
dividends are taxable to individual shareholders at the applicable 20% or 28%
capital gains rate, regardless of how long the shareholder has held the Fund's
shares. Dividends are taxable to shareholders in the same manner whether
received in cash or reinvested in additional Fund shares.
A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by a Fund in October, November or December with
a record date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
Upon the sale or other disposition of shares of a Fund, in the event that
the Fund fails to maintain a constant net asset value per share, a shareholder
may realize a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the shares.
Each Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability.
The U.S. Treasury Fund intends to invest only in U.S. Treasury securities
and obligations of those agencies and instrumentalities of the U.S. government
that provide interest income exempt in many states from state and local personal
income taxes, except to the extent uninvested cash is invested in repurchase
agreements. Some states have minimum investment requirements that must be met by
the U.S. Treasury Fund. Distributions attributable to net capital gains, if any,
are generally subject to state and local taxes. It is possible that a state or
local taxing authority may in the future seek to tax an investor on a portion of
the interest income of an obligation held by the U.S. Treasury Fund.
Shareholders should consult with their own tax advisers with respect to the
application of their state and local tax laws to these distributions.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. The Funds intend to report to their shareholders
before the end of February each year as to the source of dividends and other
distributions, if any, paid or declared by each Fund during the previous
calendar year which may be exempt from state income taxes. Shareholders should
consult their own tax advisers regarding specific questions as to federal, state
or local taxes.
Further information relating to tax consequences is contained in the SAI.
TAXES FOR THE TAX-EXEMPT MONEY-MARKET FUNDS OF INTERSTATE, CALIFORNIA,
CONNECTICUT, FLORIDA,
MASSACHUSETTS, NEW JERSEY, NEW YORK, OHIO AND PENNSYLVANIA
To maintain its regulated investment company status for federal income tax
purposes, each Fund intends to satisfy certain requirements imposed by the
Internal Revenue Code, so as to avoid any federal income or excise tax
liability. Dividends derived from the interest earned on Municipal Obligations
designated by a Fund as "exempt interest dividends" and are not subject to
federal income taxes. To the extent a Fund invests in Municipal Obligations
issued by its respective state or political subdivision thereof, exempt-
interest dividends derived from the interest thereon generally is not subject to
state and, with respect to the New York Tax-Exempt Fund, local personal income
taxes.
Any distributions of net realized long-term gains earned by the Interstate
Tax-Exempt Fund are taxable to shareholders as such regardless of the length of
time the 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. 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 U.S. and its possessions and territories will
be exempt from the Florida intangibles tax, and the remaining portions of those
shares will be fully subject to the intangibles tax, even if they partly relate
to Florida
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<PAGE> 20
tax-exempt securities and the same is true with respect to the Pennsylvania
Tax-Exempt Fund and the Pennsylvania county personal property tax.
Shareholders are advised to retain all statements to maintain accurate
records of their investments. If any dividends are not exempt from federal
income or state or local personal income taxes, shareholders will be advised of
the percentage by February of the following year. Shareholders should consult
their tax advisers regarding specific questions as to federal, state or local
taxes.
Further information relating to tax consequences is contained in the SAI.
REDEMPTIONS
TIME AND METHOD OF REDEMPTION. Shares of each Fund are redeemed at their NAV
determined after receipt by the Fund of a request in proper form. Each Fund
usually transmits payment the same day when requests are received before 11:00
AM (New York time) (12:00 NOON for the Primary and U.S. Government Funds) and
the next day for requests received after the time specified to enable
shareholders to receive additional dividends. This is not always possible, and
transmission of redemption proceeds may be delayed. Payment will normally be
made by check or bank transfer. Shares do not earn dividends on the day a
redemption is effected, regardless of the time the order is received.
WRITTEN AND TELEPHONE REDEMPTION REQUESTS. The Funds strongly suggest (but do
not require) that each redemption, written or by telephone, be at least $1,000,
except for redemptions which are intended to liquidate the account. A
shareholder will be charged $2 for redemption checks issued for less than $100.
Upon request, redemptions will be made by bank wire, however, wire redemptions
of less than $10,000 will be charged a fee (currently $10). 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 could cause such a delay. If a Fund has previously been advised in
writing of your brokerage or bank account, telephone requests will be accepted
by calling 800-637-1700. The Funds may be liable for any losses caused by their
failure to employ reasonable procedures. To reduce the risk of loss, proceeds of
telephone redemptions may be sent only (1) to the bank or brokerage account
designated by the shareholder on the Application or in a letter with the
signature(s) guaranteed; or (2) to the address of record if all the conditions
listed below are met. To change the designated brokerage or bank account it is
necessary to contact the Firm through which shares of the Fund were purchased or
if purchased directly from the Funds, it is necessary to send a written request
to the Funds with signature(s) guaranteed as described below. Other redemption
orders must be in writing with the necessary signature(s) guaranteed by a
domestic commercial bank; a domestic trust company; a domestic savings bank,
credit union or savings association; or a member firm of a national securities
exchange. Guarantees from notaries public are unacceptable. The Funds will waive
the signature guarantee requirement on a redemption request once every thirty
(30) days if all of the following conditions apply: if the redemption check is
(1) for $5,000 or less; (2) payable to the shareholder(s) of record; and (3)
mailed to the shareholder(s) at the address of record. The requirement of a
guaranteed signature protects against an unauthorized person redeeming shares
and obtaining the redemption proceeds. Redemption instructions and election of
the plans described 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 Funds reserve the right to refuse a telephone redemption if it believes
it is advisable to do so. Procedures for telephone redemptions may be modified
or terminated by the Funds 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.
CHECKING. The Funds offer a comprehensive package of services which enhance
access to your account. By completing the Application or a signature card (for
existing accounts) and certain other documentation if the owner of record is a
fiduciary, corporation, partnership, trust or other organization, you can write
checks in any amount against your account. Redemptions by check lengthen the
time your money earns dividends, since redemptions are not made until the check
is processed by the Fund. Because of this, you cannot write a check to
completely liquidate your account, nor may a check be presented for
certification or immediate payment, otherwise, you may use your Reserve checking
account as you would any checking account. Your checks will be returned
(bounced) and a fee charged if they are postdated, contain an irregularity in
the signature, amount or otherwise, or are written against accounts with
insufficient funds. All transaction activity, including check redemptions, will
be reported on your account statement. A fee will be charged for providing check
copies. Upon proper notice, the Funds may choose to impose a fee if it deems a
shareholder's actions to be burdensome. Checking may not be available to clients
of some Firms and a Firm may establish its own minimum check amount. For more
information call 800-637-1700.
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STOP PAYMENTS. The Funds will honor stop payment requests on unpaid shareholder
checks provided they are advised of the correct check number, payee, check
amount and date. Stop payment requests received by the Funds by 2:00 PM (New
York time) in proper form will be effective the next business day. Oral stop
payment requests are effective for fourteen (14) calendar days, at which time
they will be canceled unless confirmed in writing. Written stop payment requests
will remain in effect for one year. A fee will be charged for this service.
AUTOMATIC WITHDRAWAL PLANS. If you have an account with a balance of at least
$5,000, you may, upon written notice, participate in either of the following:
(i) an Income Distribution Plan providing for monthly, quarterly or annual
payments by redemption of shares from reinvested dividends or distributions paid
to your account during the preceding period; or (ii) a Fixed Amount Withdrawal
Plan providing for the automatic redemption of a sufficient number of shares of
your account to make a specified monthly, quarterly or annual payment of a fixed
amount. Changes to instructions must be in writing with signature(s) guaranteed.
In order for such payments to continue under either Plan, there must be a
minimum of $25 available from reinvested dividends or distributions. Payments
can be made to you or your designee. An application for the Automatic Withdrawal
Plans can be obtained from the Funds. The amount, frequency and recipient of the
payments may be changed by giving proper written notice to the Funds. The Funds
may impose a charge, 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 some Firms or may be available subject to conditions or
limitations.
AUTOMATIC TRANSFER PLANS. You may redeem shares of a Fund by telephone (minimum
$100) 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, modify or terminate this
privilege at any time after the participant has been duly notified. This
privilege may not be available to clients of some 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 NYSE is closed (other
than for customary closings), (b) when, as determined by the SEC, trading on the
Exchange is restricted or an emergency exists making it not reasonably
practicable to dispose of securities owned by the Fund or for it to determine
fairly the value of its net assets, or (c) for such periods as the SEC may
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 redemptions normally
will not be transmitted until two (2) Business Days after the purchase.
GENERAL INFORMATION
JOINT OWNERSHIP. When an account is registered in the name of one person and
another, for example a husband and wife, either person is entitled to redeem
shares in the account. The Application provides that persons so registering
their account indemnify and hold the Funds harmless for actions taken by either
party.
BACKUP WITHHOLDING (FOR THE PRIMARY FUND, U.S. GOVERNMENT FUND, AND THE U.S.
TREASURY FUND). The Funds are required by federal law to withhold 31% of
dividends and other distributions that are subject to federal income tax if (i)
a correct and certified Taxpayer Identification Number ("TIN") is not provided
for your account, (ii) you fail to certify that you have not been notified by
the IRS that you underreported taxable interest or dividend payments or (iii) a
Fund is notified by the IRS (or a broker) that the TIN provided is incorrect or
you are otherwise subject to backup withholding. Amounts withheld and forwarded
to the IRS can be credited as a payment of tax when completing your federal
income tax return. For individual shareholders, the TIN is the social security
number. However, special rules apply for certain accounts. For example, for an
account established under the Uniform Gift to Minors Act, the TIN of the minor
should be furnished. Shareholders should be aware that, under regulations
promulgated by the IRS, a Fund may be fined $50 annually for each account for
which a certified TIN is not provided or is incorrect. In the event that such a
fine is imposed, a corresponding charge will be made against the account. The
Funds will not accept purchase orders for accounts which a correct and certified
TIN is not provided or otherwise subject to back up withholding, except in the
case of certain non-resident alien accountholders.
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
some Firms will receive a statement combining transactions in Fund shares with
statements covering other brokerage or mutual fund accounts.
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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. Some Firms may
establish variations of minimum balances and fee amounts if those 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 800-353-8805 and follow the instructions.
Clients may also access full account activity for the previous six months on the
Internet at www.reservefunds.com.
INQUIRIES. Shareholders should direct their inquiries to the Firm from which
they received this Prospectus or to 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, copies
of Fund redemption or shareholder checks and special research services.
PERFORMANCE. The Funds may compare their performance to other income producing
alternatives such as money-market funds and various bank products (based on
average rates of bank and thrift institution certificates of deposit,
money-market deposit accounts and NOW accounts as reported by industry
publications). An investment in shares of a Fund is not insured by the Federal
Deposit Insurance Corporation.
Yield information is useful in reviewing each Fund's performance relative to
other funds that hold investments of similar quality. Because yields will
fluctuate, yield information may not provide a basis for comparison with bank
and thrift certificates of deposit which normally pay a fixed rate for a fixed
term and are subject to a penalty for withdrawals prior to maturity which will
reduce their return.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
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[CAPTION]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
---
<S> <C>
Shareholder Expenses............................ 2
Financial Highlights............................ 4
Yield........................................... 10
Investment Objectives and Policies.............. 10
Management...................................... 16
How to Buy Shares............................... 17
Shares of Beneficial Interest................... 18
Daily Dividends................................. 18
Taxes for the Primary, U.S. Government and U.S.
Treasury Funds................................ 18
Taxes for the Tax-Exempt Money-Market Funds of
Interstate, California, Connecticut, Florida,
Massachusetts, New Jersey, New York, Ohio and
Pennsylvania.................................. 19
Redemptions..................................... 20
General Information............................. 21
Investors are advised to read and retain
this Prospectus for future reference.
American Express Money-Market Account is a cash
management service offered by The Reserve Funds
through American Enterprise Investment Services Inc.,
a subsidiary of American Express Financial
Corporation. Shares offered are shares of The Reserve
Funds.
</TABLE>
AMERICAN ENTERPRISE INVESTMENT SERVICES INC.
A subsidiary of American Express Financial Corporation
IDS Tower 10
Minneapolis Minnesota 55440
(C) 1998 American Express Financial Corporation
All rights reserved.
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